|
Citation: 2004TCC377
|
|
Date: 20040608
|
|
Docket: 98-793(IT)G
98-794(IT)G
|
|
BETWEEN:
|
|
THOMAS WHEALY and ROBERT SISKIND,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Mogan J.
[1] The appeals of Thomas Whealy v.
The Queen (Court file 98-793) and Robert Siskind v. The
Queen (Court file 98-794) were heard together on common
evidence. For convenience, I will refer to the individual
Appellants by their family names as "Whealy" and
"Siskind", respectively. For Whealy, the taxation years
under appeal are 1987, 1988, 1989, 1993, 1995 and 1996. For
Siskind, the taxation years under appeal are 1987, 1988, 1989,
1990, 1991 and 1994. The Appellants claim that, in 1988, they
acquired certain interests in a partnership and that, in all
relevant years after 1988, they have carried on a business in
that partnership. In each year under appeal, one or both of the
Appellants deducted in computing income (or taxable income as the
case may be) an amount described as his allocated share of a loss
incurred by the partnership.
[2] By Notices of Reassessment, the
Minister of National Revenue disallowed the deduction of all
amounts claimed by the Appellants to be allocated portions of
losses incurred by the partnership. Whealy and Siskind have come
to this Court appealing from those reassessments. There are a
number of issues but the principal issue appears to be whether
the organization which purported to allocate losses pro rata to
the Appellants was a partnership. Most of the relevant
transactions occurred in 1988 and they are complicated.
The Facts
[3] The parties entered as Exhibit A-1
a binder of documents (35 tabs but tab 8 is blank) on the
understanding that the authenticity of the documents is admitted.
None of the documents in the binder requires proof but either
party may dispute the accuracy of any statement or amount in a
document, or may dispute the admissibility of a particular
document.
[4] Siskind and Whealy both live in
London, Ontario. Siskind was born in 1942 and Whealy in 1941.
They met at the University of Western Ontario around 1960. At the
hearing, each one described himself as a real estate developer.
Siskind became a lawyer and practised in London for about 15
years from 1967 to 1982. Much of his practice was concerned with
commercial law and real property and so he started to do some
real estate development when he was practising law. In 1982, he
gave up the practise of law to do full-time development. Whealy
obtained two degrees from the University of Western Ontario (B.A.
and M.A.) and then went to Chicago where he was engaged in some
real estate development. In 1972, Whealy returned to London and
joined with Siskind in land development. They started with
townhouses but later moved to the design, construction and
management of commercial buildings, office buildings,
condominiums, and a couple of hotels.
[5] Marvin Weisler is a urinary
surgeon living in Edmonton, Alberta. Siskind is married to Dr.
Weisler's sister and so Siskind and Weisler are
brothers-in-law. Dr. Weisler's father owned some real estate
investments and, when the father became ill in the mid-late
1970s, Dr. Weisler had to step in and become involved in the
management of the real estate. At that time, he also became
involved with Siskind and Whealy in other real estate projects.
By 1982, Siskind and Whealy and Weisler were working together as
an informal partnership or joint venture in the development of
various real estate projects. Siskind described their respective
areas as follows. Siskind would find the property and arrange for
its purchase and zoning. Whealy would be responsible for
construction. Weisler would be responsible for financial matters
and work with their outside accountants. They (Siskind, Whealy
and Weisler) would frequently have other partners participating
in one or more development projects.
[6] In the summer of 1988, their
accountants (Coopers & Lybrand) brought to Weisler's
attention a proposal which involved a loss to be realized on the
disposition of certain land and building in Texas, and the
allocation of that loss among the partners of the partnership
which owned the land and building. The general concept of the
proposal is set out in a letter to Weisler dated August 19, 1988.
See Exhibit A-1, Tab 4. Weisler described the proposal to Siskind
and Whealy; and the three decided to participate in equal
portions. Weisler also described the proposal to two individuals
in Edmonton (Jean Pare and her son Grant Lovig) who decided to
participate. See Exhibit A-1, Tabs 5 and 6.
