Date: 20020510
Docket: A-382-98
Neutral citation: 2002 FCA 174
CORAM: DÉCARY J.A.
ROTHSTEIN J.A.
NADON J.A.
BETWEEN:
STANLEY WITKIN
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Toronto, Ontario, on April 29, 2002.
Judgment delivered at Ottawa, Ontario, on May 10, 2002.
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: DÉCARY J.A.
NADON J.A.
[2] The Minister of National Revenue had disallowed losses which the appellant claimed by reason of his being a partner in a Texas partnership. The losses arose from the downturn in the real estate market in Texas in the mid to late1980s. The facts are complex but the only ones relevant for purposes of this appeal are the following.
[3] On or about March 31, 1988, the appellant and other Canadian taxpayers acquired a 99% interest in Claridge Holdings No. 1 for U.S. $99. In addition, they were required to contribute U.S. $1,342,000 to Claridge Holding No. 1 on closing. The sole asset of Claridge Holdings No. 1 consisted of a 99% interest in a Texas partnership called Claridge Associates. The assets of Claridge Associates consisted of:
1. A right to acquire 5.4% of unsold condominium units in a complex called The Claridge, subject to a U.S. $23,000,000 encumbrance and a U.S. $3,000,000 net profit participation to another party for U.S. $1,342,000. The right was conditional on the vendor being in a position to convey the 5.4% interest to Claridge Associates. In the event the vendor was not in such a position, Claridge Associates was to recover U.S. $250,000 plus a 50% participation in an "Equitable Joint Venture".
2. A two-year option to purchase the balance of the unsold condominium units, i.e. 94.6% in The Claridge for U.S. $40,000,000, subject to encumbrances.
3. A tax loss totalling approximately U.S. $ 34,000,000 or Cdn. $45,000,000 arising from the write down of The Claridge and the incurring of other costs.
[4] It was the allocation and use of his portion of the tax loss of Claridge Holdings No. 1 by the appellant that gave rise to the Minister's reassessment.
[5] Whether Claridge Holdings No. 1 was a partnership was an issue in the Tax Court. If it was, the appellant would have been a partner and would be entitled to his pro rata share of the losses of Claridge Associates that flowed through to Claridge Holdings No. 1. If not, the appellant could not take advantage of the partnership rules in section 96 of the Income Tax Act and would not be entitled to deduct such losses.
[6] The learned Tax Court Judge approached the question on the basis of whether the appellant had a reasonable expectation of profit. He found the appellant did not and dismissed the appellant's appeal.
[7] The decision of Beaubier T.C.C.J. was released on May 19th, 1998, prior to the decisions of the Supreme Court of Canada in Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, Spire Freezers Ltd. v. Canada, [2001] 1 S.C.R. 391 and Backman v. Canada, [2001] 1 S.C.R. 367. As a result of this recent jurisprudence, it is now well established that the threshold question in cases such as this is whether the appellant was a partner in a partnership according to the definition of partnership that exists under the relevant provincial law, even in respect of foreign partnerships (see Backman, supra paragraph 17).
[8] In Continental Bank, supra, at paragraph 22, the three essential ingredients of partnership were described:
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.
[9] As the Tax Court decision in this case was issued before the Supreme Court decisions in Continental Bank, Spire Freezers and Backman, supra, through no fault of his own, the learned Tax Court Judge erred in law in applying the wrong test - that is, the "reasonable expectation of profit" test and not the "carrying on a business in common with a view to profit" test to determine whether the appellant was a partner in a partnership. Counsel before this Court agreed that the "reasonable expectation of profit" test is a more difficult test to meet than the "carrying on a business in common with a view to profit" test.
[10] A finding of whether the facts are such as to satisfy a legal test (in this case, the test for partnership), is a finding of mixed fact and law. See Housen v. Nikolaisen, 2002 S.C.C. 33 at paragraphs 26 and 27. Once an error of law has been extricated from the conclusion of mixed fact and law, the Appeal Court, on the basis of the facts found by the Trial Judge that are untainted by the error of law (unless a palpable and overriding error in those facts is demonstrated), must reach its own conclusion applying the correct legal test (see Housen, supra, at paragraphs 27 and 35).
