Goldstein v. The Queen, 96 DTC 1029, [1995] 2 CTC 2036 (TCC)

Bowman J.T.C.C.:-

Introduction

These appeals are from assessments for the appellant’s 1991 and 1992 taxation years. They have to do with the disallowance by the Minister of National Revenue of a portion of the contribution made by Mr. Goldstein to a registered retirement savings plan. In 1991 and 1992 respectively, the appellant deducted $8,443 and $7,160 as contributions to his RRSP. The Minister, on assessing, reduced his allowable deductions for those years to $6,736 and $5,646 respectively.

The difference between the Minister and the appellant lies in the computation of the appellant’s ’’earned income". Earned income, as defined in paragraph 146(1)(c), is a factor in the formula used in calculating the taxpayer’s "RRSP deduction limit" as defined in paragraph 146(1)(g.1), which in turn is a component in the determination of the amount of RRSP premiums deductible under subsection 146(5). If the taxpayer’s earned income is reduced this may reduce the amount of RRSP contributions that are deductible. The issue is the treatment in the computation of the appellant’s earned income of losses sustained by the appellant as a limited partner in two limited partnerships that owned multiple-unit residential buildings ("MURBs"). The losses sustained by the partnerships were from the rental of property and the amount allocated to the appellant represented his share of the partnership’s losses. The appellant excluded these losses from the computation of his earned income whereas the Minister deducted them. Hence the question.

A second issue is whether the Minister, having through his officials confirmed to the appellant that under his then prevailing interpretation of the words "earned income" in section 146 there were to be excluded the appellant’s share of losses of a limited partnership that owned rental properties that were MURBs, is estopped from taking a different position on assessing.

Facts

Mr. Goldstein in 1991 and 1992 and in prior years was a limited partner in two limited partnerships, Royal Lady Manor Limited and Waters Edge Tower Limited. The income or loss from these partnerships was derived from the rental of real property. In both years the partnerships sustained losses and the appellant’s share thereof, in the case of Royal Lady Manor Limited partnership, was $2,492 and $796 and, in the case of Waters Edge Tower Limited partnership, was $18,115 and $17,977. These losses were claimed and allowed in the computation of the appellant’s income.

In computing the amount of RRSP premiums that he could deduct the appellant was required to determine his "earned income" for the purposes of section 146 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). To this end he consulted his accountants, Ernst & Young, to determine whether the losses that he had sustained as a limited partner in the two partnerships should be deducted in computing his "earned income".

A partner in Ernst & Young, Mr. T.R. Burpee, testified as an expert witness and he put in evidence a memorandum dated April 23, 1991 which had been prepared following Mr. Goldstein’s consultation. Since the memorandum sets out accurately the representations upon which the argument of estoppel is based, I reproduce it in its entirety:

Re: RRSP Earned Income Definition

Question

Mr. Stanley Goldstein owns units of a limited partnership which was set up to hold a multiple-unit residential building ("MURB”). He has asked us to review whether the income or losses realized from this limited partnership should be considered in the calculation of earned income for purposes of the RRSP deduction.

Facts

Earned income is defined under paragraph 146(1 )(c) of the Income Tax Act and Article 925 of the Quebec Taxation Act. Earned income includes income and losses realized by a taxpayer, either alone or as a partner actively engaged in a business. It also includes income from property, where such income or loss is derived from the rental of real property. It is apparent that any limited partnership income or losses are not income or losses incurred by a taxpayer engaged actively in the business, since a limited partner only has limited involvement in the partnership. It is also apparent that MURB rental income or losses are property income or losses, which are usually included in the computation of earned income. However, in this case, any income or loss from Mr. Goldstein’s MURB investment is technically income from a partnership in which he is not actively engaged, which is not specifically referred to in the definition of earned income. The question of whether limited partnership income or losses from the rental of real property should affect the computation of earned income is complex. I concluded that income or losses from a limited partnership are not included in the calculation of earned income, since they excluded from the definitions of earned income in paragraph 146(l)(c) of the Income Tax Act, and Article 925 of the Quebec Taxation Act.

Findings

In order to ensure that the administrative practices of the federal and Quebec taxation authorities are consistent with the above conclusion, I contacted Mr. Wayne Harding of Revenue Canada, Rulings in Ottawa, concerning the above issue. He indicated that even though MURBs are rental properties, the income or loss from which is included in earned income calculations, the fact that the MURB is legally set up as part of a limited partnership signifies that income or losses from this partnership do not affect earned income. The reasoning behind this decision is that the overriding factor is the limited partnership format, which indicates that any income or loss from such a limited partnership is not specifically referred to in paragraph 146(1 )(c) of the Income Tax Act and thus does not affect earned income.

