Delesalle v. The Queen, 85 DTC 5613, [1986] 1 CTC 58 (FCTD)

McNair, J.:—The sole issue in these consolidated actions is whether the sum of $60,343 paid to the plaintiff, Phillipe E. Delesalle, on his retirement from the architectural firm of Cohos, Delesalle & Evamy, was income or a payment on account of capital.

The Minister initially regarded the payment as one of capital but by notice of reassessment dated March 4, 1981, reassessed the plaintiff’s 1973 income tax by the inclusion of the sum of $60,343, which was identified as “Work in Progress — Previously not Taxed.” The plaintiff filed notice of objection and, on August 4, 1981, the Minister confirmed his reassessment.

Meanwhile, the Minister had reassessed Martin Cohos and the other remaining partners by adding to their income in the 1974 taxation year proportionate amounts of the sum of $71,130, representing the work in progress payment of $60,343 to the plaintiff and the like amount of $10,787 paid at the same time to another retiring partner, R. Baxter. The remaining partners appealed this assessment to the Tax Review Board which, on October 16, 1980, disallowed the Minister's assessment on the ground that the payments to the retiring partners for work in progress were on account of income and properly deductible to the remaining partners. The Minister brought actions by way of appeal against the remaining partners from the decision of the Tax Review Board.

An order was made by Muldoon J. on December 28,1983 that the appeal to the Minister in respect of Martin Cohos and the five other remaining partners as well as the appeal of the plaintiff against the Minister’s reassessment be consolidated for purposes of trial, to be heard on common evidence, under the above captioned style of cause. Further directions were given in this regard at the commencement of trial.

In 1960 the plaintiff and Martin Cohos entered into partnership in Calgary for the practice of architecture. Over the next 13 years the enterprise prospered and grew apace. New partners were brought in and the work force was expanded. On April 1, 1972, the partners, by then eight in number, entered into a formal partnership agreement for carrying on the practice of architecture in partnership under the firm name of Cohos, Delesalle & Evamy. By the terms thereof, Cohos and Delesalle were accorded the status of senior partners with the largest equal percentages of profit and certain grandfather rights. About the same time, the plaintiff was suffering from ill health and feelings between him and his senior colleague, Cohos, had become exacerbated. It was finally agreed that the plaintiff should withdraw from the partnership effective as of April 1, 1973 and that Trafford Smith, of the firm's accountants, Clarkson, Gordon & Co., would act as arbitrator in negotiating a fair and honest settlement of the plaintiff’s partnership interest and the terms of his withdrawal from the firm.

Discussions ensued with a view to accomplishing an amicable and orderly withdrawal. On January 15, 1973 a meeting was held between the plaintiff, two of the partners, Martin Cohos and John Zuk, Trafford Smith and the firm's solicitor, Richard Tingle. Cohos took handwritten notes of what was generally agreed as to the terms of the plaintiff’s withdrawal from the firm on April 1, 1973. On January 17, 1973, the plaintiff and the remaining partners signed a letter agreement setting out the terms of withdrawal, which had been prepared by the firm’s solicitor from his recollection of the meeting held on the previous day and the summary notes made by Cohos. Basically, the agreement provided that Delesalle was to be paid for the capital contributed by him and interest thereon, his share of the partnership profits for the fiscal year ended March 31, 1973, the balance of salary owing to April 1, 1973, moneys payable pursuant to paragraph 8(a) of the partnership agreement, one year’s salary of $24,000 payable in 12 consecutive monthly instalments of $2,000 each commencing April 1, 1973, and grandfather payments of $14,000 a year for the period from April 1, 1973 to April 1, 1983, payable in equal monthly instalments, the first of such instalments to be due on April 1, 1973. There was a provision that the partnership could retain the name "Delesalle" as part of the firm name and further provisions for Delesalle to act in a consultative capacity with the use of an office and access during normal working hours to the files and documents with which he had been associated while a partner.

The monetary numbers for the chips to be taken from the game, as the plaintiff was wont to term it, were yet to be determined by the mediator, Trafford Smith. It is common ground that the monetary settlement for the plaintiff’s partnership equity was to be arrived at on the accrual basis of accounting which the firm had been following for the past few years. Trafford Smith seemed inclined to the view that the provisions of the partnership agreement for the termination of a partnership interest as modified by the letter agreement of January 17, 1973 were wedded to a cash basis of accounting which would have had the result, had their terms been explicitly followed, of yielding to the plaintiff a minimal amount of something in the range of $400. Be that as it may, there was an agreement among the partners to leave it to the mediator, Trafford Smith, to come up with a fair settlement figure for the plaintiff's partnership equity.