[11] The relevant untainted findings of fact by the Tax Court Judge were the following:
1. The appellant was a sophisticated investor and businessman.
2. It was not reasonable that the appellant chose not to use or review projections given to him if his purpose was to obtain a profit.
3. Based on the evidence the appellant's plan was that the operation of The Claridge would be carried on in the same losing manner as before.
4. Even on the optimistic projections provided to the appellant, for practical purposes, there was only a mere possibility of a return of capital and that possibility was remote.
5. There was no evidence that the appellant had information to calculate a return based on the alternative of recovering $250,0000 plus participation in the "Equitable Joint Venture".
6. The appellant would not reap any benefit from the $40,000,000 option even it was exercised.
7. On the evidence, the appellant bought a tax loss and intended to do so.
[12] The appellant lays great stress on the fact that the proper partnership documents were in place and that the Court should have regard to them. In cases such as this, it is certainly correct that valid partnership documents must be in place for there to be a partnership. But that is not the end of the inquiry. The Court must also enquire into whether 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 (see Backman, supra, at paragraph 25). Therefore, valid partnership documents and stated intentions of the parties to carry on business in common with a view to profit are not sufficient. Other objective evidence may be relevant and that is the case here.
[13] According to the findings of fact of the learned Tax Court Judge, the appellant is a sophisticated investor, yet he did not rely on or consider the projections provided to him. There was no plan to make The Claridge profitable. There was only a remote possibility of return of capital, let alone a return on capital or profit. There was no evidence of information necessary to calculate a return on the $250,000, Equitable Joint Venture alternative and the exercise of the $40,000,000 option would not be of benefit to the appellant.
[14] While the appellant challenges the weighing of evidence and the assessment of facts found by the Trial Judge he has not demonstrated any palpable or overriding error in respect of the Judge's findings of facts.
[15] While a primary motivation of a taxpayer, in entering a purported partnership, may be to secure a tax loss, there must at least be an ancillary intention to carry on business in common with a view to profit for the test for partnership to be met. (See Continental Bank, supra, at paragraph 43.) In this case, the only evidence accepted by the Tax Court Judge was that the appellant was intending to, and did, purchase a tax loss. Applying the correct, low threshold, test for partnership to the facts as found by the Trial Judge, it is apparent that the appellant was not carrying on business in common with a view to profit in respect of his participation in Claridge Holdings No. 1. Therefore, he was not a partner in a partnership, he was not entitled to avail himself of the partnership rules in section 96 of the Income Tax Act, and he could not use the losses originating with The Claridge as deductions for purposes of his Canadian income tax liability in the relevant years.
[16] The appeal should be dismissed.
[17] As the appeal of Paul Nicholl was heard together with the appeal of the appellant on common evidence, and as the facts pertaining to the appellant and Mr. Nicholl are the same, these reasons should apply to the Nicholl appeal and should be placed on that file, and the appeal of Paul Nicholl (Court file A-383-98) should be dismissed.
[18] The Minister should be entitled to one set of costs in this file and in Court file A-383-98.
"Marshall Rothstein"
J.A.
"I agree
Robert Décary J.A."
"I agree
Marc Nadon J.A."
FEDERAL COURT OF APPEAL
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: A-382-98
STYLE OF CAUSE:Stanley Witkin v. Her Majesty The Queen
PLACE OF HEARING: Toronto, Ontario
DATE OF HEARING: April 29, 2002
REASONS FOR JUDGMENT : ROTHSTEIN J.A.
CONCURRED IN BY: DÉCARY J.A.
NADON J.A.
DATED: May 10, 2002
APPEARANCES:
Mr. Sheldon Silver
Mr. David Poore
Ms. Elizabeth Chasson FOR THE APPELLANT
Mr. Eric Noble FOR THE RESPONDENT
SOLICITORS OF RECORD:
Goodman Phillips & Vineberg FOR THE APPELLANT
Morris Rosenberg, Deputy
Attorney General of Canada FOR THE RESPONDENT
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