Linda Hyatt of Ernst & Young in Toronto has dealt with a similar situation and has contacted Mr. John Carey of Revenue Canada, Appeals Division. Mr. Carey indicated that Revenue Canada was presently reviewing the definition of earned income, and attempting to include rental income and losses from limited partnerships in its definition. However, Revenue Canada has been unable to make a final decision on this issue and has therefore agreed to leave their policy unchanged; that is, limited partnership rental income and losses are not included in the definition of earned income.

I also contacted Fabienne Fortier of Revenue Quebec in Montreal, who confirmed that the Quebec treatment is the same as that of the federal government.

Conclusion

In conclusion, any income or loss from a MURB set up as a limited partnership does not affect earned income calculations. Thus, it is advantageous for a MURB to be set up in a limited partnership for investors who want to enjoy the tax deductions offered by MURB rental losses, and yet want to maximize their earned income for RRSP contribution purposes.

In reliance upon these communications from the Department of National Revenue, Mr. Goldstein filed his returns for 1990 and 1991 upon the premise that the losses sustained as a partner in the limited partnerships were not to be taken into account in determining his earned income under section 146 for the purposes of determining how much he could deduct as a contribution to his RRSP. Before the end of 1991 he was informed that the Department’s interpretation had changed and that under its new interpretation of section 146 it required, in the computation of earned income, the deduction of losses sustained as a partner in a limited partnership which derived its income or loss from the rental of MURBs. The Minister assessed Mr. Goldstein’s 1989, 1990, 1991 and 1992 taxation years accordingly. The 1989 and 1990 taxation years are not before me. They were disposed of on consent, the terms of which are not relevant here. Before the time the appellant’s 1992 return was filed he was aware that the Department had changed its mind and therefore did not rely upon the earlier position. The question of estoppel is, however, squarely before me for 1991.1 find as a fact that for that year Mr. Goldstein clearly relied to his detriment upon a representation made to him, through his accountants, by the Department about their administrative practice and upon the interpretation of section 146 which they had at that time.

Analysis

I shall deal first with the question of the correctness in law of positions taken on the interpretation of paragraph 146(1 )(c). As stated, the meaning of ’’earned income" is central. For the purposes of section 146 it is defined as follows, in paragraph 146(1 )(c):

146(l)(c) "earned income" of a taxpayer for a taxation year means the amount, if any, by which the aggregate of all amounts each of which is

(i) the taxpayer’s income for a period in the year throughout which the taxpayer was resident in Canada from

(A) an office or employment, determined without reference to paragraphs 8(1 )(c), (m) and (m.2),

(B) a business carried on by the taxpayer either alone or as a partner actively engaged in the business, or

(C) property, where such income is derived from the rental of real property or from royalties in respect of a work or invention of which the taxpayer was the author or inventor,

(ii) an amount included under paragraph 56(1 )(b), (c), (c.l), (g) or (o) in computing the taxpayer’s income for a period in the year throughout which the taxpayer was resident in Canada,

(iii) the taxpayer’s income for a period in the year throughout which the taxpayer was not resident in Canada from

(A) the duties of an office or employment performed by the taxpayer in Canada, determined without reference to paragraphs 8(1 )(c), (m) and (m.2), or

(B) a business carried on by the taxpayer in Canada, either alone or as a partner actively engaged in the business

except to the extent that the income is exempt from income tax in Canada by reason of a provision contained in a tax convention or agreement with another country that has the force of law in Canada, or

(iv) in the case of a taxpayer described in subsection 115(2), the aggregate that would be determined under paragraph (e) thereof in respect of the taxpayer for the year if

(A) that paragraph were read without reference to subparagraphs (iii) and (iv) thereof, and

(B) subparagraph (e)(ii) thereof were read without any reference therein to paragraph 56(1 )(n),

except any part thereof included in the aggregate determined under this paragraph by reason of subparagraph (iii) or exempt from income tax in Canada by reason of a provision contained in a tax convention or agreement with another country that has the force of law in Canada,

exceeds the aggregate of all amounts each of which is

(v) the taxpayer’s loss for a period in the year throughout which the taxpayer was resident in Canada from

(A) a business carried on by the taxpayer, either alone or as a partner actively engaged in the business, or

(B) property, where such loss is sustained from the rental of real property,

(vi) an amount deductible under paragraph 60(b), (c) or (c.l) in computing the taxpayer’s income for the year, or

(vii) the taxpayer’s loss for a period in the year throughout which the taxpayer was not resident in Canada from a business carried on by the taxpayer in Canada, either alone or as a partner actively engaged in the business,

and, for the purposes of this paragraph, the income or loss of a taxpayer for any period in a taxation year is the taxpayer’s income or loss computed as though that period were the whole taxation year.

