Backman v. Canada, 2001 DTC 5149, 2001 SCC 10, [2001] 1 SCR 367

Backman v. Canada, [2001] 1 S.C.R. 367, 2001 SCC 10

Philip Douglas Backman                                                                   Appellant

v.

Her Majesty The Queen                                                                   Respondent

Indexed as:  Backman v. Canada

Neutral citation:  2001 SCC 10.

File No.:  27561.

2000:  November 10; 2001: March 1.

Present:  McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Iacobucci, Bastarache, Binnie and LeBel JJ.

on appeal from the federal court of appeal

Income tax -- Calculation of income -- Partnership -- Losses -- Original U.S. partners assigning partnership interest to Canadian assignees and assignees immediately selling asset of partnership back to original partners at loss -- Assignees subsequently purchasing one percent interest in oil and gas property which ceased production shortly after acquisition -- Whether valid partnership established for income tax purposes -- Whether assignees entitled to deduct partnership loss –  Whether purchase of interest in oil and gas property established ancillary intention to carry on business with view to profit -- Whether taking of  assignment constituted assignees as  partners notwithstanding criteria for valid partnership.

A U.S. partnership, which was involved in the construction of an apartment complex incurred potential losses which the appellant and other Canadians sought to acquire for use as an income tax deduction in Canada.  Through a series of transactions that occurred on the same day, they became assignees of the interests of the original American partners.  The Canadians then disposed of the apartment complex to the original American partners, resulting in the acquisition and realization of accounting losses to the Canadians.  These accounting losses were used as deductions in computing the Canadians’ 1988 Canadian taxable income under s. 96 of the Income Tax Act.  The Canadian partners also acquired a one percent interest in a Canadian oil and gas property for $5,000.  This interest was not managed by the Canadian partners, never produced a profit, and production ceased shortly after the acquisition.  The taxation authorities by notice of reassessment disallowed the claim for partnership losses.  The appellant filed a notice of objection but the reassessment was confirmed.  Appeals to the Tax Court of Canada and then to the Federal Court of Appeal were unsuccessful.  Both courts concluded that the definition of a partnership  was not met in this case.

Held:  The appeal should be dismissed.

Even in respect of foreign partnerships, a taxpayer seeking to deduct Canadian partnership losses through s. 96 of the Income Tax Act must satisfy the definition of partnership that exists under the relevant provincial or territorial law.  The three essential ingredients of a partnership are (1) a business (2) carried on in common (3) with a view to profit.  A valid partnership does not depend on the creation of a new business.  It is sufficient that an existing business is continued. It is also not necessary to show that the partners carried on a business for a long period of time.  A partnership may be formed for a single transaction.  The common purpose requirement will usually exist where the parties entered into a valid partnership agreement setting out their respective rights and obligations as partners.  The existence of  a “view to profit” is to be determined by an inquiry into the intentions of the parties.  To meet the requirement, it will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose.  The determination of the existence of a view to a profit is not a matter of strictly quantitative analysis.  The law of partnership does not require a net gain over a determined period in order to establish that an activity is with a view to profit.  Where a partnership is formed with the predominant motive of acquiring a tax loss, it is therefore not necessary to show an intention to profit by the amount necessary to recoup the acquired losses or produce a net gain.  Finally, for a person to become a partner by assignment, the criteria of a valid partnership must be reaffirmed in order for the partnership to continue in its new form.  Otherwise the partnership will continue as formerly constituted, absent an event of dissolution.  A bare assignee will have only those rights and entitlements provided for in the relevant statute or partnership agreement.

Here, although the partnership agreement and other documentation indicated an intention to form a partnership, the fundamental criteria of a valid partnership were not met.  The Canadians did not intend to carry on business with a view to a profit.  While a partnership can be formed only for a brief period of time, there was no continuity of a business.  Once the Canadians acquired their interests in the alleged partnership, the apartment complex was owned only briefly before it was sold, terminating the former business of managing the complex.  Furthermore, there was no evidence showing that the Canadians intended to make a profit during the term of their involvement with that complex.  The purchase of a working interest in an oil and gas property did not establish an ancillary intention to carry on business with a view to a profit.  Although the documentary evidence indicated an intention to form a partnership in that property, there was no evidence that the alleged partnership or its agents expended anything other than nominal time, attention or labour on the project and did not incur any liabilities to other persons in respect of it.