On or about March 11, 1973 the plaintiff and Trafford Smith had a meeting to go over and discuss a document which the plaintiff had received from Smith captioned "P. Delesalle — Statement of Equity — In C.D. & E. Group.” The "statement" purported to show the plaintiff’s monetary interests in three companies and contained a number of figures and notations made by the plaintiff. It also contained the following interesting projection, minus notations, with respect to the plaintiff's equity position in Cohos, Delesalle and Evamy:

C.D. & E.

Estimate of capital account at March 31, 1973	$100,000
Adjusted cost base at some date which amount represents tax free
Capital	$ 30,000
Amount (% thereof) subject to capital gains tax at such time as final
payment is made from C. D. & E. (sometime in 1977)	$ 70,000

Trafford Smith prepared the firm’s financial statements for the fiscal year ended March 31, 1973, which contained a schedule setting out in columnar form the capital accounts of the partners. The column for Delesalle showed a balance of $103,111 in his favour. The plaintiff was paid this amount following his retirement from the firm at the end of March.

The plaintiff returned to his ranch in Invermere, British Columbia, for a time and in the fall of 1973 went to sojourn in France for several years, returning periodically from time to time. In the meantime, Trafford Smith had recommended, because of an anticipated conflict situation, that Mr. Douglas Brown might better handle the plaintiffs tax affairs and arranged the necessary introduction. Brown was a partner of Clarkson, Gordon and Co. who was in the process of leaving to establish his own accountancy practice. In the late summer or early fall of 1973, Brown started gathering the necessary information for the preparation of the plaintiffs 1973 income tax return. He received from Trafford Smith the 1973 financial statements of the partnership. He received nothing else from Smith. In January or February of 1974 he conferred with the plaintiff about the filing of his 1973 T-1 Return during the course of one of the latter’s trips back to Canada. Brown consulted with an income tax specialist in the firm of Jones, Black & Company about attributing a substantial portion of Delesalle’s settlement of $103,111 to goodwill. The result of the whole exercise was that the settlement figure of $103,111 was reported in the plaintiff's 1973 T-1, Return as follows:

5. Items 4(a), (b) and (c) were included in the 1973 reported business income in full.

6. Item 4(d) was, due to the transitional rules of the Income Tax Act, included in the 1973 reported business income as to one-half of forty-five per cent in the net amount of $13,868.32 ($61,637.00 @ 45% 2).

7. The amounts reported were taken from financial data provided by the firm of Cohos, Delesalle and Evamy and had been prepared by Clarkson, Gordon & Co., chartered accountants. The reported net profits had been prepared on the accrual method and included post-1971 accounts receivable and work-inprogress; the appropriate changes in these latter accounts for the 1973 fiscal year were thus included in the net profit of the partnership for the year in respect of which the taxpayer duly reported his determined share.

8. The Adjusted Cost Base of the taxpayer’s partnership interest at March 31, 1973 was computed in the amount of $17,422.00 in the above referred to financial data.

In the schedules or spread sheets to the financial statements which Brown received from Trafford Smith, there were arrows and handwritten interlineations showing $12,225 for Delesalle’s share of 1971 receivables and taxable income of $27,400 as well as the figure of $14,074 for 1971 receivables remaining to be taken into income, which conformed exactly to the amounts reported for these items by Brown in the plaintiff's 1973 income tax return. Brown insists that the notations were those of Trafford Smith.

On April 8, 1976 Smith wrote the plaintiff’s legal advisers, Jones, Black & Company, to advise in response to their earlier inquiry that he had filed with the Department amended schedules to the 1973 financial statements of Cohos, Delesalle & Evamy which changed certain of the previous calculations therein and were apparently designed to lay the groundwork for filing the partners" 1974 income tax returns by treating the sum of $71, 130 paid to the retiring partners, Delesalle and Baxter as taxable work in progress in their hands. Included somewhere in this revision was a calculation of the progress component of withdrawal payments to the retiring partners, which portrayed in part as follows:

Sometime in the early part of 1976, the plaintiff confronted Trafford Smith in his office about the changes that had been made in the firm's 1973 financial statements to allocate the $60,343 of work in progress to his income. According to the plaintiff, Smith admitted that the changes had ben made behind his back at the urging of the remaining partners. Smith professed in his testimony that he did not recall the details of what was said. I find this difficult to credit. There is no question but that the meeting was acrimonious. The plaintiff never spoke with Smith again.