[7] Because the five individuals from
Canada (Siskind, Whealy, Weisler, Lovig and Pare) decided to
participate in the proposal with respect to the land and building
in Texas, a series of transactions occurred in Texas on
September 12, 1988 to give effect to the proposal. Those
transactions are described in Exhibit A-1, Tab 7(1) with a
closing agenda listing 15 documents to be signed in order from
10:56 p.m. to 11:39 p.m. The documents are all reproduced under
Tab 7 but can be summarized in a number of facts to which the
parties have agreed. The facts set out in paragraphs 8 to 10
below are admitted in the pleadings or in the Appellant's
Request to Admit or are taken from the documents in Exhibit
A-1.
[8] On or about January 30, 1986,
Preston Court Venture ("PCV"), Preston Court Associates
("PCA") and Preston Partners ("Preston-P")
entered into an agreement of limited partnership named
Preston/Lovers, Ltd. (the "Old Partnership"). The Old
Partnership was formed by Texas entities pursuant to the Texas
Limited Partnership Act. See Exhibit A-1, Tab 1. Shortly
after its creation, the Old Partnership acquired certain lands
and improvements located in Dallas County, Texas ("the Real
Estate Assets"). Following the purchase of the Real Estate
Assets and prior to September 12, 1988, the real estate market in
Dallas declined and the value of the Real Estate Assets
declined.
[9] The following transactions
occurred in the following sequence on September 12, 1988:
(a) PCV, PCA and Preston-P
agreed to amend their original partnership agreement to convert
certain limited partnership interests in the Old Partnership,
acquired by PCV from PCA and Preston-P, to general partnership
interest;
(b) PCV granted a promissory note in
the amount of $6,500,000(USD) to the Old Partnership;
(c) The Old Partnership entered into
an option agreement with Preston/Lovers-I, Ltd. (the "New
Partnership") whereby the New Partnership was granted an
option to purchase certain property from the Old Partnership;
(d) The Old Partnership and the New
Partnership entered into a second option agreement whereby, if
the New Partnership exercised its option to purchase certain
property from the Old Partnership, then the Old Partnership had a
separate option to purchase certain land and improvements from
the New Partnership on or before September 30, 1990 for
$25,000,000(USD).
Note: The facts in subparagraphs (e) to (l)
inclusive are admitted by the Respondent subject to the following
condition: The Respondent admits that the transactions described
in subparagraphs (e) to (l) inclusive occurred but the Respondent
denies that Siskind and Whealy and the other assignees became
partners in the Old Partnership because the Respondent claims
that Siskind and Whealy and the other assignees did not carry on
any business in partnership on September 12, 1988 or at any time
thereafter.
(e) For $112,342(USD), PCV sold
and assigned 49.98% of its general partnership interest in the
Old Partnership to Siskind, Whealy and other assignees in the
following ratio:
Marvin Weisler
- 8.00%
Robert Siskind
- 8.00%
Thomas
Whealy
8.00%
Grant
Lovig
6.50%
Jean
Pare
19.48%
TOTAL
49.98%
(f) The partnership agreement
respecting the Old Partnership was amended to recognize the sale
and assignment of a portion of PCV's general partnership
interest to Marvin Weisler, Siskind, Whealy, Grant Lovig and Jean
Pare;
(g) For $112,274(USD), PCV sold and
assigned 49.95% of its general partnership interest in the Old
Partnership to Siskind, Whealy and other assignees in the
following ratio:
Marvin Weisler
- 7.99%
Robert Siskind
- 7.99%
Thomas
Whealy
7.99%
Grant
Lovig
6.49%
Jean
Pare
19.49%
TOTAL
49.95%
(h) The partnership agreement
respecting the Old Partnership was amended to recognize the sale
and assignment of a portion of PCV's general partnership
interest to Marvin Weisler, Siskind, Whealy, Grant Lovig and Jean
Pare;
(i) PCV sold and assigned its
.05% general partnership interest in the Old Partnership to the
assignees; PCA sold and assigned its .01% limited partnership
interest in the Old Partnership to the assignees; and Preston-P
sold and assigned its .01% limited partnership interest in the
Old Partnership to the assignees, as follows:
|
Assignee
|
General Partnership Interest
|
Limited Partnership Interest
|
|
Marvin Weisley
|
.01%
|
.00%
|
|
Robert Siskind
|
.01%
|
.00%
|
|
Thomas Whealy
|
.01%
|
.00%
|
|
Grant Lovig
|
.01%
|
.00%
|
|
Jean Pare
|
.01%
|
.00%
|
|
386853 Alberta Ltd.
|
.00%
|
.02%
|
|
TOTAL
|
.05%
|
.02%
|
(j) The partnership agreement
respecting the Old Partnership was amended to recognize the sale
and assignment of partnership interests noted in subparagraph (i)
above;
(k) The Old Partnership purchased from
PRI Producing Inc., PRI Gas Transmission Inc. and Hiawatha Oil
Company, Inc. the following oil and gas interests for
$25,000(USD): an interest in the Ellis #1-35 well in
Oklahoma and an interest in the Campbell #A-2-41 and
#A-1-41 wells in Texas; and
(l) The New Partnership
exercised its option to purchase certain assets from the Old
Partnership including the Real Estate Assets.
[10] In September 1988, the value of Park
City Towers was $6,050,000(USD) in total ($1,550,000 land and
$4,500,000 building). Exhibit A-1, Tabs 9 and 29 are copies of
the 1988 income tax returns of Siskind and Whealy, respectively.
Included in each tax return is a copy of the Old Partnership
financial statements for the fiscal period January 1 to September
30, 1988. The balance sheet shows comparable amounts at December
31, 1987. According to the balance sheet, the Old Partnership had
fixed assets (land and building) with a book value of $19,478,358
at December 31, 1987 but no fixed assets at all on September 30,
1988. The Old Partnership's only asset at September 30, 1988
was "oil and gas properties" with a book value of
$32,463(USD). According to other parts of the financial
statements, the Old Partnership had a terminal loss of $9,287,504
on the disposition of its building, and a loss of $3,760,042 on
the disposition of its land.
[11] If the Old Partnership's only asset
at September 30, 1988 was oil and gas properties with a book
value of $32,463(USD), I conclude that those oil and gas
properties were the Ellis well in Oklahoma and the Campbell wells
in Texas (referred to in subparagraph 9(k) above) although there
does not appear to be any direct evidence on this point. Siskind
stated that he had done other tax shelters (like movies) but had
never felt comfortable with them because there were no hard
assets. He felt comfortable with the Old Partnership because
producing gas wells were hard assets. If the gas wells were the
source of Siskind's comfort, he paid little attention to them
and knew little about them from 1988 to 2000. The same could be
said of Whealy. Because Dr. Weisler was the person who introduced
to Siskind and Whealy the concept of acquiring real property
losses in Texas, Weisler was the contact person for the gas
wells.
[12] Any revenue coming from the wells was
sent to Dr. Weisler in Edmonton. Around 1997, Dr. Weisler
transferred responsibility for the wells to Grant Lovig who, in
turn, transferred the responsibility to Siskind around 2000.
Exhibit A-1, Tabs 17 to 22 inclusive are monthly statements from
CIBC to the Old Partnership (c/o Grant Lovig, Edmonton) for
random months from July 2001 to October 2002 showing various
amounts deposited as revenue from the wells, and one payment out
(Tab 20) for legal fees. There is little evidence concerning the
Campbell wells and, in particular, whether they produced any
revenue. Siskind said that the Campbell wells "had some
problems and was sold off when Mr. Lovig was still looking
after the interest". Transcript page 68. Exhibit A-1,
Tab 25 is a letter from Grant Lovig (on behalf of the Old
Partnership) dated September 19, 2002 conveying its interest in a
Campbell well for $1,000(USD).
[13] The parties did not agree on the actual
percentage interest which the Old Partnership acquired in the
Ellis well and in the Campbell wells but Exhibit A-4 is a copy of
the "Gas Balancing Historic Report" issued by a person
identified only as "Samson" for the month of December
2002 but prepared on March 27, 2003. Exhibit A-4 reports on an
Ellis well and, in the two left-hand columns, shows an
"owner number" and a "unit working interest".
