Lane v. The Queen, 78 DTC 6535, [1978] CTC 795 (FCTD), briefly aff'd 86 DTC 6568, [1986] 2 CTC (FCA)

Collier, J:—The plaintiff is a dentist. The Minister of National Revenue, for the plaintiff’s 1971 taxation year, included in taxable income an amount of $45,077. That sum was said by the Minister to be the recapture of capital cost allowance

arising upon the disposition by the taxpayer of his interest in the depreciable property of the Meadowlark Court Syndicate . . .* [1]

The plaintiff unsuccessfully appealed the Minister’s assessment to the Tax Review Board. He then appealed to this Court.

In May 1967 the plaintiff, with 7 others, agreed to purchase certain property

. . . each as to an undivided one-eighth ( /s) thereof . . .+ [2]

That property consisted of land with 72 apartments. The purchasers then agreed

. . . to form a syndicate for the purpose of acquiring and managing the said lands and improvements thereon . . .

The “business”:!: [3] of the syndicate was to be carried on in the name of Meadowlark Court Syndicate. The object of the syndicate was said to be^ [4]

. . . the acquisition of the said lands . . . and the improvements thereon, the management of such lands and improvements and the acquisition and management of any other property upon which the members of the Syndicate may unanimously agree.

The syndicate document provided for 8 equal unitsll. [5] Each of the participants became the owner of one unit. The plaintiff, in respect of his interest in the properties and syndicate, made an outlay of approximately $30,000.

The plaintiff, and the others, each became the registered owners of an undivided: one-seventh interest in the real property.

The financial statements of the syndicate from June 1, 1967 to December 31, 1970 were put in evidence. The source of income in each year was the net rental of the apartments. Depreciation on the buildings and equipment, in accordance with the relevant provisions of the Income Tax Act and regulations, was deducted. Each participant:in the syndicate claimed, individually, his proportion of the capital cost allowance permitted the syndicate in each year. For the years 1967 to 1970 inclusive, in respect of the plaintiff, the total of those capital cost allowance deductions was $52,249.

In June 1971 the plaintiff sold, to a company called Tri-A Developments Ltd., his one-seventh interest in the Meadowlark Court Syndicate (Exhibit 3). The purchase price was $38,000, payable $20,000 in cash, and the balance by instalments over a five year period. The purchaser, in 1973, had difficulty in making the annual payment. The plaintiff agreed to some kind of compromise. He ultimately accepted or received a total of approximately $28,000, rather than the full amount of $38,000.

The parties to this litigation arrived at certain values and figures (Exhibit 1). The actual cost of the land, buildings and equipment in 1967 was agreed. So was the hypothetical selling price of those assets in 1971. To arrive at the recapture figure for the plaintiff, one-seventh of those values was taken.

The Minister relied on subsection 20(1) and paragraph 20(6)(j) of the Income Tax Act*. [6] I set out the relevant portions:

20. (1) Where depreciable property of a taxpayer of a prescribed class has, in a taxation year, been disposed of and the proceeds of disposition exceed the undepreciated capital cost to him of depreciable property of that class immediately before the disposition, the lesser of

(a) the amount of the excess, or

(b) the amount that the excess would be if the property had been disposed of for the capital cost thereof to the taxpayer,

shall be included in computing his income for the year.

20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(j) where a taxpayer has disposed of an interest in a partnership, an amount equal to the part of the consideration for the disposition of the interest of the taxpayer in the partnership that can reasonably be regarded as being in relation to the interest of the taxpayer in the depreciable property of a class that was used in the business of the partnership shall be deemed to be proceeds of disposition of depreciable property of that class and the person who acquired the interest of the taxpayer in the partnership shall be deemed to have acquired an interest in property at a Capital cost equal to that amount.

The Tax Review Board held the transaction fell within subsection 20(1), quite apart from the rule set out in paragraph 20(6)(j). As earlier recorded, the taxpayer’s appeal to that tribunal was dismissed.

The plaintiff contends subsection 20(1), putting paragraph 20(6)(j) aside for the moment, is not applicable. What was disposed of (sold) here, it is said, was not the plaintiff’s interest in the buildings and equipment, but his interest in: the assets of the syndicate. Counsel relied on MNR v Strauss, [1960] Ex CR 315; [1960] CTC 86; 60 DTC 1060. See also: Bourret v MNR, 30 Tax ABC 111; 62 DTC 501; Marks v MNR, 30 Tax ABC 155; 62 DTC 536; and contrast: Orris v MNR, 36 Tax ABC 236; 64 DTC 613 and analogous decisions. In that line of cases, it was recognized that the disposition by a member of a partnership of his share in the partnership, is not necessarily a disposition of a share in particular assets held, as a group, by the partnership members.

The defendant argues, in this case, that the plaintiff was the registered owner of an undivided one-seventh interest in the lands and buildings (the depreciable property); those lands and buildings were the only assets of the syndicate; when the plaintiff disposed of his interest in the syndicate, he transferred, separately, that one-seventh interest in the real property to the purchaser; there was therefore, quite apart from a sale of an interest in a syndicate, a disposition by the taxpayer of depreciable property, with the consequences set out In subsection 20(1).

I do not accept that contention.