The question raised by all this is whether there was an agreement between the plaintiff and the remaining partners at the time of Delesalle’s withdrawal from the firm to treat the $60,343 of work in progress as income to him or alternatively, and failing that, whether there was a subsequent agreement by the remaining partners to allocate the work in progress component as income in the plaintiff’s hands so as to become binding on him as a “deemed partner" by virtue of section 96(1.1) of the Income Tax Act.

Counsel for the plaintiff contends that there was no oral agreement between the partners at the time of the plaintiff's withdrawal to treat the work in progress component of $60,343 as income to the plaintiff. He submits that it clearly was a capital receipt, by virtue of the partnership agreement as modified by the letter agreement of January 17, 1973 and the negotiated terms of withdrawal as reflected in the 1973 financial statements of the partnership, and before the changes were made thereto and submitted to the Minister without the knowledge of the plaintiff. In short, there was no agreement to allocate the $60,343 of work in progress to income. He further contends that section 96(1.1) of the Act does not avail to permit the remaining partners to change the allocation from capital to income without the agreement of the retiring partner.

Counsel for the Crown takes the position that the real point for determination in the case is whether the remaining partners agreed with the retiring partner to purchase or acquire his interest in the partnership which, if that were so, would necessarily constitute the work in progress amount of $60,343 as capital disposed of by the retiring partner. He contends that in the absence of any agreement to the contrary the plaintiff received as retiring partner his share of the work in progress as the proceeds of disposition of his partnership interest and therefore received it as a capital gain.

Counsel for the defendant submits that there was an agreement between all the partners to allocate the untaxed work in progress to the retiring partners, Delesalle and Baxter, thereby enabling the remaining partners to claim a proportionate part thereof as a deduction to their income. He says that such an agreement was made prior to or at the time of Delesalle’s retirement. Alternatively, he contends that if it is found that there was no such agreement in fact then the remaining partners have the right to allocate the work in progress component to income under subsection 96(1.1) of the Act.

Subsection 96(1) of the Income Tax Act is a codification of the principles for the taxation of partnerships which requires that the partnership level of income or loss, as the case may be, shall be computed as if the partnership were a separate person resident in Canada with a taxation year concurrent with the partnership's fiscal period with the calculated income or loss flowing through to the partners and being taxable in their hands.

Subsection 96(1.1) was added by S.C. 1974-75-76, c. 26, s. 60(2), applicable to the 1972 and subsequent taxation years, and reads:

Sec. 96(1.1)

Allocation of share of income to retiring partner.

For the purposes of subsection (1) and sections 101 and 103,

(a) where the principal activity of a partnership is carrying on a business in Canada and the members thereof have entered into an agreement to allocate a share of the income or loss of the partnership from any source or from sources in a particular place, as the case may be, to any taxpayer who at any time ceased to be a member of

(i) the partnership, or

(ii) a partnership that at any time has ceased to exist or would, but for subsection 98(1), have ceased to exist, and either

(A) the members thereof, or

(B) the members of another partnership in which, immediately after that time, any of the members referred to in clause (A) became members

have agreed to make such an allocation or to his spouse, estate or heirs or to any person referred to in subsection (1.3), that taxpayer, his spouse, estate or heirs, or that person, as the case may be, shall be deemed to be a member of the partnership; and

(b) all amounts each of which is an amount equal to the share of the income or loss referred to in this subsection allocated to a taxpayer from a partnership in respect of a particular fiscal period of the partnership shall, notwithstanding any other provision of this Act, be included in computing his income for the taxation year in which that fiscal period of the partnership ends.

In M.N.R. v. Wahn, [1969] C.T.C. 61; 69 D.T.C. 5075 (S.C.C.), a lawyer withdrew from the law firm of which he had been a partner and started his own firm and the issue was whether a yearly instalment of the larger sum allocated to him under the terms of the partnership agreement was income or a payment made on account of capital. The retiring partner had always computed his income on a cash basis. On his admission to partnership, he had not made and had not been required to make any contribution to capital account. The partnership agreement contained no provision for securing the goodwill of a withdrawing partner to the remaining partners and the provisions for payment of an allowance to a withdrawing partner were clearly referable to an allocation of profits rather than a capital payment for goodwill. The Supreme Court held that the yearly instalment of the withdrawal payment was income of the recipient and not capital.