From Exhibit A-4, I have extracted the following information to
indicate the size of the Old Partnership's working interest
in relation to the two persons who appear to have the two largest
working interests:
Owner No.
|
Unit Working Interest
|
Current Entitlement
|
|
-
|
Samson
.68710680
|
1,229
|
|
643508
|
Keystone Company
.10000000
|
179
|
|
010609
|
Preston/Lovers, Ltd.
.05405270
|
97
|
I conclude that, in approximate portions, Samson has a 68.71%
interest, Keystone Company a 10% interest, and the Old
Partnership a 5.4% interest in the Ellis well. My conclusion is
supported by the "current entitlement" column because
Samson's entitlement (1,229) is about seven times
Keystone's (179) and the Old Partnership's (97) is a
little more than half of Keystone's. According to Exhibit
A-4, there are 35 persons with what are called "unit working
interests" in the Ellis well. If Samson (68.71%) and
Keystone (10%) are excluded, there is only 21.29% to be divided
among the other 33 participants. Therefore, it is not surprising
that the Old Partnership's interest is only 5.4%.
[14] Exhibit A-2 is a schedule prepared for
the hearing by PriceWaterhouseCoopers showing the
Partnership's Net Earnings from Oil & Gas Operations from
1989 to 2002, omitting any amounts for 1994 for which no records
were available. It shows net earnings of $17,124(Can) from
September 30, 1989 to September 30, 2002 (with no amounts for
1994). Five of the reporting years show negative amounts while
the remaining eight years show positive amounts. In nine of the
reporting years, the net amounts (positive or negative) are under
$1,400(Can); in three of those years the net amounts (positive or
negative) are between $1,400 and $2,700(Can); and in 2001 the net
earnings are $11,211(Can). From Exhibit A-2, I conclude that 65%
of the net earnings of $17,124 was received in the one year
2001.
[15] The supporting schedules in Exhibit A-2
show both revenue and expenses from oil and gas operations. In
some years, the expenses exceed revenues but there is no evidence
that the Old Partnership was ever required to make a cash
contribution toward the operation of the Ellis well or the
Campbell wells after the original cost of $25,000(USD) was paid
in September 1988. I infer that any contribution toward expenses
payable by the holder of a small minority working interest in
those wells was deferred and set off against future revenues.
Siskind stated that the net revenues were accumulated in a bank
account in Edmonton and he recalled a distribution around
1997/1998 among himself, Whealy, Weisler, Lovig and Pare.
[16] Siskind, Whealy and Weisler each
incurred a cost of $106,561 in order to acquire interests in the
Old Partnership. The cost was determined as follows (Exhibit A-1,
Tab 28):
|
|
|
|
Weisler
|
Siskind
|
Whealy
|
Total
|
|
U.S. Funds
|
|
|
|
|
|
Partnership Purchase
(433,846 x 48.01%)
|
$69,429.82
|
$69,429.82
|
$69,429.82
|
$208,289.46
|
|
Johnson Bromberg
(27,760.12 x 48.01%)
|
4,442.47
|
4,442.48
|
4,442.48
|
13,327.43
|
|
Don A. Tipton, Inc.
|
1,738.48
|
1,738.47
|
1,738.47
|
5,215.42
|
|
Total
|
75,610.77
|
75,610.77
|
75,610.77
|
226,832.31
|
|
Converted @ 1.2168
|
92,003.18
|
92,003.18
|
92,003.18
|
276,009.54
|
|
Canadian Funds
|
|
|
|
|
|
Thorsteinsson, Mitchell
(31,347.39 x 48.01%)
|
5,016.63
|
5,016.63
|
5,016.62
|
15,049.88
|
|
Thorsteinsson, Mitchell
|
2,874.71
|
2,874.71
|
2,874.71
|
8,624.13
|
|
Coopers & Lybrand
|
6,000.00
|
6,000.00
|
6,000.00
|
18,000.00
|
|
Cruikshank (estimate)
|
500.00
|
500.00
|
500.00
|
1,500.00
|
|
Cash Reserve
|
166.67
|
166.66
|
166.67
|
500.00
|
|
Total
|
14,558.01
|
14,558.00
|
14,558.00
|
43,674.01
|
|
Total Canadian Funds
|
$106,561.19
|
$106,561.18
|
$106,561.18
|
$319,683.55
|
[17] Exhibit A-1, Tab 13 is a letter dated
September 29, 1988 from John Gregory of the Thorsteinsson
law firm to Dr. Weisler. Because the letter is short, I will set
it out in full:
Re:
Preston/Lovers, Ltd.
