Sandhu v. The Queen, 80 DTC 6097, [1980] CTC 158 (FCTD)

Addy, J:—These three actions were, on consent, ordered to be tried together on common evidence.

The plaintiffs in the first two actions who shall hereinafter be referred to as the Canadian plaintiffs, are Canadian citizens and are resident and do business in Canada. They are brothers-in-law. The plaintiff in the third action is a citizen of India and has resided there at all material times. He is the brother of the plaintiff Harkishan Sandhu.

The three plaintiffs are all appealing a third and final assessment against each of them for the taxtion year 1974.

In 1971 the Canadian plaintiffs caused a partnership to be registered, pursuant to the laws of British Columbia, under the name of Punjab Express Foreign Exchange (hereinafter referred to as Punjab Express). In the partnership declaration the Canadian plaintiffs declared that they were the sole members of the partnership.

The business of Punjab Express was carried on from 1970 to 1976 when it ceased to operate, apparently due to the fact that its assets had been seized by the defendant. It had, during that period, carried on the business of a foreign currency exchange business in the City of Vancouver, which consisted of obtaining funds in Canadian dollars from clients in this country in order to have rupees remitted on their behalf to persons in India, who were generally relatives or friends of the Canadian clients.

The operations of Punjab Express generated a very substantial profit for the year 1974 and a substantial loss for the 1975 taxation year. The defendant issued its final re-assessments of the plaintiffs on the basis that they were all in partnership and allocated one-third of this loss against all of them which loss, pursuant to paragraph 111(1)(a) of the Income Tax Act, was carried back to 1974 so as to reduce the net income previously assessed for that year, the Canadian plaintiffs claim that, as they were the only two members of the partnership, one-half of the 1975 loss instead of one-third should be allocated against their respective profits for 1974. The Indian plaintiff on the other hand claims that he is not taxable at all because he is not a Canadian citizen and has never at any time carried on business in Canada. He alleges on the contrary that he has at all material times resided in and carried on business solely in India. He therefore claims not to be taxable under either section 2 of paragraph 253(b) or any other provisions of the Income Tax Act. The relevant provisions of the above- mentioned sections are as follows:

TAX PAYABLE BY PERSONS RESIDENT IN CANADA

2.(1) An income tax shall be paid as hereinafter required upon the taxable income for each taxation year of every person resident in Canada at any time in the year.

TAX PAYABLE BY NON-RESIDENT PERSONS

(3) Where a person who is not taxable under subsection (1) for a taxation year

(a) was employed in Canada.

(b) carried on a business in Canada, or

(c) disposed of a taxable Canadian property.

EXTENDED MEANING OF CARRYING ON BUSINESS

253. Where, in a taxation year, a non-resident person

(b) solicited orders or offered anything for sale in Canada through an agent or servant whether the contract or transaction was to be completed inside or outside Canada or partly in and partly outside Canada, he shall be deemed, for the purposes of this Act, to have been carrying on business in Canada in the year.

There are in effect two issues before the court:

(1) whether Punjab Express was a partnership consisting of only the two Canadian plaintiffs or of all three plaintiffs;

(2) whether, in the event of the partnership consisting only of the two Canadian plaintiffs, the Indian plaintiff was nevertheless deemed to be carrying on business in Canada.

Although during 1970 and early in 1971 Punjab Express was dealing with other brokers in England, subsequently and during all times material to this action it had dealt exclusively through a firm, which might conveniently be termed a money brokerage firm, known as Eastern Trade Corporation (hereinafter referred to as Eastern Trade). This firm which had offices in Coventry in England and also in Dubai, India, would receive from Punjab Express orders on behalf of the latter’s Canadian clients to remit certain amounts in rupees to designated persons in India. Eastern Trade would advise Punjab Express by telephone of the current amount of the exchange rate it would be charging to convert American dollars to rupees at any given time and Punjab Express would obtain from its clients in Canada, in addition to the amount required as a commission for its services, the required sums to be paid in rupees to the recipients in India.