Pigeon J. said at p. 5085:

It is contended that what is said in the agreement respecting income tax cannot override the provisions of the Act. This is quite true but does not mean that what is said is not to be taken as expressing the intention of the parties. I find it obvious that the intention was that the payment to a withdrawing partner should be an allocation of profits. It is true that the fact that a payment is measured by reference to profits may not prevent it from being of a capital nature but there must be something to show that such is the true nature of a payment. In the present case, I can find nothing tending to indicate that it is so. . . .

The Wahn case was followed and applied in The Queen v. Boorman, [1977] C.T.C. 464; 77 D.T.C. 5338, which held that a payment made to a doctor pursuant to agreement on his withdrawal from a medical partnership was taxable as income in his hands on the ground that it was clear from the partnership agreement that there was no purchase or buying back of anything in the nature of a capital asset but rather a distribution of income to the withdrawing partner, calculated on an arbitrary basis.

In M.N.R. v. Sedgwick, [1963] C.T.C. 571; 63 D.T.C. 1378 (S.C.C.), a prominent Toronto lawyer and four associates had entered into a partnership arrangement with a Toronto stockbroker to advance money to enable him to purchase a seat on the Stock Exchange and to provide working capital for his brokerage firm in return for a percentage of the net profits of the business. The business grew and profits resulted but in 1955 the Toronto Stock Exchange ruled that the silent partners could no longer continue to take a share of the net profits because they were not actively engaged in the business. In consequence, on February 1, 1956 a mutual agreement was made to terminate the partnership arrangement on the basis that the silent partners would give up any capital interest in the brokerage business and their right to share in the profits in consideration of a total payment of $550,000. The respondent became entitled to receive $55,000 of which $30,000 was related to 1956 profits and was added to his declared income. The Minister appealed the decision of the Exchequer Court allowing the respondent's appeal. The majority of the Supreme Court upheld the appeal on the ground that the agreement of February 1, 1956 was not one for the sale of an interest in a partnership but rather was one for winding up of the partnership and the payment of $30,000 was clearly referable to the respondent's share of the partnership profits as determined by the agreement.

Spence J. wrote a strong dissent in which he took a different view of the transaction. The learned judge cited Glenboig Union Fireclay Co. v. The Commissioners of Inland Revenue, [1922] S.C. (H.L. 112), Rutherford v. Commissioners of Inland Revenue, (1926), 10 T.C. 683, and Van Den Berghs Ltd. v. Clark, [1935] A.C. 431 and quoted with approval the following passage from Lord Macmillan in Van Den Berghs [p. 442] at p. 1384:

But even if payment is measured by annual receipts, it is not necessarily itself an item of income. As Lord Buckmaster pointed out in the case of Glenboig Union Fireclay Co. v. Commissioners of Inland Revenue, 1922 S.C. (H.L.) 112, 115, “There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the test.”

The learned Judge concluded that the purchase price was a capital receipt, no part of which should have been included in the respondent's income.

The rationale of his dissent is thus stated at pp. 1384-1385:

If the arrangement arrived at by virtue of the agreement of the 1st of February 1956 (Ex. 3) is, as I have found it to be, a sale of partnership assets by the various partners to the continuing partner and included in those assets the right of the retiring partners to share in any profits of the partnership, either those which were earned before the agreement or those which would be earned thereafter, then I am of the opinion that the authorities quoted require the sale price to be considered as a capital receipt, and I am of the opinion that if, when the sale price was Calculated by including as part thereof an estimate of the already earned but undistributed profits, the same result applies. . . .

In my opinion, the law is clear that the mere fact that the measure for the calculation of a payment to a withdrawing partner is referable to the profits of the firm is not sufficient of itself to divest the payment of the attributes of a capital receipt in the absence of some corroborative indication of the intention of the parties that the payment was to be regarded as income.

I find that there was no agreement made contemporaneously with the plaintiff's withdrawal from the firm to allocate the $60,343 component of work in progress as income in his hands. Indeed, the weight of evidence points the other way and is indicative of the fact that the settlement payment of $103,111 was regarded by the parties at that time as being of a capital nature. The mediator, Trafford Smith, testified to the desire of all parties to arrive at a fair settlement of the plaintiff's partnership equity and it does not seem to me that this was just a random choice of words. Moreover, it was Smith himself who prepared the statement showing the plaintiff's equity in the Cohos, Delesalle and Evamy Group which interestingly projected an estimate of $100,000 for the “capital account” of the plaintiff as at March 31, 1973 and estimated capital gains of $70,000, one-half of which would be subject to capital gains tax. This equity statement was prepared and submitted to the plaintiff for approval on or about March 11, 1973 and was devoid of anything remotely suggestive of an income allocation for unbilled work in progress. It is impossible to believe by any stretch of the imagination that the rules of the game were completely rewritten between then and the plaintiff's departure from the firm on April 1, 1973.