I enclose copies of the cash flow analysis in respect of the
resource properties acquired by Preston/Lovers, Ltd. The resource
properties consist of interests in two proved, producing gas
wells, one located in Texas and one located in Oklahoma. The
projections indicate a payout over about 4½ years.
I have written to Plains Resources and asked them to forward your
share of the net operating revenues to your office. A copy of my
letter to Plains Resources is enclosed.
Yours truly,
Messrs. Siskind, Whealy and Weisler were in agreement that the
reference in the letter to "a payout over about 4½
years" was a reference to the cost of the wells ($25,000)
and not a reference to their cost ($106,561 each) of acquiring
interests in the Old Partnership. Exhibit A-2 shows net earnings
of $17,124(Can) from the wells over a 14-year period from 1989 to
2002. The projected payout over 4½ years was certainly
optimistic. Siskind explained that the net earnings would have
been higher if Dr. Weisler or Grant Lovig had signed a marketing
agreement which apparently was overlooked either at the beginning
(1988/1989) or sometime in the 1990s. Evidence with respect to
the marketing agreement is vague and I cannot determine the
extent (if any) to which it may have increased the net earnings
from the wells.
[18] Exhibit A-1, Tab 7 is a list of the
documents (closing agenda plus 18 documents) which were
tabled at the closing in Texas on September 12, 1988. The closing
agenda was tightly scripted from 10:56 p.m. to 11:39 p.m. for the
execution and delivery of the 15 documents listed in the closing
agenda. Document number 15 is a "Purchase and Sale
Agreement" with respect to the purchase by the Old
Partnership of certain interests in gas wells in Oklahoma and
Texas at a cost of $25,000. I assume that the cost is expressed
in U.S. dollars because the entire transaction took place in
Texas with three American vendors and one American purchaser. In
Exhibit A-1, Tab 28 (cost of Old Partnership interests), U.S.
dollars are converted to Canadian dollars at the rate of 1.2168.
Applying the same rate to the cost of the wells ($25,000) results
in a cost of $30,420 Canadian dollars. The net earnings of
$17,124(Can) in Exhibit A-2 for the period 1989 to 2002 show
that, after 14 years, the Appellants had recovered less than 60%
of the cost of the wells.
[19] I will attempt to summarize the results
of the transactions which took place in Texas on September 12,
1988 using the abbreviated names of the parties from paragraphs 8
and 9 above:;
(a) the original partners (PCV,
PCA and Preston-P) of the Old Partnership formed a second Texas
limited partnership under the name "Preston/Lovers-I,
Ltd.", also referred to as the "New
Partnership";
(b) the Old Partnership purchased the
Ellis well (in Oklahoma) and the Campbell wells (in Texas) for
$25,000(USD);
(c) the Old Partnership granted an
option to the New Partnership to purchase all of the assets of
the Old Partnership (except the Ellis and Campbell gas wells) for
an amount equal to the liabilities and obligations of the Old
Partnership (estimated to be not less than $11,170,000);
(d) the New Partnership granted an
option to the Old Partnership (conditional upon the New
Partnership exercising its option in (c) above) to repurchase the
same assets for $25,000,000(USD) on or before September 30,
1990;
(e) Siskind, Whealy, Weisler,
Lovig and Pare (the "Canadians") purchased from PCV,
PCA and Preston-P all of their interests in the Old Partnership
for about $225,000(USD);
(f) the New Partnership
exercised its option to purchase all of the assets of the Old
Partnership except the Ellis and Campbell gas wells;
(g) at midnight on September 12, 1988,
the only assets of the Old Partnership were the Ellis and
Campbell gas wells; and the only partners in the Old Partnership
were the five Canadians named in (e) above;
(h) on September 30, 1988, the Old
Partnership had realized the following losses all expressed in
U.S. Dollars:
- an operating
loss of $1,203,936 for the period January 1 to September 30,
1988;
- a capital
loss of $3,760,042 on the sale of land; and
- a terminal
loss of $9,287,504 on the sale of buildings.