Cases Cited

Considered:  Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, rev’g [1996] 3 F.C. 713; distinguished:  Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391, 2001 SCC 11; referred to:  Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, 2000 SCC 36; Economics Laboratory (Canada) Ltd. v. M.N.R., 70 D.T.C. 1208; Gordon v. The Queen, [1961] S.C.R. 592; Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336; Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622; Canada v. Antosko, [1994] 2 S.C.R. 312; Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536; Tara Exploration and Development Co. v. M.N.R., 70 D.T.C. 6370.

Statutes and Regulations Cited

Income Tax Act,  S.C. 1970‑71‑72, c. 63, s. 96 [am. 1984, c. 1, s. 43(1); am. 1985, c. 45, s. 48(1); am. 1987, c. 46, s. 32(1); am. 1988, c. 55, s. 66].

Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39.

Partnership Act, R.S.A. 1980, c. P-2, s. 34.

Partnerships Act, R.S.O. 1980, c. 370, s. 5.

Authors Cited

Black, Henry Campbell.  Black's Law Dictionary, 6th ed.  St. Paul, Minn.: West Publishing Co., 1990.

Canada.  Department of National Revenue, Taxation.  Interpretation Bulletin IT-90, “What is a Partnership?”, February 9, 1973.

Lindley & Banks on Partnership, 17th ed.  By R. C. I’Anson Banks.  London: Sweet & Maxwell, 1995.

Manzer, Alison R.  A Practical Guide to Canadian Partnership Law.  Aurora, Ont.: Canada Law Book (loose-leaf updated October 2000, release 6).

Nathanson, David C.  “Tax Motive Kills Partnership:  Spire Freezers (cf. Continental Bank)” (1999), 7 Tax Litigation 458.

Tobias, Norman C.  Taxation of Corporations, Partnerships and Trusts.  Scarborough, Ont.: Carswell, 1999.

VanDuzer, J. Anthony.  The Law of Partnerships and Corporations.  Concord, Ont.: Irwin Law, 1997.

APPEAL from a judgment of the Federal Court of Appeal, [2000] 1 F.C. 555, 178 D.L.R. (4th) 126, 246 N.R. 309, 46 B.L.R. (2d) 225, 99 D.T.C. 5602, [1999] 4 C.T.C. 177, [1999] F.C.J. No. 1327 (QL), dismissing the appellant’s appeal from a judgment of the Tax Court of Canada, 97 D.T.C. 1468, [1997] T.C.J. No. 728 (QL), which found that the appellant was not entitled to deduct partnership losses under s. 96 of the Income Tax Act.  Appeal dismissed.

C. D. O’Brien, Q.C., Al Meghji and Michel Bourque, for the appellant.

Paul Malette and Naomi Goldstein, for the respondent.

The judgment of the Court was delivered by

1                                   Iacobucci and Bastarache JJ. -- This appeal was heard with Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391, 2001 SCC 11,  released concurrently.  Both cases raise the basic question of whether a valid partnership has been established for income tax purposes.

I.  Facts

2                                   In 1985, a limited partnership was created by U.S. residents (the “American Partners”) under the laws of Texas, called "The Commons at Turtle Creek Ltd." (the “Commons”).  The Commons acquired land and constructed an apartment building on the land (the “Dallas Apartment Complex”).  By August 1988, the cost of the land and the building far exceeded the fair market value.

3                                   The appellant believed that, through a series of transactions,  he could acquire and realize a portion of the losses arising from the difference between the original cost and the August 1988 market value of the Dallas Apartment Complex which he could then use as a deduction in computing his Canadian taxable income.

4                                   In order to secure the losses, the appellant, 38 other Canadians, and an Alberta corporation (collectively referred to as the “Canadians”), arranged to become assignees of the interests of the original American partners in the Commons.