I find as a fact that there was an agreement between the partners for the repayment of what may be colloquially referred to as “Delesalle's capital,’ comprising the sundry components alluded to in the letter agreement and that it was further agreed that Trafford Smith would play the role of mediator in arriving at a mutually satisfactory settlement figure therefor. It was not by chance or accident that the settlement payment of $103,111 was shown in the schedule for the partners' capital accounts in the financial statements of the firm for March 31, 1973 under the column for Delesalle. The letter agreement of January 17, 1973 and the Cohos' notes of the meeting held the previous day clearly contemplated a repayment of capital as consideration for the plaintiff’s withdrawal from the firm. It is not without significance that the agreement stipulated for the retention of the surname “Delesalle” as part of the firm name of the continuing partners and that Delesalle was to be indemnified and saved harmless from any and all claims and demands that might thereafter arise by reason thereof.

In final analysis, the point is simply whether the plaintiffs withdrawal from the firm was accomplished on the basis of an allocation of income, including his interest in the unbilled work in progress, or rather was a purchase or buying back of his partnership interest, which included as part thereof his interest in the partnership's work in progress.

Kekewich J. had resort to common business usage and first principles in considering the true implications of withdrawal from a partnership in Gray v. Smith (1890), 43 Ch. D. 208, by putting it this way at page 213:

. . . Then what does “withdraw” mean? “Withdraw” seems to me to infer plainly two things. First, that the withdrawing partner shall make over to the continuing partners all his interest in the partnership and in the partnership assets, whether there be real or personal estate, whether there be outstanding contracts, or anything of the kind. That seems to me to be clearly the first thing indicated by the term “withdraw.” Secondly, it seems to me to mean — applying the ordinary rules of partnership law — that the continuing partnership shall indemnify the retiring partner against all the liabilities of the firm from that time forth. They take the assets, they take the benefit of the contracts, they take the chances of success for the future, and they must keep him indemnified. . . .

It is my opinion, based on the evidence in its entirety, that the sum of $103,111 paid to the plaintiff on his withdrawal from the firm of Cohos, Delesalle and Evamy was a repayment of capital for the plaintiff’s interest in the firm as at March 31, 1973, and that there was no intention of the parties at that time to treat it or any part thereof as an allocation of income.

This brings me to the final point, which is whether the remaining partners could make a subsequent agreement binding on the plaintiff to allocate as income in his hands the work in progress component of $60,343 under section 96(1.1) of the Income Tax Act.

In Laferriére v. M.N.R., [1981] C.T.C. 2634; 81 D.T.C. 580, the Tax Review Board held that a substantial payment to a withdrawing partner for the purchase of his partnership interest pursuant to the provisions for withdrawal in the partnership agreement was income and not capital, comprising as it did the components of income of accounts receivable and unbilled work in progress as determined by the auditor, and having regard to the fact that no capital contribution had been paid in by the departing partner when he entered the partnership. The Board was of the opinion that section 96(1.1) of the Act did not apply in the case at bar.

The reasons for this conclusion are stated by Mr. Tremblay at 2645 (D.T.C. 587):

It seems clear that, for the section to apply, all the members of the partnership must enter into an agreement with the departing partner, not merely two members as in the case at bar (even though they had majority control).

In Sian v. M.N.R., [1981] C.T.C. 2880; 81 D.T.C. 794, the taxpayer was a partner in a firm of accountants who withdrew from the partnership on February 1, 1975. There was no partnership agreement nor any agreement at the time of withdrawal as to whether the payout for the withdrawing partner's interest in the firm was capital or income. It was agreed that the adjusted cost base of the taxpayer's partnership interest was $35,221. The remaining partners subsequently made a unanimous agreement between themselves in the absence and without the knowledge of the retiring partner by which they allocated to him as income $22,526 of work in pro- gress. Counsel for the Minister relied completely upon section 96(1.1) contending that it was a deeming provision by the terms of which the remaining partners of a partnership could agree between themselves to make an allocation of income or capital for the interest of a retiring partner and without the retiring partner being party thereto. The Tax Review Board accepted this submission.