The expression can be traced back to the Income War Tax Act. For the purposes of this case the relevant portion of paragraph 146(l)(c) is subparagraph 146(l)(c)(v), which reads as follows:

(v) the taxpayer’s loss for a period in the year throughout which the taxpayer was resident in Canada from

(A) a business carried on by the taxpayer, either alone or as a partner actively engaged in the business, or

(B) property, where such loss is sustained from the rental of real property.

It is obvious that clause A does not apply. Although the appellant was admittedly a partner in a limited partnership, it cannot be said that his losses were from ”a business carried on by [him]...as a partner actively engaged in the business". Even if it can be said that the limited partnerships carried on business, Mr. Goldstein clearly was not a partner who was "actively engaged in the business".

This leaves only clause 146(l)(c)(v)(B). Were his losses from "property, where such loss is sustained from the rental of real property"?

The question whether Mr. Goldstein’s loss is a loss from property, where such loss is sustained as a limited partner in a partnership which has losses from renting real property is not susceptible of a ready answer. I can understand the uncertainty that prompted Ernst & Young to consult the departmental officials. Mr. Goldstein argued that his loss is not from property but rather from a partnership. I do not think that this is a correct view of the matter. A partnership is not a "source" of income in the sense in which that expression is used in sections 3 and 4 of the Income Tax Act. Partnership is a legal relationship that exists between persons engaged in a commercial enterprise in common. A partnership derives income from a source or sources, just as an individual or a corporation does. It is not, in itself, a source of income.

This does not, however, end the analysis. Since clause 146(l)(c)(v)(A) refers specifically to partnerships in the business of which the taxpayer is actively engaged, does this necessarily exclude losses sustained by a limited partner in a partnership where that partner’s involvement is purely passive? Before attempting to answer this question two subsidiary questions arise:

A. Is a commercial activity of a partnership necessarily always a source of income that is a business or can it be property?

B. Assuming the source referred to in question (a) above can be property, does the interposition of a partnership between the taxpayer and the rental operation necessarily exclude the operation of clause 146(l)(c)(v)(B)?

As to the first question, Mr. Goldstein stated that he thought the partnerships were formed under the law of either Manitoba or Alberta. Assuming this to be correct, the definition of partnership in the partnership

acts of both provinces is essentially the same: the relationship that subsists between persons carrying on business in common with a view to profit. If it is suggested that one is to conclude that the use of the word "business” in the definition of partnership in a provincial partnership act means that a partnership’s source of income cannot, for the purposes of the Canadian Income Tax Act, be property, as opposed to a business, then I think that this conclusion ascribes to a definition in a provincial statute an effect that goes beyond its purpose. I accept that for a partnership to exist for the purposes of the Income Tax Act it must be one that is valid under the applicable civil law to which the partnership is subject. It does not follow that the words in the federal act must necessarily have the same meaning as in the provincial act, or vice versa. The result, in my view, is that:

I. a source of income that is property if owned by one person does not become a business merely because it is owned by a partnership; and

II. even if any commercial pursuit of a partnership must be characterized as the carrying on of a business, there is no reason why that business cannot consist in the holding of property for the purpose of deriving rental income therefrom. While there may be cases in which it is necessary to decide whether a source of income is business and not property, or vice versa [1] there is no reason in principle for assuming that the two concepts are mutually exclusive or that they exist in watertight compartments.

As to the second question, relating to the interposition of a partnership, I think that, whether or not the partnerships can be regarded as ’’carrying on business", their losses were from property and that those losses were sustained from the rental of property. Were they then the appellant’s losses from that source? I think they were.

