Citation: 2008TCC682
Date: 20081219
Docket: 2004-2159(IT)G
BETWEEN:
STEFANSON FARMS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] Stefanson Farms Ltd. appeals an assessment made under
the Income Tax Act for the 1998 taxation year.
[2] The central dispute between the parties is the cost of
inventory that was acquired by the appellant in the course of a partnership reorganization
that was undertaken in the 1998 taxation year.
[3] The respondent submits that the provisions of
subsection 98(5) of the Act apply to the reorganization and that the
cost of inventory acquired by the appellant is nil by virtue of subparagraph
98(5)(b)(i).
[4] The appellant submits that subsection 98(5) does not
apply and that the cost of inventory acquired is accordingly its fair market
value under general principles. The fair market value was $227,245 at the
relevant time and the appellant seeks a deduction for this amount in the 1998
taxation year. The deduction is being claimed under the cash basis of
accounting. The method of accounting is not in dispute.
[5] Subsection 98(5) of the Act is a rollover
provision that permits a business to be transferred from a partnership to a
partner on a tax-deferred basis. Essentially, the partnership is deemed to have
disposed of its property at the cost amount for tax purposes, and the same
amount becomes the cost of the property to the successor to the business.
[6] In this case, the reorganization involved a change in
the ownership of a family farm from a partnership to a corporation. The
successor to the business is the appellant in this appeal.
[7] The dispute centres on one of the elements of
subsection 98(5), which is that the successor to the business must have been a
partner in the partnership. The appellant submits that it never was a member of
the partnership.
[8] The relevant part of subsection 98(5) provides:
(5) Where partnership business carried on as sole proprietorship.
Where at any particular time after 1971 a Canadian partnership has ceased to
exist and within 3 months after the particular time one, but not more than
one, of the persons who were, immediately before the particular time, members
of the partnership (which person is in this subsection referred to as the
“proprietor”, whether an individual, a trust or a corporation) carries on
alone the business that was the business of the partnership and continues
to use, in the course of the business, any property that was, immediately
before the particular time, partnership property and that was received by the
proprietor as proceeds of disposition of the proprietor’s interest in the
partnership, the following rules apply:
[…]
(b) the cost to the proprietor of each such property shall be
deemed to be an amount equal to the total of
(i) the cost amount to the partnership of the property
immediately before that time,
[…]
(Emphasis
added)
Background
[9] Randall Stefanson was the majority partner in the
partnership that operated the farm before the reorganization, and he was the
sole shareholder of the appellant which carried on the business after the reorganization.
He was the only witness for the appellant at the hearing.
[10] The transactions that are relevant to the appeal are
not in dispute and are set out as assumptions in the reply to the notice of
appeal. The relevant paragraphs are reproduced below.
16. In confirming the Reassessments of the Appellant’s 1998
taxation year the Minister relied on the following assumptions:
a) Prior to January 1, 1998, Randall Stephanson (“Randall”)
and Anne Stephanson [sic] (“Anne”) were partners in a Family Partnership;
b) Randall had a 99% interest in the partnership and Anne had
a 1% interest in the Family Partnership;
c) The Family Partnership assets included inventory,
receivables and capital assets;
d) The value of the inventory on January 1, 1998 was $277,245.00;
e) The Family Partnership had calculated its income using cash
basis.
f) The value of the inventory of the Family Partnership as at
December 31, 1997, had been expensed for tax purpose.
g) By agreement dated October 16, 1998 and effective January
1, 1998 the Appellant purchased Randall’s interest in the Family Partnership
for $418,406.00 and issued a Promissory Note to Randall for the purchase price
plus one class A share;
h)
[…]
i)
On January 3, 1998 the Appellant purchased Anne’s interest in the Family
Partnership for $4,226.00 and issued a Promissory Note to Anne for the purchase
price plus one class A share;
j)
[…]
k)
The Appellant continued to operate the business formerly operated by the
Family Partnership, using the property formerly owned by the partnership;
l)
The Appellant had an initial fiscal year ending December 31, 1998;
m)
The Appellant used the accrued method to calculate its cost of goods
sold for the 1998 taxation year.
n)
[…]
Discussion
[11] The issue boils down to whether the appellant and Ann
Stefanson were partners for the period from January 1 to January 3, 1998. This
was the period during the course of the reorganization beginning when the
appellant purchased a partnership interest from Randall Stefanson and ending
when Ann Stefanson sold her partnership interest to the appellant.
[12] The appellant submits that it never was a partner in
the partnership.
[13] The problem that I have with this position is that the
written agreements that were entered into suggest otherwise. Although the
agreements do not explicitly state that the appellant and Mrs. Stefanson were
to be partners, that is the clear implication of the documents. No other
reasonable interpretation of what was intended by these agreements was
suggested at the hearing.
[14] I find that the agreements are relatively clear on
their face that the appellant and Mrs. Stefanson were to be partners for the
period from January 1 to January 3, 1998.
[15] Mr. Stefanson testified that the documents were
prepared by professional advisers and that he did not understand what the
advisers had intended. That would not be uncommon. Business persons routinely
sign complex agreements on the advice of professionals without a detailed
understanding of them. It does not follow that the parties to the agreements
should not be bound by them.
[16] Mr. Stefanson also testified that his mother and the
appellant did not conduct any partnership business during the relevant two day
period. It was submitted that there could not be a partnership in these
circumstances: Backman v. The Queen, 2001 DTC 5149, 2001 SCC 10.
[17] In my view, this is a not a satisfactory reason for
the appellant to disavow the written agreements. The circumstances in Backman
were quite different. In this appeal it is the taxpayer that argues that the
documents do not reflect the true state of affairs. That was not the case in Backman.
[18] The situation before me has some similarity to The
Queen v. 1524994 Ontario Ltd., 2007 FCA 74. In that case, a taxpayer
created documents which it later argued did not represent the actual facts. The
Federal Court of Appeal made short shrift of the taxpayer’s argument and held
that the form of the documents should be respected. Reference may also be made
to The Queen v. Gurd’s Products Company Limited, 85 DTC 5314 (FCA).
[19] Finally, I would also note that there is insufficient
factual evidence in this case to establish that no partnership business was
carried on between January 1 and January 3. Mr. Stefanson made a brief
statement to that effect but the evidence was not detailed enough for me to
conclude that no partnership business was conducted during this period.
[20] The appeal will be dismissed, with costs to the
respondent.
Signed at Toronto,
Ontario this 19th day of December 2008.
“J. Woods”
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