Randall v. The Queen, 85 DTC 5208, [1985] 1 CTC 268 (FCTD)

Walsh, J:—This case came for trial at the same time and on the same evidence as T-2209-80, the action bearing number T-2208-80 concerning plaintiffs assessment for his 1977 taxation year and that bearing number T-2209-80 concerning his assessments for his 1974, 1975 and 1976 taxation years. The basis of the assessments in the appeals is the same in both cases save for the amounts which, of course, differ.

It was conceded that plaintiff, now a stockbroker in Vancouver was a nonresident, residing in Mexico during the four years in question, and the question in issue is whether the income he received from his share of a partnership in a firm called Caterers Company (hereinafter referred to as “Caterers”) was income from a business carried on in Canada and taxable as such or was investment income subject solely to the 15 per cent non-resident tax deduction which was in fact made at least for the 1975, 1976 and 1977 taxation years. For the 1977 taxation year the reassessed income from Caterers was in the amount of $16,875.27 and in the years 1974, 1975 and 1976 it was respectively $42,306.34, $24,324.83, and $17,608.22. The amounts held as non-resident withholding tax are admitted by defendant so are not in issue although they do not work out to 15 per cent and will, of course, be taken into consideration in the calculation of any balance of tax claimed as a result of the reassessments.

In order to understand plaintiffs contentions it is necessary to go far back into the history of the business in question. His late father had been engaged in the business of racetrack management and ownership and was succeeded in this by plaintiff and his brothers William and John Randall, John now being dead and William being a resident Canadian for taxation purposes. In 1930 when plaintiff and his said two brothers entered into a partnership in Vancouver under the firm name of Caterers Company, horse racing was conducted in British Columbia under a system of limited periods of time at each racetrack. The rights to the food and beverage concessions at all of the British Columbia racetracks was in the control of plaintiffs father who entered into an agreement for the conduct and management of these concessions with a partnership styled Concessionaires Company (hereinafter called “Concessionaires”) of which the active partner was Peter Geoghegan. Concessionaires were to pay one-half of the annual net profits of conducting the catering operations to Caterers which had no active role in the operations of the concessions, its function being to maintain Concessionaires’ right as a licensee of Mr Randall Sr and his assigns to exploit the food and beverage concessions at the racetracks.

Eventually these operations were consolidated at Pacific National Exhibition Track where the operations were carried out by Concessionaires during the years concerned in the appeal. In March, 1938 Caterers entered into a written agreement with Ascot Jockey Club documenting its exclusive rights at that track. By 1967 plaintiff ceased to be employed in any capacity in racetrack management or operations, becoming a stockbroker which occupation he carried out until he terminated his Canadian residence temporarily in 1970. It is his contention that during the period while he was resident in Mexico he had no operating function as a member of the partnership, being a completely silent partner and that all that Caterers did was receive its share of the earnings of Concessionaires, distributing same to the partners.

It is the Crown’s position that Caterers and Concessionaires were in fact partners and that in 1938 when the Concessionaires Company partnership was formed by two of the Geoghegans for carrying on restaurant concession operations at the Lansdowne and Brighouse Park racetracks near Vancouver an agreement was entered into on June 8, whereby Caterers assigned and granted to Concessionaires an undivided one-half interest in their assets and business at Hastings Park racetrack in Vancouver and Concessionaires granted and assigned to caterers an undivided one-half interest in their business and assets at the Lansdowne Park and Brighouse Park racetracks, now closed, the Hastings Park racetrack having now become the Pacific National Exhibition racetrack.

While defendant refers to a number of sections of the Income Tax Act on which reliance is placed, it is really paragraph 2(3)(b) which must be interpreted. This is the section which makes a non-resident taxable for taxable income earned from a business carried on in Canada.

A number of agreements are involved which were produced as exhibits. On March 15, 1938 Samuel William Randall (the father of plaintiff), Ascot Jockey Club Limited and the Exhibition Breeders Association Limited entered into an agreement with William, John and Robert Randall, carrying on business as Caterers Limited. This refers to a lease entered into on December 6, 1937 between the Vancouver Exhibition Association as lessor and Samuel Randall as lessee to run for ten years from May 18, 1938 with an option for the lessee to renew same for further periods up to the end of the year 1960 for a building known as the Derby Cafe. Reference was made to an earlier agreement dated November 27, 1933 between the Vancouver Exhibition Association and the Exhibition Breeders Association Limited for operating the refreshment concession at the grandstand and clubhouse for a seven-day period during the annual exhibition and to another lease bearing the same date between the Vancouver Exhibition Association and the Ascot Jockey Club Limited leasing a portion of Hastings Park in Vancouver to the latter for the purpose of holding race meetings as allowed by law and operating the refreshment concession during said meetings.