By what was obviously some very devious channels which probably did not involve any actual transfer of funds to India, the amounts in rupees would be turned over by Eastern Trade to couriers or agents in India for delivery to the Indian beneficiaries. On confirmation of receipt by them, Punjab Express would at that time pay to Eastern Trade the amount previously agreed upon. In other words, Eastern Trade would grant Punjab Express a credit of 100 per cent of the amount of the orders until the latter was Satisfied that the money had been received in India by the various persons to whom it was to be given. The amounts were handed by the couriers or agents personally to the recipients in India and not through any bank.

Strangely enough, according to the evidence at trial, the rate of exchange charged its clients in Canada by Punjab Express, which necessarily had to include its commission, the fees to be paid the agents in India and possibly a fee for Eastern Trade, was inferior to the rate these clients would have been obliged to pay had they forwarded the money to India in a normal manner through chartered banks. The business in fact depended on this lower exchange rate and, to some extent perhaps, on the fact that the money was delivered more expeditiously and by hand to the ultimate recipients. No detailed nor direct explanation was given as to how Eastern Trade could possibly supply this service at a lower rate than the banks. As I stated previously, it was suggested that there probably never was any actual transfer of funds to India but that the amounts were paid in India from monies already available there from some unknown source. One can only speculate that possibly the source of the monies which Eastern Trade was using might account for the apparent bargain price exchange rates which included a door-to-door banking service. In any event, the business was certainly a clandestine one involving code names for the various parties and agents, as well as for the money being sent. For instance, the code word “ticket” was used to signify 100,000 rupees, the word “case” signified 200,000 rupees. Eastern Trade was referred to as “New Airlines” and the Indian plaintiff was “Inderjil” and also at times , as “Paramjil”.

The Indian plaintiff acted as one of the couriers or agents for the money which Eastern Trade made available for delivery. It appears that he looked after all of the deliveries of money ordered through Punjab Express required to be made within certain districts in the State of Punjab in India. The Canadian plaintiffs testified that he in fact took care of something over 50 per cent of the total orders placed by Punjab Express through Eastern Trade. The evidence seems clear also that he was responsible for establishing the original contacts between Eastern Trade and Punjab Express.

The Canadian plaintiffs testified that the Indian plaintifff was not in any way a partner of Punjab Express but merely an agent acting for them in India where in effect he carried on a separate and distinct undertaking, namely, a money distribution business. They also testified that he received from the, strictly and exclusively as a commission for his services, in addition to any commission which might have been paid to him by Eastern Trade, one-third of the net profits of Punjab Express derived from the monies which were delivered by or through him to consignees in India. The defendant on the other hand adopted the position that the Indian plaintiff was not a mere agent but a full partner of the Canadian plaintiffs and that he was entitled to a full share of all of the net profits of the business.

The issues centered to a great extent around certain entries made in what was called the “orange book’’. This book, extracts of which were produced at trial under Tab 28 of Exhibit 2, contained handwritten entries made following a visit to Canada of the Indian plaintiff, between July and September 1973.

At the trial the plaintiff Parduman Hundal testified that the figures in the “orange book’’ were inserted at the time of the visit of the Indian plaintiff and left the impression that the latter, rather than the witness, was the one who could justify those figures and that he also at the time applied some sort of subtle pressure on the Canadian plaintiffs. It is, of course, impossible for the Indian plaintiff to have supplied in Canada the final figures shown in the “orange book’’ for the period ending in February 1974 as he had left the country to return to India in September 1973. Be that as it may, the figures, purporting to cover the gross profits, expenses and net profits for the period July 1973 to February 1974, were arrived at following certain consultations between all three plaintiffs and included the following:

The Canadian plaintiffs claim that the $81,500 in gross profits represent only the profits derived from the transactions actually handled by the Indian plaintiff in India during the eight month period in question and not the profits from the entire business of Punjab Express for that time, as alleged by the defendant. They however were unable to produce any figures whatsoever or any documents to justify this assertion. On the other hand, it was established that the expenses included the sum $10,300 credited to the Indian plaintiff for monies allegedly paid by him to agents in India and $600 per month drawn by each of the two Canadian plaintiffs as salaries, to be charged against the business together with other expenses incurred in Canada. It was also established at trial that the above-mentioned salaries of the Canadian plaintiffs set-off against those profits, consisted of their total drawings for the period and not merely a proportion of their drawings which might be attributed to the business which the Indian plaintiff allegedly handled for them. As to the other expenses incurred in Canada, it appears that they were also the total expenses incurred by Punjab Express during the period in question. These expenses were set-off against the earn- ings. There was no evidence showing any additional expenses incurred by Punjab Express during the period covered by the “orange book’’, other than those shown as set-off against the profits of $81,500, nor were any details available to attribute any of the expenses in Canada nor the $10,300 allegedly incurred in India by the Indian plaintiff to any particular operations or transactions. I find as a fact that all of the expenses incurred in Canada or in India during the period covered by the “orange book” were set off against the figure of $81,500 shown as gross profits or earnings.