(i) over the next 24 months the
Old Partnership did not exercise its option to repurchase (for
$25,000,000 by September 30, 1990) the assets which were sold to
the New Partnership on September 12, 1988.
Analysis
[20] For 1988 and subsequent years, the Old
Partnership allocated certain portions of its losses among its
Canadian partners; and those partners deducted their pro rata
share of such losses in computing income or taxable income as the
case may be. Revenue Canada (as it was then known) disallowed the
deduction of such losses, and the Appellants have come to Court
appealing from those disallowances.
[21] The principal issue is whether the Old
Partnership continued to exist as a partnership under Canadian
law after September 12, 1988. The Appellants' basic argument
is that the Old Partnership, through its interests in the Ellis
and Campbell gas wells, sells natural gas and is therefore
engaged in a partnership business. The Respondent's basic
argument is that the Old Partnership's ownership of minimal
interests in two gas wells was not the carrying on of a business;
and the Appellants (Siskind and Whealy) did not have a view to
profit with respect to such minimal interests.
[22] For the reasons set out below, I accept
the Respondent's argument and have concluded (i) that the Old
Partnership did not carry on any business after September 12,
1988; and (ii) that the Appellants did not have a view to profit
with respect to the minimal interests in two gas wells purchased
by the Old Partnership.
[23] Counsel for both parties cited the
decisions of the Supreme Court of Canada in Backman v. The
Queen, 2001 DTC 5149 and Spire Freezers Ltd. et al v. The
Queen, 2001 DTC 5158. Both decisions were unanimous and were
delivered on March 1, 2001. In Backman, Iacobucci J. and
Bastarache J. writing for the Court stated in paragraph 18 that
the three essential ingredients of a partnership are (1) a
business, (2) carried on in common, (3) with a view to profit.
The facts in Backman are similar to the facts in these two
appeals by Siskind and Whealy in the following way:
(i) In 1985, a Texas limited
partnership ("the Commons") purchased land and
constructed an apartment building thereon ("the Dallas
Apartments").
(ii) By August 1988, the cost of
the Dallas Apartments far exceeded the fair market value.
(iii) On August 29, 1988, Mr. Backman
and other Canadian taxpayers acquired 99.97% of the partnership
interests in Commons.
(iv) The Commons sold the Dallas
Apartments to its original Amercian partners realizing a
significant loss on the sale.
(v) The Commons purchased a small
interest in an oil and gas property plus a condominium in
Montana.
(vi) For 1988 and subsequent years,
Mr. Backman and the other Canadian taxpayers deducted their
allocated shares of the losses realized in the Commons from its
disposition of the Dallas Apartments.
(vii) The deduction of the losses was
disallowed and Mr. Backman appealed.
[24] Mr. Backman's appeal to the Tax
Court of Canada was dismissed (97 DTC 1468). His further appeal
to the Federal Court of Appeal was dismissed (99 DTC 5602).
And finally, his appeal to the Supreme Court of Canada was
dismissed (2001 DTC 5149). In the Tax Court of Canada, Judge Rip
stated at page 1482:
All the transactions were predetermined: the Canadians would
acquire the Dallas Apartment Complex subject to an option held by
a partnership consisting of the former limited partners of the
Commons and the new general partner. The option allowed the new
limited partnership to re-acquire the property at a price which
would trigger the losses inherent in the Dallas Apartment
Complex. The Canadians held an interest in the property for less
than two hours. ...