The assignors, Samuel Randall, Ascot Jockey Club Limited and Exhibition Breeders Association Limited, assigned to Caterers their rights under these leases which also involved the exclusive right to sell racing programs during the meetings. It was provided that the assignees not assign the lease or make any arrange ments to exercise or enjoy the rights given them through the agency of any other person or persons without first obtaining the permission of the assignors. The financial terms of the agreement are not pertinent in this litigation.

On June 8, 1938 the three Randall brothers, carrying on business as Caterers Company, entered into an agreement with the Geoghegans, carrying on business as Concessionaires, whereby Caterers and Concessionaires agreed to give each other a one-half interest in their respective assets and in their respective businesses, Caterers assigning to Concessionaires an undivided one-half interest in their assets and business at Hastings Park and the Concessionaires assigning to Caterers an undivided one-half interest in their business and assets at Lansdowne Park and Brighouse Park.

The next agreement is unfortunately undated but William Randall, who was one of the signatories of it, testified that he believes it was made in 1941. It was an agreement between the Randall brothers and the Geoghegans setting forth that all concessions owned or operated by either of them shall be operated for the benefit of both parties with all expenses and all losses, if any, to be borne equally by the parties, that is to say, the Caterers and the Concessionaires and that all equipment and property used in the business should belong to both parties in equal shares. This merely complements the June 8, 1938 agreement, dealing with the operation of the business.

On July 21, 1964 the BC Turf and Country Club Limited entered into an agreement with the Ascot Jockey Club Limited stating that they are joint lesees under a lease made with the Pacific National Exhibition as lessor from July 20, 1964 and expiring on May 19, 1994. It refers to a partnership entered into between BC Turf and Ascot on November 21, 1960, under the name of British Columbia Jockey Club and that it is now their desire to continue their partnership until May 19, 1994.

The agreement provides, inter alia, that a partnership under the name of Concessionaires Company will have the exclusive concession for all catering, liquor, food, confectionery sales and services in connection with the operation of the partnership at Exhibition Park for seven years for payments set out therein, which does not concern us here. Provision was made for extending the seven- year lease granted to the Concessionaires Company in the event that the cost of furnishings and equipment to be provided by it exceeded $70,000, by one year for each additional $10,000 or part thereof contributed by the Concessionaires. At this stage it should be mentioned that William Randall testified that the Ascot Jockey Club had long been controlled by his father, Samuel Randall, who died in 1961, but the sons had bought his shares in 1952 and now controlled same. Plaintiff Robert Randall testified that in the 1974 to 1977 years he received director’s fees from the Ascot Jockey Club but had no business in Canada nor did he do any trading there nor did he have any capital gains resulting from dispositions in Canada nor carry on any business in Mexico.

The next document is a letter dated April 4, 1974 addressed to Concessionaires Company signed by the British Columbia Jockey Club, BC Turf Limited, Ascot Jockey Club Limited, with the latter’s signature being that of William A Randall as president. The terms are accepted by Concessionaires Company with the signatures of W T O Geoghegen and W A Randall appearing as partners. Mr Randall, an attorney, does not deny his signature but stated in testimony that he was never a partner of Concessionaires Company and does not know why he signed as such. He stated, however, that the Pacific National Exhibition Act had been passed and it was his understanding that the concession contract would be cancelled unless they made a new arrangement. Concessionaires had no say in the terms of the agreement. It may be that as Caterers owned one-half of the assets of Concessionaires the other parties to the agreement wanted a second signature. In any event, this letter confirmed that terms of payment for the concession contained in the agreement of July 21, 1964 between BC Turf and Country Club Limited and Ascot Jockey Club Limited would be amended so that from 1975 to 1981 Concessionaires would have to pay to Pacific National Exhibition 50 per cent of profits from the operation of the food and liquor concession or $80,000, whichever was the greater with a proportional abatement if the number of race meetings was less than 100. At the end of 1981 the equipment would become the property of the Pacific National Exhibition subject to payment of the net book value of any capital expenditures made for such equipment during the period. At the end of 1981 Pacific National Exhibition had agreed to consider Concessionaires for the operation of the concession, if they were satisfied with the manner in which it was being conducted. This agreement covers the period of the tax years in question.