Mr. Goetz stated the ratio of the Board’s decision at 2882 (D.T.C. 796):

It would have been so much more simple, equitable, fair and just for the remaining partners to have allocated the full amount of the adjusted cost base of $35,221 to the appellant as his total capital interest in the partnership as it existed January 31, 1975. They chose to do otherwise for their own personal tax positions. That under the law was their prerogative. A partnership breakup, like a marriage, is not a happy event and sweet reasons and fairness are generally conspicuous by their absence. I am bound by the provisions of the Income Tax Act and for the reasons given above, I must dismiss the appeal.

Counsel for the defendant Cohos advances the same proposition on which the Minister succeeded in Sian v. M.N.R., Is it tenable in the circum- stances of this case? In my opinion, it is not.

There is a time-honoured principle of law that a person is not normally bound by the terms of an agreement to which he is not a party. The question posed is whether the words of section 96(1.1) of the Income Tax Act read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act bespeak the intention of Parliament to create an exception to the general principle to enable the remaining or continuing partners of a partnership to make a subsequent agreement between themselves to allocate income to a retiring partner without his being party thereto, and thereby nullify a prior agreement between all the partners to treat a payment made on withdrawal from the firm as capital in nature.

As Driedger, Construction of Statutes, 2nd ed., states at p. 30:

. . . Where the language of a legislature admits of but one interpretation effect must be given to it whatever its consequences.

But this principle is not inflexible and immutable for all occasions and it is not at all adaptable where the language of a statute admits of several interpretations. In such a case, the proper rule is that stated by Lord Atkinson in Victoria City v. Bishop of Vancouver Island, [1921] 2 A.C. 384 (P.C.) at p. 388:

There is another principle in the construction of statutes specially applicable to this section. It is thus stated by Lord Esher, in Reg. v. Judge of the City of London Court [1] (3): “If the words of an Act are clear, you must follow them, even though they lead to a manifest absurdity. The Court has nothing to do with the question whether the legislature has committed an absurdity. In my opinion, the rule has always been this: — if the words of an Act admit of two interpretations, then they are not clear; and if one interpretation leads to an absurdity, and the other does not, the Court will conclude that the legislature did not intend to lead to an absurdity, and will adopt the other interpretation.” . . .

Where the language of a statute is reasonably capable of two constructions the court, as interpreter and not legislator, may adopt that which is just and reasonable rather than one which is patently unreasonable; see Driedger, op. cit., pp. 33-34.

In the Sian case the Board adopted the Minister’s approach by placing emphasis on the concluding words of paragraph (a) of section 96(1.1) that deemed the taxpayer “to be a member of the partnership" thereby calling into play paragraph (b) for the actual allocation of income or loss in computing the taxpayer's income. The Board chose to completely ignore the opening words of section 96(1.1) in reference to its purposes in the circumstance where the members of a partnership "entered into an agreement" to allocate a share of the income or loss of the partnership to a retiring or withdrawing member.

In my opinion, the plain and grammatical meaning of the words of section 96(1.1) of the Act are meant to apply to the situation where the members of a partnership have agreed to allocate a share of the income or loss of the partnership to a taxpayer who has ceased to be a member of the partnership but who is nevertheless deemed to be a continuing member thereof solely for the purpose of the allocation of such income or loss as initially agreed by all the partners. The wording of clause 96(1.1 )(a)(ii)(B) is not intended to permit the continuing partners to change the original agreement for the allocation of a share of the income or loss of the partnership to the retiring partner but rather is meant to cover the continuation of another partnership from the predecessor firm whereby the current members thereof can accede to the agreement for allocation so long as one or more of them were members of the former partnership.

Where there is an allocation agreement in the foregoing context, the retiring partner to whom the income or loss is allocated pursuant to such agreement is deemed to be a member of the partnership but only for the limited purposes adumbrated by the opening words of section 96(1.1), that is, the flow through provisions of section 96(1), the allocation of a share of the gain from the disposition of farm land, and the anti-avoidance provisions of section 103.

In my opinion, the construction of section 96(1.1) contended for by the defendant Cohos involves an artificial straining of the plain and ordinary meaning of the words of the section to obtain a patently unreasonable result for which there is no warrant whatever. Consequently, I reject it.

For these reasons, the appeal of the plaintiff, Philippe E. Delesalle, is allowed with costs and the matter is referred back to the Minister for reassessment in accordance therewith. In the result, the appeal of the Minister in the Cohos case is allowed with costs. Needless to say, the award of costs contemplates only one set of costs in each case. Judgment will go accordingly.