According to the closing agenda (Exhibit A-1, Tab 7, subtab
1), the Appellants (Siskind and Whealy) held an interest in the
Old Partnership's real estate in Dallas for only 38 minutes
from 11:00 p.m. to 11:38 p.m. on September 12, 1988. The
Appellants acknowledged at trial that they never intended to hold
the real estate in Dallas which had been owned by the Old
Partnership from its inception. Accordingly, I find that the
Appellants were not partners in the Old Partnership with respect
to its ownership of any real estate in Dallas.
[25] The real thrust of the Appellants'
argument is that the Old Partnership continued to carry on
business after September 12, 1988 through its ownership of
participating interests in the two gas wells. Having regard to a
similar argument put forward in Backman, the Supreme Court
of Canada stated in paragraphs 29 and 30:
[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. ...
[26] Exhibit A-2 shows that in the 10 years
from September 30, 1989 to September 30, 1999, the net earnings
of the Old Partnership's small interests in two wells was
only $3,283 being an excess of positive years ($6,668) over
negative years ($3,385) with no amounts available for 1994. After
September 12, 1988, the interests in the Old Partnership were
owned approximately 50% by Jean Pare and Grant Lovig and 50%
equally by Siskind, Whealy and Weisler. In that 10-year period,
Siskind's 16 2/3% interest in the net earnings ($3,283) for
the two gas wells was $547.14. Whealy's was the same. Siskind
and Whealy each paid $106,561 to acquire a 16 2/3% interest
in the Old Partnership. See Exhibit A-1, Tab 28. Compared to that
cost, a 10-year return of $547 from minimal interests in two gas
wells is insignificant, miniscule and negligible.
[27] In evidence, there was reference to the
fact that Siskind or Whealy or both neglected, in at least one
year, to report his miniscule share of earnings from the Old
Partnership. This neglect was remedied by a voluntary disclosure
to Revenue Canada around the time the Appellants were examined
for discovery for these appeals. I find the oversight easily
understandable given the insignificant earnings from the Old
Partnership in the overall picture of each Appellant's
income. It is not surprising that no documents can be found with
respect to earnings from the two gas wells for 1994. I conclude
that the earnings (if any) in any particular year were not
material for either Appellant.
[28] In Backman, the Supreme Court of
Canada discussed "carrying on business" at paragraph
19:
[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.
After September 12, 1988, the Old Partnership did not hold
itself out to anyone as engaged in the sale of goods or services.
The minimal interests in the two gas wells did not give the Old
Partnership any voice whatsoever in the management of those
wells. The receipt of insignificant revenue from year to year (if
any was received at all) did not require the occupation of time,
attention or labour by Siskind, Whealy, Weisler, Lovig or Pare.
The Old Partnership did not incur any liabilities to any third
parties. And no one relied on the minimal interests of the Old
Partnership in two gas wells for livelihood or profit.
[29] Counsel for the Appellants relied on
the decision of the Supreme Court in Spire Freezers which
is also (like Backman) similar to these appeals by Siskind
and Whealy:
(i) In 1978, a partnership
("HCP") was formed in California to develop a
residential condominium project on an island.
(ii) To obtain approval for the
project, HCP was required to build a low-rent apartment building
(Tremont) on the island.
(iii) Tremont was owned by a
corporation ("TAC") which was wholly owned by HCP.
(iv) By 1980, "BDI" and
"Peninsula" were the only remaining partners (50/50) in
HCP, and Peninsula was a wholly-owned subsidiary of BDI.
(v) By 1986, the costs of the
residential condominium project exceeded the fair market value of
that project by $10 million(USD).
(vi) In 1987, Spire Freezers Ltd.
("Spire Freezers") and other Canadian persons learned
that they could purchase the tax losses of the HCP project at 20
cents on the dollar.
(vii) On November 30, 1987, the following
transactions occurred:
(a) HCP purchased Tremont from
TAC for $2.9 million, borrowing the purchase money from BDI.
(b) HCP sold its shares of TAC to BDI,
and the amounts owing between HCP and BDI were cancelled by a
set-off.