There is no direct evidence as to whether Eastern Trade had actually paid any commission to the Indian plaintiff, The Canadian plaintiffs testified that he had been paid some commission but they did not know the amount nor the rate. Their evidence as to any commission paid by Eastern Trade, if any was in fact paid to the other plaintiff, is strictly hearsay and cannot be taken as evidence of payment of any commission nor of any obligation to pay same on the part of Eastern Trade. It is interesting to note however that they claimed to have settled with him on the basis of one-third of the net profits and to have given him credit for his expenses in India, without knowing what commission he might have received from Eastern Trade for the very services in regard to which the $10,300 expenditure would have been incurred. I must conclude that there is no evidence that he did receive any commission from Eastern Trade and find further that the inference to be gathered from the actions of the Canadian plaintiffs is that, in fact, he had been receiving none regarding Punjab Express business during any relevant period.

The Canadian plaintiffs also testified that the Indian plaintiff was to receive nothing by way of commission or otherwise from February 1974 and that from that time, Eastern Trade undertook with them to remunerate him directly and in return increased the rate of exchange by some one-half per cent. According to the Canadian plaintiffs they formerly had been realizing between one per cent to one and a half per cent gross profit on each transaction which would mean the gross profit would then have been reduced by One-third to one-half as a result of the new arrangement. No objective evidence whatsoever however was produced to substantiate this new arrangement in the way of correspondence or calculation of profits. They also, when questioned on this subject, referred to the reduction imposed by Eastern Trade as a slight one. A reduction of one-third to one-half is not Slight and would not have been considered as such by anyone, if imposed.

The Indian plaintiff did not attend the trial in order to confirm whether or not he was entitled to further shares in the profits since February 1974 nor whether he had received any since then. The only evidence which I find which seems to touch on this point directly is a letter of the 19th of June 1974 from the Indian plaintiff referring to his “commission for the last year”. This might well be some evidence tending to show that he would be an agent on commission rather than a partner but it is certainly not evidence which would tend to show that he was not entitled to further compensation after February 19, 1974 since the balances outlined in the “orange book” for the period ending in February 1974 apparently had been fully settled between the partners.

On the evidence of the nature of the partnership, considerable evidence was adduced at trial regarding the tax returns filed by the Canadian plaintiffs for the taxation years 1971 to 1976 and also regarding certain profit and loss statements of Punjab Express prepared on their behalf and submitted to the Department of National Revenue.

Their returns for 1971, 1972 and 1973 were prepared by one R Kingsley, a chartered accountant. They showed the Canadian plaintiffs as being the only members of the partnership. At the time of preparing those reports Mr Kingsley was not made aware by his clients of any interest the Indian plaintiff might have in the net profits and he in fact did not know of his existence until the latter came to Canada in 1973.

The Department of National Revenue began investigating the affairs of the Canadian plaintiffs in March 1975. At that time Mr Kingsley enlisted the help of one Mohindar Gill, a certified general accountant of Vancouver, since the latter could speak Punjabi and could be of considerable help in communicating with the plaintiffs and in the ensuing negotiations with the Department. From that time on the two accountants collaborated very closely in the preparation of all statements and in the negotiations with officials of the Department. They accordingly prepared the 1974 returns for the Canadian plaintiffs again showing them as the sole partners. Neither of the accountants had been informed by any of the plaintiffs of the existence of the “orange book’’ nor of any interest that the Indian plaintiff might have in the net profits of the partnership.