5                                   A series of transactions took place on August 29, 1988 which were intended to secure the losses to the Canadians all according to a predetermined closing agenda.  The transactions were intended to result in:

(a) the Canadians’ becoming partners (with 99.97 percent general partnership interests and .03 percent limited partnership interest) in the ongoing Commons limited partnership by assignment of partnership interests from the American partners for a total cost of US$180,000;

(b) the disposition of the Dallas Apartment Complex by the Commons to the original American partners, and the acquisition and realization of accounting losses to the Canadians.  The Canadians could then use the losses as deductions in computing their 1988 Canadian taxable income under s. 96 of the Income Tax Act,  S.C. 1970‑71‑72, c. 63;

(c) acquisition of a one percent interest in a Canadian oil and gas property at a cost of C$5,000.

6                                   Although the alleged partnership purchased an interest in the oil and gas property, it never produced a profit and production was halted owing to flooding shortly after its acquisition.  Later, the alleged partnership purchased a Montana condominium, but this asset also never produced a profit. 

7                                   In the 1988 taxation year, each of the Canadians was allocated his proportionate percentage of the loss arising from the sale of the Dallas Apartment Complex by the Commons.  By notice of reassessment, the taxation authorities disallowed the partnership losses claimed by the appellant. The appellant filed a notice of objection but the reassessment was confirmed.  The appellant appealed to the Tax Court of Canada, then to the Federal Court of Appeal, and now to this Court.

II.  Judgments Below

1.  Tax Court of Canada, 97 D.T.C. 1468                                         

8                                   Rip T.C.C.J. found that the transactions in this case were legally effective and not a sham, and that the tax avoidance provisions of the Act had no application to the appeal at bar. 

9                                   The reasons for judgment of Rip T.C.C.J. are primarily concerned with the issue of whether the Canadians became members of a valid partnership.  The Tax Court judge concluded that the definition of a partnership requires a relationship or an association between persons carrying on a business with a view to profit.   He also concluded that the “sole purpose” of the Canadians in entering into the transactions at issue was to acquire a potential tax loss.  Relying on the since overturned Federal Court of Appeal decision in Canada v. Continental Bank Leasing Corp., [1996] 3 F.C. 713, the Tax Court judge found (at p. 1483) that

neither the appellant nor any of the Canadians intended anything other than to obtain a tax loss from the venture. The purchases of the Canadian Oil and Gas Property and the Montana Condominium were nothing more than window dressing.  Their expectation of income from these two properties was minimal, never even approaching the amount of the loss that they hoped to deduct from their income.  The relationship subsisting between the Canadians was not that of carrying on business in common with a view to profit.  The Canadians were not associated to carry on a business for profit.

10                               Thus, the Tax Court judge found that the Canadians were not members of a partnership with respect to the ownership of the Dallas Apartment Complex.   The Tax Court judge also dismissed the argument that the Canadians did not have to meet the criteria for the creation of a partnership because they had acquired partnership interests in an existing partnership.  He held that this relationship must exist between partners whether they create a new partnership or are admitted to an existing one.  Having found that the criteria of a partnership relationship were not met in the case at bar, the Tax Court judge concluded that the appeal should be dismissed.

2.  Federal Court of Appeal, [2000] 1 F.C. 555

11                               The Federal Court of Appeal (Rothstein J.A., Isaac C.J. and Décary J.A. concurring) unanimously affirmed the result reached by the Tax Court judge.  The Federal Court of Appeal addressed two major issues:  first, was there any business being carried on with a view to profit which was ancillary to the Canadians’ tax minimization objective?  Second, were the Canadians partners by reason of the assignment of partnership interests in an existing partnership?

12                               With regard to the first issue, the Federal Court of Appeal applied the principles enunciated by this Court in Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298.  They considered the evidence of the Canadians’ intentions and conduct in relation to each of the assets owned by the Commons at the material times.  They concluded that, after the Canadians took up their assignments, there was no business carried on by the Commons.  In the Federal Court of Appeal’s view, once the Canadians became members of the Commons, all that took place was a series of transactions leading to the disposition of the Dallas Apartment Complex and the acquisition of the Canadian oil and gas property.  Accordingly, the Federal Court of Appeal concluded that, unlike the facts in Continental Bank, supra, there was “no real, albeit ancillary, profit element” (para. 26) to permit the inference that a business was being carried on with a view to profit in order to satisfy the definition of partnership.