Finally, an agreement was made on June 12, 1974 between Pacific National Exhibition and Ascot Jockey Club and BC Turf Limited (formerly BC Turf and Country Club Limited) carrying on a partnership under the name of British Columbia Jockey Club (hereinafter referred to as the “partners”), amending the agreement made between the parties on July 20, 1964, giving the partners the exclusive right to the Exhibition racetrack facilities. The pertinent portions of the agreement for the present purposes are that it acknowledges that food and alcoholic beverage concessions are operated by the Concessionaires Company pursuant to an agreement between Concessionaires Company and the partners, who shall cause during the years 1975 to 1981 Concessionaires Company to pay the Exhibition the amounts previously referred to in the letter, which need not be spelled out here.

It is significant that none of the last three agreements, dating to as far back as July 21, 1964, make any mention of Caterers. Although the March 15, 1938 agreement between Samuel Randall, Ascot Jockey Club and Exhibition Breeders Association and the three Randall Brothers carrying on business as Caterers included, in addition to concessions, the sale of programs and these were included in the updated agreement confirming the partnership between Caterers and Concessionaires operated by the Geoghegans, and the agreement of July 20, 1964 between BC Turf and Country Club Limited and Ascot Jockey Club Limited also refers to Concessionaires having the concession of programs, all reference to programs is omitted from the letter agreement of April 4, 1974 between the British Columbia Jockey Club, BC Turf Limited and Ascot Jockey Club Limited and Concessionaires and from the agreement dated June 12, 1974 between Pacific National Exhibition and Ascot Jockey Club Limited and BC Turf Limited, which refer to food and alcoholic beverage concessions only. The program concession was operated by a business known as W T O Geoghegan Programs, managed and conducted by Peter Geoghegan who also operated the food and beverage concessions for Concessionaires. Possibly as a result of the program sales being operated by a separate partnership, it was conceded during the course of the hearing that plaintiffs share of the profits from this were taxable although operated as in the case of other concessions by Peter Geoghegan and people employed by him. The amounts involved are $5,242.14 for 1977, $4,442.59 for 1974, $5,389.02 for 1975, and $5,069.11 for 1976. Plaintiff was a partner in the W T O Geoghegan Programs.

Plaintiff testified that since he was born in 1927 he was only eleven years old at the time of the initial agreement which he signed with his brothers on March 15, 1938, but he stated that he never at any time had anything to do with the management of Caterers. When he was twelve or thirteen years old he worked in a refreshment stand at the park and at fourteen or fifteen he worked in the mutuels, being paid for this as an employee. He received his share of the net earnings of Caterers, however, while he was still under age. It was always Peter Geoghegan who engaged staff, purchased the equipment, established the prices and in general managed business on behalf of Concessionaires with neither plaintiff nor his brothers having any say in it, according to his evidence. The distribution cheques he received were signed by Peter Geoghegan and he does not know if Caterers ever even had a bank account. Since 1980 it has now become a limited company but this has no bearing on the years under consideration. William Randall had testified that he occasionally signed some cheques and had signed the application for the liquor permit but otherwise was not involved, and in any event it is not he whose tax is under dispute.

Caterers’ financial statements and those of W T O Geoghegan Programs for each of the years in question are found in Exhibit O-3, being the tax return for plaintiffs 1976 taxation year, and including subsequent reassessments in 1978. The statements for the WTO Geoghegan Program account indicate the distribution of its profits, one-half being to W T O Geoghegan and the other half being divided equally between each of the three Randall brothers.

With respect to Caterers Company, it had a balance sheet and financial statements of its own showing the partners’ three accounts and their drawings in the given years and capital balances to their credit, but these statements incorporate what is referred to as a combined profit and loss statement of Concessionaires Company and Caterers Company and schedule of general expenses of both companies. The net profit of the two together is applied in accordance with what is referred to as the profit sharing arrangements of the amended concession agreement, from which is deducted the 50 per cent profit sharing payable to Pacific National Exhibition, the balance being divided equally between Concessionaires and Caterers. The Caterers statement then shows the division of its share equally to the three brothers.

It is apparent that although Caterers have been supplanted by Concessionaires as operators of the concessions as far back as 1964, Concessionaires were still bound by and have honoured the partnership agreement entered into with Caterers in 1938, and the undated one made in 1941. There is no reason to doubt the evidence of the witnesses that the actual physical operations were carried out by Concessionaires without any active participation by any of the Randalls. It was they, however, who had connections and influence through the Ascot Jockey Club which they controlled and of which William Randall is still president, to maintain the exclusive franchise rights provided they were properly operated. This was their contribution to the partnership.