A first meeting was arranged early in August 1975 at the residence of Mr Gill. Two investigating officers of the Dept of National Revenue, the two Canadian plaintiffs and both their accountants were present at the meeting. It was only during the course of that meeting that the accountants first heard of the existence of the “orange book’’ which had been seized by the department officials at the beginning of their investigation in March of that year. Following the meeting, revised financial profit and loss statements for Punjab Express were prepared by its accountants for the years 1971 to 1973. These clearly showed a three-way partnership. They were signed by the Canadian plaintiffs and forwarded to the Department a couple of weeks following that meeting under cover of a letter of August 25, 1975 which simply referred to the fact that amended statements were enclosed for those three years which were “on the lines arranged at our last meeting.” I intend to deal later with what was said at that meeting.

A statement entitled “Punjab Express Partners’ Accounts” (refer Tab 23 of Exhibit 2) dealing with the years 1971 to 1975 was also prepared, showing all three as equal partners sharing all profits and losses of the Punjab Express partnership equally. All three plaintiffs had also as of December 31, 1973 either in their own names or through their wives purchased an apartment house from the profits of Punjab Express. The purchase price was $652,000 with an amount of approximately $167,000 payable in cash. The apartment was shown in the statement as part of the partnership assets with each plaintiff having one-third interest in the apartment as such. The accountants also subsequently prepared income tax returns for 1975 and 1976 showing all three plaintiffs as fully participating in the profits and losses of Punjab Express during those years.

Both Canadian plaintiffs testified that they had been threatened and intimidated by the departmental officials into showing the Indian plaintiff as a full partner, which they did in order to placate the investigators and either avoid prosecution or mitigate the eventual penalties to be imposed.

I completely and unreservedly reject their statement that they were intimidated or threatened by anybody connected with the Department of National Revenue. All meetings took place in the presence of both or at least one of their accountants and both accountants categorically denied that there was any threat or intimidation made either directly or indirectly at any time. On cross-examination the plaintiffs stated that the threats or intimidation were conveyed to them through their accountants. This again was completely denied by the latter. Finally, the plaintiff Harkishan Sandhu, during cross-examination was confronted with a statement made by him during his examination for discovery, where he stated categorically that he had never been threatened or intimidated. He was completely unable to explain satisfactorily the direct contradiction between this evidence and his evidence at trial. I find therefore that the statements as to the existence of any threats were but pure fabrication. The only thing said by the inspectors, according to both accountants called on behalf of the plaintiffs, was that, at the original meeting following which the 1971 to 1973 profit and loss statements were submitted, with the letter of August 25, 1975, the plaintiffs would be expected to tell the truth and that the amended financial statements would have to reflect the situation as shown in the “orange book”. I find as a fact that the only instruction or direction given by the representatives of the Department in this regard at any time was that statements were to be prepared reflecting the figures and the split of profits shown in the “orange book” and no more. Having regard to this, no satisfactory explanation was given and indeed no explanation whatsoever was given as to why if the $81,500 in fact only reflected a part of the profits, the statements submitted on August 25,1975 for the years 1971 to 1973 and the income tax statements for the following years prepared after August 1975 did not show this.

When one examines for instance, Schedule 9(a) to the plaintiff Hundal’s 1974 income tax return, found at Tab 4 of Exhibit 2, one finds that gross profit of the whole year is declared to be $28,075. This is totally irreconcilable with the oral evidence of the plaintiff that the profit of $81,500 for the eight months between July 1975 and February 1974 represents only the share of the gross profits attributable to deliveries made through the Indian plaintiff, especially in view of their evidence that 1974 was a better business year than 1973 and of the further evidence that the Indian plaintiff’s deliveries accounted for only about one-half of the business of Punjab Express.

I reject the evidence of the plaintiffs regarding the nature of the gross profit represented in the “orange book”. I find as a fact that it was intended by the plaintiffs to represent the total revenues for Punjab Express for the period covered-by the “orange book”, and that similarly, the amount of $24,400 described as expenses represents the total expenses and that the amount of $19,033 for each of the three plaintiffs represents their one-third share of the total net profits realized by Punjab Express for that period.

In view of the reports submitted subsequently I do not accept the evidence that the situation regarding sharing of profits and expenses changed after February 1974 as stated by the two plaintiffs. Not only have they failed to substantiate this with any concrete evidence whatsoever but their own reports contradict their oral testimony.