13                               With regard to the second issue, the Federal Court of Appeal held that the entry of new persons and the departure of existing partners will be considered to constitute the creation of a new partnership provided the requisite components of the definition of partnership are satisfied.  Hence, the court concluded that the taking of an assignment of partnership interest does not obviate the need to comply with the definition of partnership, and that the Canadians’ failure to comply with that definition rendered the alleged partnership nothing more than a collection of co-owners of property.

III.  Analysis

14                               As noted at the outset, the resolution of this appeal turns on the application of principles of the law of partnership.  The principal issue is whether the appellant was a member of a valid partnership such that he could deduct partnership losses from his income pursuant to s. 96 of the Act.  The secondary issue is, notwithstanding the criteria for a valid partnership, whether the taking of an assignment constituted the appellant as a partner.

15                               In dealing with these issues in this appeal and in Spire Freezers, we do not find it necessary to discuss the general anti-avoidance rule that was introduced on September 13, 1988 as the transactions in these appeals took place before that date and are consequently not affected by the rule.

16                               Section 96(1) of the Act provides as follows:

96. (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;                    

(d) each income or loss of the partnership for a taxation year were computed as if this Act were read without reference to subsections 66.1(1), 66.2(1) and 66.4(1) and as if no deduction were permitted by section 29 of the Income Tax Application Rules, 1971, subsection 65(1) or section 66, 66.1, 66.2 or 66.4;          

(e) each gain of the partnership from the disposition of land used in a farming business of the partnership were computed as if this Act were read without reference to paragraph 53(1)(i);     

                                                                   . . .

(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 case,

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.

1.      Was the Appellant a Member of a Partnership: Was He Carrying on Business in Common with a View to Profit?

(a) The Essential Ingredients of Partnership

17                The term “partnership” is not defined in the Act.  Partnership is a legal term derived from common law and equity as codified in various provincial and territorial partnership statutes.  As a matter of statutory interpretation, it is presumed that Parliament intended that the term be given its legal meaning for the purposes of the Act: N. C. Tobias, Taxation of Corporations, Partnerships and Trusts (1999), at p. 21. We are of the view that, where a taxpayer seeks to deduct Canadian partnership losses through s. 96 of the Act, the taxpayer must satisfy the definition of partnership that exists under the relevant provincial or territorial law.  This is consistent with Interpretation Bulletin IT-90, “What is a Partnership?” dated February 9, 1973.  It is also consistent with the approach taken to the interpretation of the Act by a majority of this Court in Will-Kare Paving & Contracting Ltd. v. Canada, [2000] 1 S.C.R. 915, 2000 SCC 36, at para. 31.  It follows that even in respect of foreign partnerships, for the purposes of s. 96 of the Act, the essential elements of a partnership that exist under Canadian law must be present: for a similar approach, see Economics Laboratory (Canada) Ltd. v. M.N.R., 70 D.T.C. 1208 (T.A.B.).

18                Each of the common law provinces has enacted its own partnership legislation based on the Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39.  However, partnership as a concept was recognized by the courts of law and equity long before the enactment of that statute.  It is perhaps not surprising that common law jurisdictions generally, and the common law provinces of Canada in particular, define partnership as a relationship comprised of the same three essential ingredients.  The three essential ingredients of partnership were recently described by this Court in Continental Bank, supra, at para. 22: 

Section 2 of the [Ontario] Partnerships Act defines partnership as "the relation that subsists between persons carrying on a business in common with a view to profit". This wording, which is common to the majority of partnership statutes in the common law world, discloses three essential ingredients: (1) a business, (2) carried on in common, (3) with a view to profit.

19                In law, the meaning of “carrying on a business” may differ depending on the context in which it is used.   Provincial partnership acts typically define “business” as including “every trade, occupation and profession”.   The kinds of factors that may be relevant to determining whether there is a business are contained in the existing legal definitions.  One simple definition of "carrying on trade or  business" is given in Black's Law Dictionary (6th ed. 1990), at p. 214:  "To hold one's self out to others as engaged in the selling of goods or services."  Another definition requires at least three elements to be present:  (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit:  see Gordon v. The Queen, [1961] S.C.R. 592, per Cartwright J., dissenting but not on this point, at p. 603.