(c) Peninsula sold its 50% interest in
HCP to Spire Freezers; BDI sold a 25% interest in HCP to Spire
Freezers; for a brief moment, the partners of HCP were BDI and
Spire Freezers; and then BDI sold its remaining 25% interest in
HCP to a group of individual Canadians.
(d) The total purchase price for a
100% interest in the HCP partnership was $34,530,000(USD) paid by
the purchasers in (c) above.
(e) HCP sold the residential
condominium project to BDI for $33.3 million (USD), realizing an
operational loss of $10.4 million (USD).
(viii) In effect, Spire Freezers and the group of
individual Canadians paid $1.23 million (USD) to acquire Tremont
and the realized losses of $10.4 million (USD).
(ix) Spire Freezers and the individual
Canadians have managed Tremont since its acquisition by HCP in
November 1987.
(x) In the fiscal year ending December
31, 1987, the HCP partnership claimed a loss of $10 million (USD)
and allocated it to Spire Freezers and the individual Canadians
partners.
(xi) The losses were disallowed by
Revenue Canada.
[30] When allowing the appeals of Spire
Freezers Ltd. and the individual Canadians, the Supreme Court
of Canada distinguished the different result in Backman by
the following comment at paragraph 20 of the Spire
Freezers judgment:
[20] However, despite the
similarities between the transactions in this case and those in
Backman, there are some essential differences. For
example, in respect of whether there was a carrying on of
business, it is notable that there is a significant difference
between the subordinate assets in Backman and Spire in
terms of the degree of effort required of the appellants and
expended by them in management. In Backman, the
subordinate asset was a one percent interest in an oil and gas
property, purchased for the sum of $5000 during the transition
between American and Canadian control of the alleged partnership.
The alleged partnership in Backman had no significant
management control over that asset, nor did the acquisition of
that asset represent a continuation of a pre-existing business of
one of the putative partners. When production was shut-down
shortly after purchase, no other investments in oil and gas were
made. Thus, in Backman, the alleged partnership was "an
empty shell that does not in fact carry on business" (see
Backman, supra, at para. 20). In this case, the
subordinate asset held by the partnership was the entire interest
in an apartment building. The property management business that
was associated with that asset was pre-existing and continued by
the Canadians. Tremont required a substantial management effort
which the appellants provided, and from which they benefited by
generating profit. As noted by Robertson, J.A., "the partnership
continued to hold title to a profit-generating asset, namely, the
apartment building, for at least a decade after the sale of the
condominium development".
In a similar vein, the Supreme Court stated in Backman
at paragraph 33:
[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.
[31] In my opinion, the facts in these
appeals by Siskind and Whealy are closer to the Backman
case than the Spire Freezer case. There was no prior asset
or business of the Old Partnership which Siskind or Whealy or
their Edmonton colleagues (Weisler, Lovig or Pare) were required
to manage or operate. The Old Partnership was gutted of all
significant assets on September 12, 1988 and left with only
newly acquired minimal interests in two gas wells. To me, the
ownership of those minimal interests was as passive as owning a
few shares in a public listed company a level below "blue
chip" status; the kind of company which, in a given year,
may or may not pay a dividend. Owning the minimal interests in
the gas wells was so passive that the Old Partnership did not
carry on any business at all after September 12, 1988. From and
after September 12, 1988, Siskind, Whealy, Weisler, Lovig and
Pare were co-owners of tiny interests in a couple of gas wells
but they were not partners with respect to those wells.
[32] There is no evidence that Siskind or
Whealy or their Edmonton colleagues had any voice in the decision
as to what minimal interest would be acquired in the Ellis and
Campbell wells or any other wells in Texas, Oklahoma, Alberta or
any other oil patch in Canada or the U.S.A. There is no evidence
that the Appellants or their Edmonton colleagues ever complained
about the low rate of return on the Ellis and Campbell wells.
There is no evidence that the Appellants or their Edmonton
colleagues really cared about their co-ownership of small
interests in the Ellis and Campbell wells. The appeals are
dismissed. The Respondent is awarded full costs until after
discoveries but only one set of costs thereafter.
Signed at Ottawa, Canada, this 8th day of June, 2004.
Mogan J.
Email this Content