I can well understand that, until the prosecution had been terminated and the sentences imposed, the Canadian plaintiffs were quite frightened and apprehensive, if not terrified, as to what might happen to them. But this does not and cannot account for their reporting to the defendant that the Indian plaintiff was entitled to share in all of the profits and losses following February 1974, if in fact he was not entitled to such profits. They both had the benefit of professional accounting advice at all relevant times. Furthermore they were far from illiterate: one plaintiff was a university graduate and the other, who seemed quite intelligent and fluent in English, had taken a bookkeeping course.

The witness Kingsley stated that he believed the reports, prepared by him and Mr Gill and submitted to the Department on behalf of the plaintiffs from August 25, 1975, to be true and to represent the true situation. The witness Gill said that he believed the partnership was composed of only two and that the Canadian plaintiffs insisted on reporting on the basis of three partners because they were terrified of what might happen. Mr Gill’s view of the situation, which was founded on his concept of the emotional condition or motivation of his clients, was obviously not related in any way to the field of accountancy. He did not produce any figures or documents to justify his impression or view that there were but two of the plaintiffs in the partnership. Furthermore he was unable to satisfy me as to why, as an accountant, reports would have been submitted in the preparation of which he had been directly involved, without there being any written reservation accompanying these reports, since they apparently did not represent the true situation as he personally understood it to exist.

To summarize, with the exception of the evidence of the two Canadian plaintiffs, I find no concrete evidence direct or circumstantial, other than the statement in the letter of June 19, 1974, tending to establish that the true situation was not as stated in the 1975 and 1976 returns which had been certified as correct by the taxpayers, namely that the three plaintiffs were at that time sharing equally in all of the revenues and expenses of the business operations of Punjab Express. In view of the other evidence, I am unable to conclude that, by reason of the mere use of the word “commission” in a letter requesting the amounts to be due the Indian plaintiff, I should find that he was not entitled to share in all of the net profits of Punjab Express. I should add also at this stage that that statement should not of itself preclude any finding that a partnership existed at law. The terms used to describe a legal relationship, especially when those terms are used by lay persons, are never conclusive in establishing the legal nature of a relationship. The court must look at all of the evidence, for it is the substance and not the form nor the terminology which must be considered, and it is the true intention of the parties which governs. Ref: Cox v Hickman (1860), 8 HLC 267; Collier, J in Northern Sales (1963) Ltd v MNR, [1973] CTC 239; 73 DTC 5200; Sproule et al v McConnell, [1925] 1 WWR 609.

I do not, under the circumstances, accept the evidence of the Canadian plaintiffs on this issue and I find as a fact that following the month of February 1974 and for the remainder of that year as well as throughout 1975, the same situation existed as during the period represented by the “orange book”, namely the eight month period from July 1973 to February 1974.

The Partnership Act of British Columbia RSBC 1948, c 247 is applicable. It, like most other provincial partnership Acts in so far as the provisions governing the nature of partnerships are concerned, is in effect a codifica- tion of certain well established commonlaw principles of the law of partnership. The relevant provisions appear to be the following:

3.(1) Partnership is the relation which subsists between persons carrying on business in common with a view of profit.

4. In determining whether a partnership does or does not exist, regard shall be had to the following rules:—

(a) . ..

(b) The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived:

(c) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business; and in particular

(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such;

The solution to the question resides in determining whether the plaintiffs were, during 1974 and 1975 carrying on a business in common according to subsection 3(1). Subparagraph 4(c)(ii) makes it clear that the sharing of profits does not of itself turn a relationship of master and servant or principal and agent into a partnership.

The case of Disher v Donkin, [1913] 5 WWR 870 affirmed that principle and made it clear that even a sharing of one-half of the net profits of a business did not of itself create a partnership where a relationship of principal and agent had existed previously.

It is interesting to note however, that, unlike the present case, the issue there turned on a conflict between the Partnership Act of British Columbia and the Master and Servant Act of that province, where the onus rests upon the employee of establishing the existence of a partnership and furthermore that, unlike the case at bar, there were no partnership books or account opened or returns of the partnership or statements issued declaring that a partnership existed. It also turned mainly on a question of credibility.