The law of the province of Alberta*, [7] which may govern this syndicate, and of other provinces as wellt, [8] recognizes the concept of partnership property and assets as something apart from the individual shares of the partners in the partnership itself. The question of what is partnership property is discussed in Lindley on Partnerships} [9] at 349-351, 358- 359. In respect of a share in a partnership, this is said at 366-367:

Nature of a share in a firm

One of the features which distinguishes a partnership from an ordinary contract is that, in addition to creating contractual rights and obligations between the partners, a partnership usually (but not necessarily) involves the partners in certain proprietary rights in respect of partnership property. It is these proprietary rights which are the subject-matter of a share in the partnership.

In the absence. of a special agreement to that effect, all the members of an ordinary partnership are interested in the whole of the partnership property on the basis of equality between them, but it is not quite clear whether they are interested therein as tenants in common, or as joint tenants without benefit of survivorship, if indeed there is any difference between the two. It follows from this community of interest that no partner has a right to take any portion of the partnership property and to say that it is his exclusively. No partner has any such right, either during the existence of the partnership or after it has been dissolved.

Share a right to a proportionate interest in all the assets

What is meant by the share of a partner is his proportionate interest in the partnership assets. after they have been all realised and converted into money, and all the partnership debts and liabilities have been paid and discharged. This it is, and this only, which on the death of a partner passes to his representatives, or to a legatee or his share; which under the old law was considered as bona notabilia, and which on his bankruptcy passes to his trustee. Nevertheless, if, for any purpose, it is necessary to consider the nature of a share apart from a realisation of all the assets, such share is regarded as a proportionate interest in the specific items of property which together constitute the partnership property. This is, however, subject to the provisions of section 22 of the Partnership Act 1890, considered below.

There is nothing in the Income Tax Act, in my opinion, which alters, for tax purposes, the concepts outlined above.

The plaintiff here, in 1971, sold his unit interest in the syndicate. The main assets were, as that time, the apartment buildings and equipment. But there were other assets, and potential assets, represented by the units. The syndicate had the right to acquire and manage other properties. I note, also, that in the financial statements for 1970 one of the assets of the syndicate was guaranteed savings certificates, at a cost value of $10,000.

The sale by the plaintiff of the unit interest was something more than a disposition of his one-seventh interest in the land and buildings. But the sale of his interest in the syndicate happened to carry with it the right of the purchaser to become the owner of a one-seventh interest in the real property and equipment.

Subsection 20(1) is, by itself alone, to my mind, inapplicable.

The defendant then brings ‘into play paragraph 20(6)(j).

That paragraph was added in 1964. It seems apparent it was introduced to surmount the situation created by the Strauss, Bourret and Marks decisions, at least in respect of recapture. The editors of the Dominion Tax Service accurately, in my opinion, explained the reason for, and the object of, the amending paragraph*: [10]

Section 20(6)(j) was enacted in 1964 and is applicable to the 1964 and subsequent taxation years. Prior to its enactment it had been held in several cases that an interest in a partnership was itself a capital asset, quite distinct from the assets owned by and used in the partnership. Accordingly, the sale by a partner of his interest in a partnership was held not to give rise to taxable income in his hands. See, for example, No 315 and No 316 v MNR, 14 Tax ABC 311, 321; 56 DTC 82, 88; Strauss v MNR, [1960] CTC 86; 60 DTC 1060; Lundgard v MNR, 25 Tax ABC 59; 60 DTC 461; Bourret v MNR, 30 Tax ABC 111; 62 DTC 501; and compare the annotations at {I 10-458.33 and ',;' 11-705.09. Since the enactment of section 20(6)(j) it is no longer possible to take the position that a sale of a partnership interest is merely the sale of a capital asset in any case where the partnership property includes depreciable assets in which the selling partner can reasonably be regarded as having an interest. This provision will require the selling partner to bring into his income part of the consideration received for his interest in the partnership to the extent that the deemed sale price of his interest in the depreciable assets would result in recapture under section 20(1).

The plaintiff asserts the rule has no application. The syndicate, it is said, was not a partnership; it was not the carrying on of a business in common; it was, at best, an arrangement by a group of investors endeavouring to obtain income from property. The plaintiff relies on the classic definition of partnership found in most of the common law Partnership Acts:

“partnership” means the relationship that subsists between persons carrying on a business in common with a view to profit* [11]

The plaintiff relies, as well, on decisions such as Walsh et al v MNP, [1966] Ex CR 518; [1965] CTC 478: 65 DTC 5293: See also Wertman v MNR, [1965] 1 Ex CR 629; [1964] CTC 252: 64 DTC 5158. In that case, on the particular facts, it was held the income of the appellants received from the operation of three apartment properties, was income from property, not income from a business.

The facts here are, as I see it, quite different. The present participants formed a syndicate for the purpose of acquiring certain lands and managing the properties on them. The arrangement envisaged the acquisition of other similar properties. The evidence is not too clear as to whether other properties were acquired. The documentary evidence seems to so indicate. The syndicate agreement (Exhibit 2) describes only two lots. The financial statements for 1968 refer to only two apartment buildings, and two mortgages, and one agreement for sale. The financial statements for subsequent years show three apartment buildings, three mortgages, and two agreements for sale. The agreement between the plaintiff and Tri-A (Exhibit 3) sets out additional properties to those recited in the syndicate agreement.

All that, when considered along with the provisions of the syndicate agreement, indicates to me the carrying on, in common, of a business of acquiring and managing properties, with a view to profit.

The rule set out in paragraph 20(6)(j), therefore, applies. The plaintiff is subject to the recapture provisions. The Minister’s assessment was correct.

The plaintiff’s action is dismissed. The defendant will recover costs.