The British Columbia Partnership Act, RSBC, c-312, provides in section 5 that persons who have entered into partnership with one another are, for the purposes of this Act, called collectively “firm” and the style or name under which the business is carried on is called the “firm name”. This is what the Randall brothers did in connection with Caterers. Section 2 provides that partnership is the relation which exists between persons carrying on business in common with the view of profit. That is certainly what Caterers were doing. Paragraph 3(c) provides that the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he is a partner in the business. Caterers and Concessionaires were partners as a result of this and of the agreements between them and one-half of the profits flowed through to the Randall brothers from their partnership in Caterers.

There does not appear to be any provision in the statute for a silent or inactive partner. The case of The Queen v Rockmore Investments Limited, [1976] CTC 291; 76 DTC 6156 (FCA) dealt with a different section of the Act, namely whether respondents were carrying on an active business or not. At 293 (6157 DTC) the judgment states:

Furthermore, the contrast in paragraph 3(a) of the Act between “business” and “property” as sources of income makes it clear, I think, that a line must be drawn, for the purposes of the Act, between mere investment in property (including mortgages) for the acquisition of income from that property and an activity or activities that constitute “an adventure or concern in the nature of trade” or a “trade” in the sense of those expressions in section 248 (supra).

In the present case although plaintiff and his brothers did not themselves invest money in the business, by the agreement between them and Concessionaires in 1938, they assigned to it an undivided half interest in “their assets” and “their business” at Hastings Park and the balance sheet of Caterers Company shows among the assets equipment at cost less accumulated depreciation and construction at cost less accumulated depreciation. Partners’ accounts show among the liabilities amounts for capital, being the value of the fixed assets, equipment and construction less accumulated depreciation. This does not, however, indicate that what they were doing was merely investing in property rather than participating through Concessionaires in a business undertaking.

In the case of Harkishan Sandhu et al v The Queen, [1980] CTC 158; 80 DTC 6097 (FCTD) Addy, J states at 167 (6104 DTC):

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.)

With respect to the non-activity of the plaintiff in the operation of the business, reference might be made to the case of Ettie Wiss v MNR, [1972] CTC 264; 72 DTC 6231 (FCTD), in which Heald, J stated at 264 (6231-2 DTC):

She described herself as the silent partner in these transactions and agreed that Bernard Lehrer was the active and dominant partner. It has been decided in a number of cases that a non-active or silent partner who is quite content to leave the handling of the business to another partner is in no different position than that of the active partner (see MNR v Lane, [1964] CTC 81; Carr v MNR, [1965] CTC 334).

Similar findings were made in the case of MNR v Clifton H Lane, [1964] CTC 81; 64 DTC 5049 (FCTD) in which Noel, J stated at 91 (5054-5 DTC):

It would appear from this that the Syndicate’s non-active members were quite content to leave the handling of the Syndicate’s activities to the executive committee who had carte blanche to handle the business of the Syndicate as they thought best and because of this situation, the passive members here would be in no different position than that of the active members. Indeed, if the transactions are business transactions, any profit derived therefrom from any of the members would be taxable.

and in the case of Les Entreprises Blaton-Aubert Société Anonyme v MNR, [1972] CTC 609; 73 DTC 5009 (FCTD) dealing with a Belgian investment company which had entered into a partnership agreement with a Canadian construction firm building the Belgian pavilion at the site of Expo 1967 in which it was held at 612(5011-2 DTC):

. . . For whatever contribution the appellant had made or was making to the job, the joint venture agreement provided for an equal division of profits or losses. The position taken by counsel for the appellant is that, although the latter was a construction company, the function fulfilled in this venture by it was not a construction function but a financial one adding that it was a “once and for all” venture. It appears to me that the appellant has here a considerable hurdle to overcome in that it is a construction company and if one relies on the joint venture document entered into with the Canadian company, the object of the contract, ie, the construction of the Belgian pavilion, was the execution of a type of work in line with the business for which it was created and which it normally and usually performs in its every day operations.

In conclusion, although plaintiff did not participate actively in the operation of the concessions, he must be considered as taxable as a non-resident pursuant to paragraph 2(3)(b) of the Act for participating in the carrying on of a business in Canada, even though it was carried on on behalf of him and his brothers by Concessionaires by virtue of the agreements between it and caterers and the same would be true even if Concessionaires could be considered as merely agents. He participated in the profits and it was not a mere investment.

The appeals against the reassessments for the 1974 to 1977 taxation years are therefore dismissed with costs, only one set of costs being allowed save for disbursements incurred in connection with the second action, T-2209-80.

Appeals dismissed.