20                The existence of a valid partnership does not depend on the creation of a new business because it is sufficient that an existing business was continued.  Partnerships may be formed where two parties agree to carry on the existing business of one of them.  It is not necessary to show that the partners carried on a business for a long period of time.  A partnership may be formed for a single transaction.  As was noted by this Court in Continental Bank, supra, at para. 48, “[a]s long as the parties do not create what amounts to an empty shell that does not in fact carry on business, the fact that the partnership was created for a single transaction is of no consequence.”   Furthermore, to establish the carrying on of a business, it is not necessary to show that the parties held meetings, entered into new transactions, or made decisions: Continental Bank, supra, at paras. 31-33.  A business may be established even in circumstances where the sole business activity is the passive receipt of rent, as was noted by L’Heureux-Dubé J. in Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336, at para. 46:

Where machinery is rented out, the essential core operations may at times be limited to accepting rental revenue and assuming the business risk and other obligations. At any time during that period, any client could demand the execution of any of the contractual obligations, such as fixing an engine, for example. Where, because a rental business is fortunate enough to experience no mechanical breakdowns or accidents during a period of time, it "passively" accepts rental revenue and assumes business risk and obligations, it does not necessarily follow that it is not carrying on a business during that period. Holding otherwise would imply that rental businesses are "intermittent", that is, that they carry on a business only when something goes wrong in the operations. Such a proposition is unacceptable.

21                In determining whether a business is carried on “in common”, it should be kept in mind that partnerships arise out of contract.  The common purpose required for establishing a partnership will usually exist where the parties entered into a valid partnership agreement setting out their respective rights and obligations as partners.  As was noted in Continental Bank, supra, at paras. 34-35, a recognition of the authority of any partner to bind the partnership is relevant, but the fact that the management of a partnership rests with a single partner does not mandate the conclusion that the business was not carried on in common.  This is confirmed in Lindley & Banks on Partnership (17th ed. 1995), at p. 9, where it is pointed out that one or more parties may in fact run the business on behalf of themselves and the others without jeopardizing the legal status of the arrangement.  It may be relevant if the parties held themselves out to third parties as partners, but it is also relevant if the parties did not hold themselves out to third parties as being partners.  Other evidence consistent with an intention to carry on business in common includes:  the contribution of skill, knowledge or assets to a common undertaking, a joint property interest in the subject‑matter of the adventure, the sharing of profits and losses, the filing of income tax returns as a partnership, financial statements and joint bank accounts, as well as correspondence with third parties: see Continental Bank, supra, at paras. 24 and 36.

22                A determination of whether there exists a “view to profit” requires an inquiry into the intentions of the parties entering into an alleged partnership.   At the outset, it is important to distinguish between motivation and intention.  Motivation is that which stimulates a person to act, while intention is a person’s objective or purpose in acting.  This Court has repeatedly held that a tax motivation does not derogate from the validity of transactions for tax purposes:  Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622;  Canada v. Antosko, [1994] 2 S.C.R. 312;  Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, at p. 540.   Similarly, a tax motivation will not derogate from the validity of a partnership where the essential ingredients of a partnership are otherwise present:  Continental Bank, supra, at paras. 50-52.    The question at this stage is whether the taxpayer can establish an intention to make a profit, whether or not he was motivated by tax considerations.  For further discussion, see D. Nathanson,  “Tax Motive Kills Partnership:  Spire Freezers (cf. Continental Bank)” (1999), 7 Tax Litigation 458.

23                Moreover, in Continental Bank, supra, this Court held that a taxpayer’s overriding intention is not determinative of whether the essential ingredient of “view to profit” is present.  It will be sufficient for a taxpayer to show that there was an ancillary profit-making purpose.  This flows from the following observation made in Lindley & Banks on Partnership, supra, at pp. 10‑11, and adopted in Continental Bank, supra, at para. 43:

. . . if a partnership is formed with some other predominant motive [other than the acquisition of profit], e.g., tax avoidance, but there is also a real, albeit ancillary, profit element, it may be permissible to infer that the business is being carried on "with a view of profit."  If, however, it could be shown that the sole reason for the creation of a partnership was to give a particular partner the "benefit" of, say, a tax loss, when there was no contemplation in the parties' minds that a profit . . . would be derived from carrying on the relevant business, the partnership could not in any real sense be said to have been formed "with a view of profit".