In the case of Cox v Coulson, [1916] 2 KB 177 it was held that the sharing of the gross takings, as opposed to the net profits, did not create a partnership. It in effect states the principle found in Rule 4(b) of the Partnership Act above, but it is really not applicable to the case at bar, which involves net profits.

The case of Sutton & Co v Grey, [1894] 1 QB 285 dealt with an undertaking to split one-half of the commission earned as well as one-half of any loss incurred in respect of transactions where clients had been introduced to the plaintiff by the defendant. This did not of course cover the earnings and losses of the entire business. The same situation existed in the case of Mayer & Others, Assignees of Grant, a Bankrupt, v Sharpe & Others (1813), 5 Taunt 74; 128 ER 614.

There exists of course the usual onus on the plaintiffs as taxpayers to disprove the assumptions of the Minister of National Revenue in the assessments which they are appealing, and in the present case, there exists also the onus of displacing the prima facie assumption established by Rule 4(c) of the Partnership Act supra.

The question of a partnership must be decided by determining the intention of the parties and that intention must be ascertained not only from their oral testimony but from all the circumstances including the conduct of the business, the sharing of profits and losses, their conduct toward each other and the public, as well as by the books of account, correspondence or other instruments in writing. Badeley v Consolidated Bank (1888), 38 Ch D 238; Cox v Hickman (supra); Northern Sales (1963) Limited v MNR (supra).

Where there has been a contribution of capital and a complete sharing of profit and losses, there would have to be very conclusive and convincing evidence for the court to find that the parties concerned were not partners, regardless of how they might have chosen to describe themselves. (See Botham v Keefer (1878), 2 OAR 595.

It is true that the only evidence of any capital actually furnished by the Indian plaintiff was a sum of approximately $27,000 furnished to Punjab Express in or about August 1974 and withdrawn again on May 22, 1975. Having regard to the fact that an investigation of the affairs of the partnership by the Department of National Revenue had been commenced in March 1975, perhaps one might be permitted to speculate, in the absence of any testimony by the Indian plaintiff, as to why the amount was withdrawn from the Canadian bank.

There is no evidence that the plaintiffs at any time held out to the public that the Indian plaintiff was a member of the partnership and the Canadian plaintiffs denied at trial that this had occurred. It is also clear that when the partnership declaration was filed in February 1971 there were but two members of the partnership. At that time however, they had not been dealing with Eastern Trade. In fact, the Canadian plaintiffs testified that they did not even know then that Eastern Trade existed or that the Indian plaintiff was in any way involved with it or with the money transfer business. At some time during 1971 as soon as the three plaintiffs became aware of their mutual interest, the Indian plaintiff immediately demanded a one-third interest in the net earnings and brought Eastern Trade into the picture. The correspondence filed indicates that he, from that moment, took a very active role not only in arranging for their business association with Eastern Trade but that he participated quite actively in the business of Punjab Express by advising the Canadian plaintiffs in detail regarding various business matters and the existence of possible clients. The Canadian plaintiffs up until that time had been completely inexperienced in that type of enterprise.

Having regard to my general conclusions to which I have referred and more particularly to my findings of fact on the complete sharing of all expenses and profits of Punjab Express by the three plaintiffs during the periods in issue, to the various financial statements and income tax returns submitted to the Department, the complete lack of any evidence in the accounts to substantiate the bald statements of the Canadian plaintiffs that they were the only two members of the partnership and the absence of any testimony to that effect from the only other person involved, I completely re- ject their evidence on that issue and find that in fact and in law, most probably from sometime in 1971 through 1976 and in any event quite definitely during the whole of its fiscal years 1974 to 1975 Punjab Express consisted of a partnership composed of all three plaintiffs. I am satisfied that, during that time they were, within the meaning of subsection 3(1) of the Partnership Act, “carrying on a business in common with a view of profit’’, in the City of Vancouver, in the name of Punjab Express Foreign Exchange.

Having regard to this finding, it is obvious that the Indian plaintiff, although not a resident of Canada, carried on business here and is therefore taxable as such pursuant to paragraph 3(1)(b) of the Income Tax Act.

Since there is no dispute as to the actual figures of amounts involved, the assessments will be confirmed. The actions will, accordingly, be dismissed with costs.