24                An ancillary purpose is by definition a lesser or subordinate purpose. In determining whether there is a view to profit courts should not adopt or employ a purely quantitative analysis.  The amount of the expected profit is only one of several factors to consider.  The law of partnership does not require a net gain over a determined period in order to establish that an activity is with a view to profit.   For example, a partnership may incur initial losses during the start up phase of its enterprise.  That does not mean that the relationship is not one of partnership, so long as the enterprise is carried on with a view to profit in the future.  Therefore, where a partnership is formed with the predominant motive of acquiring a tax loss, it is not necessary to show an intention to profit by the amount necessary to recoup the acquired losses or produce a net gain.

(b) The Approach to Determining Whether a Partnership Exists

25                As adopted in Continental Bank, supra, at para. 23, and stated in Lindley & Banks on Partnership, supra, at p. 73: “in determining the existence of a partnership . . . regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case”.  In other words, to ascertain the existence of a partnership the courts must inquire into whether the objective, documentary evidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on business in common with a view to  profit. 

26                Courts must be pragmatic in their approach to the three essential ingredients of partnership.  Whether a partnership has been established in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surrounding circumstances.  That the alleged partnership must be considered in the totality of the circumstances prevents the mechanical application of a checklist or a test with more precisely defined parameters. 

(c) Application to the Facts of the Case at Bar

27                In the case at bar, taken by themselves, the partnership agreement and other documentation indicate an intention to form a partnership.  But that is not sufficient because the fundamental criteria of a valid partnership must still be met.  

28                In this case, the alleged partnership held two assets: the Dallas Apartment Complex and a one percent working interest in an Alberta oil and gas property.   We agree with the Federal Court of Appeal that the facts in this case indicate that at the time they entered into the transactions at issue, the Canadians did not intend to carry on business with a view to profit in respect of the Dallas Apartment Complex.  Once the Canadians acquired their interests in the alleged partnership, the apartment complex was owned only briefly before it was disposed of in accordance with the option granted to the American partners and according to a pre-determined closing agenda.  As was contemplated in Continental Bank, supra, a partnership can be formed for a brief period of time.  It was also acknowledged in that case that the parties need not hold meetings or make decisions, and that the passive receipt of rent can constitute a business. However, in Continental Bank, supra, the business of the partnership was pre-existing and continued after the partnership was formed.   In this case, there was no continuity of a business, in fact, one of the first acts of the alleged partnership was effectively to terminate the Commons’ former business of managing the apartment complex.  Furthermore, there was no evidence provided to show that the Canadians intended to make a profit during the term of their involvement with the apartment complex.  Consequently, in the time between the entry of the Canadians and the disposition of the Dallas Apartment Complex, the Canadians were not, judging from all the surrounding circumstances, carrying on business in common with a view to profit in respect of that asset.

29                The appellant argues that he established an ancillary intention to carry on business with a view to profit by virtue of the purchase of a working interest in an oil and gas property.   Here, again, the documentary evidence indicates an intention to form a partnership.  Just prior to the transactions at issue in this appeal, the partnership agreement was amended to provide for investment in oil and gas as one of the purposes of the partnership.  Shortly before the scheduled withdrawal of the American partners, the alleged partnership did purchase a one percent interest in an Alberta oil and gas property for $5,000.  However, as discussed above, this evidence of intention must be weighed against other factors in the context of the surrounding circumstances relating to the oil and gas property.  In considering those circumstances, we are not convinced that the putative partners had the necessary intention to carry on business in common with a view to profit.  It is difficult to accept that there was in fact a business being carried on when none of the factors relevant to the existence of a business supports that contention.  The putative partners did not hold themselves out to others as providers of goods or services derived from their interest in the oil and gas property.  They had no management duties in respect of the property.  There is no evidence that the alleged partnership or its agents expended anything other than nominal time, attention or labour on the project; nor did they incur any liabilities to other persons in respect of it. 

30                Furthermore, when asked at trial, the appellant could not remember the name of the management company that was operating the oil and gas well.  The only evidence of an expectation of profit was a vague and self-serving assertion at trial by the appellant of an expected return of between $1,000 and $1,500 per year.  There was no evidence that a profit was ever realized, and no financial statements were produced.  The one percent interest in the oil and gas property was the sole asset of the alleged partnership and approximately two months after it was purchased it became flooded and production was suspended.  No other interests in oil and gas properties were ever purchased.  Not until 18 months after the shut-down of the oil and gas property did the alleged partnership purchase another asset, the Montana condominium.

31                Given the above circumstances, we do not accept the appellant’s characterization of the Canadians’ activities in respect of the oil and gas investment as  carrying on business with a view to profit, even as an ancillary purpose.   As stated, the time,  labour and money spent on the purchase and holding of the interest in the oil and gas property was nominal; indeed,   it may be that that arrangement can be viewed as co-ownership of property as found by the Federal Court of Appeal or as an isolated event or adventure as opposed to the carrying on of a business: see Tara Exploration and Development Co. v. M.N.R., 70 D.T.C. 6370 (Ex. Ct.).

32                We agree with the trial judge that the transactions at issue were not a sham:  see Stubart Investments, supra, at pp. 545-46.  However, the trial judge also found that the purchase of the one percent interest in an oil and gas property was “nothing more than window dressing”.  We take that as a finding that there was no real ancillary profit-making purpose behind the appellant’s involvement in the oil and gas property.  Like the Federal Court of Appeal, we agree with that finding as well.  In coming to this conclusion we do not adopt or employ a quantitative analysis, that is, we do not base our conclusion solely on the amount of the expected profit, although that is a factor to consider.  In determining whether there is the necessary “view to profit” the courts must look at all the factors that relate to carrying on business in common with a view to profit.    

33                In contrast, the appellants in Spire Freezers, supra, made a considerable investment in a pre-existing business which they continued to operate after entering the partnership.  Ultimately, they acquired an asset, an apartment building, requiring substantially more than nominal management effort.  The common purpose requirement was met by the parties’ having entered into a valid partnership agreement, and by the fact that they were joint owners of the apartment building, albeit briefly. The appellants in Spire Freezers must have entered into the transaction with a view to  profit since they were apprised of the potential to make a profit from the  apartment building and they clearly intended to continue that business.   In that case, the requirements of partnership were met.

34                In summary, it is true that the trial judge in this case did not have the benefit of this Court’s reasons in Continental Bank, supra, and consequently, he applied the wrong law in finding against the appellant.  However, after applying this Court’s decision in Continental Bank, supra, we agree that the trial judge’s finding was correct in this case.  The appellant was not a member of a partnership because there was no business being carried on in common with a view to profit.

2.     Does the Taking of An Assignment Obviate the Need to Comply With the Definition?

35             The appellant’s alternative position is that he need not have satisfied the Continental Bank criteria because he and the other Canadians became partners of a valid partnership by assignment of interests in a pre-existing Texas partnership.  In this regard, the appellant argues that Texas law governs and that under Texas law the criteria of carrying on business in common with a view to profit is irrelevant to the continuing validity of that partnership.  There is some dispute between the parties as to whether this aspect of Texas law was adequately proven.  The lower courts found that it was not because the expert witness had not turned his mind to the question of whether the essential ingredients of a partnership were necessary.

36             As noted above, we are of the view that, where a Canadian taxpayer seeks to deduct partnership losses through s. 96 of the Act, the taxpayer must satisfy the essential ingredients of a partnership under Canadian law.  Even in respect of foreign partnerships, for the purposes of s. 96 of the Act, the essential elements of a partnership that exist under Canadian law must be present.  A partnership must be that entity familiar to Canadian law, it must be more than a partnership in name only.     

37             To accede to the appellant’s alternative position would require us to accept that, by virtue of the nature of a partnership as an independent and continuing entity, a person is capable of becoming a partner by acquiring an economic interest in the partnership, notwithstanding that he or she does not possess the intention to form the definitive relationship with the other partners. A partnership can be viewed as either an independent entity or a relationship between individuals depending on the context in which it is observed.   That a partnership may be considered an entity for some purposes is clear from s. 5 of the Ontario Partnerships Act, R.S.O. 1980, c. 370, where it is prescribed that for the sake of convenience a partnership may be referred to as a “firm” and the name under which it carries on business is called the firm name.  Likewise, for income tax purposes, the income from the partnership business is calculated at the firm level.  And typically, rules of civil procedure provide for actions against a partnership to be commenced and defended using the partnership name, and any order made against a partnership may be enforced against the property of the partnership, as well as the property of the partners:  J. A. VanDuzer, The Law of Partnerships and Corporations (1997), at p. 26.  

38             Furthermore, that a partnership has some characteristics of an entity follows from the principles of partnership law relating to the dissolution of a partnership.  There are some statutorily established circumstances under which the partnership is automatically deemed to be dissolved.   A court may also intervene to order dissolution of the partnership in specified circumstances.   Partners may also agree to dissolve the partnership upon the happening of certain events.  Otherwise, an overt act by one of the partners is required to terminate the partnership and end the relationship.  As well, notice to the remaining partners and possibly other persons may be necessary: see A. R. Manzer, A Practical Guide to Canadian Partnership Law  (loose-leaf), at paras.  7.60, 7.70 and 7.150. 

39             However, the question before us concerns the effect of an assignment of partnership interest, and whether an assignee becomes a partner by virtue of such an assignment.  Under partnership law generally, an assignee of a partnership interest does not of itself convert the assignee into a partner; see Lindley & Banks on Partnership, supra, at pp. 556-57.  For example, s. 34 of the Alberta Partnership Act, R.S.A. 1980, c. P-2, sets out the rights of an assignee of a partnership interest.  It is conspicuous that s. 34 does not grant to an assignee the full rights of partnership, only an entitlement to share in the profits of the partnership and, upon dissolution, the assets of the partnership.

40             In our view, for a person to become a partner by assignment there must be a valid partnership at the time of entry of the new partner.  In other words, upon the entry of a new partner, the criteria of a valid partnership must be reaffirmed in order for the partnership to continue in its new form.  Otherwise the partnership will continue as formerly constituted, provided there has not been an event of dissolution.  A bare assignee will have only those rights and entitlements provided for in the relevant statute or partnership agreement.

41             It follows from fundamental principles of partnership law that in order for a person to enter and become a new partner of a valid and pre-existing partnership, that person and the existing members of the partnership must satisfy the essential elements of a valid partnership at the time of the entry of the new partner.  That is, they all must be carrying on business in common with a view to profit.  In this regard, we agree with the conclusion of the Federal Court of Appeal that “the entry of new persons . . . will be considered to constitute the creation of a new partnership, provided of course, that the requisite components of the definition . . . are satisfied” (para. 51).  In particular, we agree with the Federal Court of Appeal’s approval of para. 3‑04 of Lindley & Banks on Partnership, supra, where the conventional legal view is stated as follows:

The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities.

42             A validly constituted partnership, therefore, is a continuing entity so long as none of the statutory or contractual events of dissolution occurs and the composition of that partnership remains the same.  A partnership agreement may facilitate a change in the composition of a partnership by providing that “the partnership continues” upon the entry or withdrawal of partners, but that does not obviate the need for persons intending to enter the partnership as  partners  to meet the essential criteria of a valid partnership.  Those criteria are fundamental and cannot be avoided simply by contract alone.  This result is consistent with the view that formation of a partnership does not depend solely on contractual arrangements but must also satisfy the essential ingredients of a partnership described by this Court in Continental Bank, supra.

43             Since we have already found that at the time of entering into the transactions at issue the alleged partners did not possess the essential ingredients of partnership as described in Continental Bank, supra, we cannot accede to the appellant’s position on this issue.                                                                           

44             Finally, after having said this, it is important to mention that, if a person or group of persons hold themselves out as partners in a partnership, but subsequently claim not to be partners for failure to meet the essential ingredients of a valid partnership, third parties dealing with such a non-entity may well have contractual and tortious remedies against the alleged partner(s).  Thus, third parties need not look behind representations of partnership in order to be assured of a remedy against the alleged partners.

IV.  Disposition

45             For the foregoing reasons, we would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant:  Bennett Jones, Calgary.

Solicitor for the respondent:  The Deputy Attorney General of Canada, Winnipeg.