Subsection 96( 1 ) of the Income Tax Act reads, so far as is relevant to this case, as follows:

96(1) Where a taxpayer is member of a partnership, his income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or his taxable income earned in Canada for a taxation year, as the case may be, shall be computed as if

(a) the partnership were a separate person resident in Canada;

(b) the taxation year of the partnership were its fiscal period;

(c) each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of

(i) each taxable capital gain and allowable capital loss of the partnership from the disposition of property, and

(ii) each income and loss of the partnership from each other source or from sources in a particular place,

for each taxation year of the partnership;

(f) the amount of the income of the partnership for a taxation year from any source or from sources in a particular place were the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent to the taxpayer’s share thereof; and

(g) the amount, if any, by which

(i) the loss of the partnership for a taxation year from any source or sources in a particular place,

exceeds

were the loss of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof.

Although it was probably not necessary to say so, it is quite clear from subsection 96(1) that the sources of income or loss of a partnership are, when that income or loss is allocated to a partner, the sources of income or loss of the partner. The sources of income or loss retain their identity when allocated to the partner. The partnership, which, after all, is not a legal entity, does not operate as some kind of filter that transforms the source of the income or loss into something other than that which it was originally. [2]

This interpretation fits more precisely with what appears to me to be the scheme and object of the definition of “earned income" in section 146. The purpose of that definition appears to be to exclude from it certain types of passive income such as interest and dividends, but not rental income which may also be passive. To interpret the definition as including losses from a direct interest in a MURB, but not one held through a partnership would seem an unduly mechanical one, and one which would lead to an absurdity. (See Contents v. The Queen (T.C.C.), January 19, 1995, Court File No. 92-2495 (unreported), at pages 10 and 11, footnotes 4 and 6.)

Accordingly I think that the Minister’s interpretation is correct and the losses which the appellant sustained are to be deducted in computing his "earned income" for the purposes of section 146.

I come next to the question of estoppel.

There is much authority relating to the question of estoppel in tax matters and no useful purpose would be served by yet another review of the cases. I shall endeavour however to set out the principles as I understand them, at least to the extent that they are relevant. Estoppels come in various forms-estoppel in pais, estoppel by record and estoppel by deed. In some cases reference is made to a concept of "equitable estoppel", a phrase which may or may not be accurate. (See Canadian Pacific Railway Co. v. The King, [1931] A.C. 414 at page 429. Cf. Central London Property Trust Ltd. v. High Trees House Ltd., [1947] 1 K.B. 130.) It is sufficient to say that the only type of estoppel with which we are concerned here is estoppel in pais. In Canadian Superior Oil Ltd. v. Paddon-Hughes Development Co., [1970] S.C.R. 932 at pages 939-40 Martland J. set out the factors giving rise to an estoppel as follows:

The essential factors giving rise to an estoppel are I think:

(1) A representation or conduct amounting to a representation intended to induce a course of conduct on the part of the person to whom the representation is made.

(2) An act or omission resulting from the representation, whether actual or by conduct, by the person to whom the representation is made.

(3) Detriment to such person as a consequence of the act or omission.

Estoppel is no longer merely a rule of evidence. It is a rule of substantive law.” [3] Lord Denning calls it "a principle of justice and of equity". (See Moorgate Mercantile Co. v. Twitchings, [1976] 1 Q.B. 225, at page 241.)

It is sometimes said that estoppel does not lie against the Crown. The statement is not accurate and seems to stem from a misapplication of the term estoppel. The principle of estoppel binds the Crown, as do other principles of law. Estoppel in pais, as it applies to the Crown, involves representations of fact made by officials of the Crown and relied and acted on by the subject to his or her detriment. [4] The doctrine has no application where a particular interpretation of a statute has been communicated to a subject by an official of the government, relied upon by that subject to his or her detriment and then withdrawn or changed by the government. In such a case a taxpayer sometimes seeks to invoke the doctrine of estoppel. It is inappropriate to do so not because such representations give rise to an estoppel that does not bind the Crown, but rather, because no estoppel can arise where such representations are not in accordance with the law. Although estoppel is now a principle of substantive law it had its origins in the law of evidence and as such relates to representations of fact. It has no role to play where questions of interpretation of the law are involved, because estoppels cannot override the law. [5]

The question of the interpretation of paragraph 146(l)(c) is a matter of law and I must decide it in accordance with the law as I understand it. I cannot avoid that obligation because the Department of National Revenue may previously have adopted an interpretation different from that which it now propounds. The question is not whether the Crown is bound by an earlier interpretation upon which a taxpayer has relied. It is more to the point to say that the courts, who have an obligation to decide cases in accordance with the law, are not bound by representations, opinions or admissions on the law expressed or made by the parties. [6]

The result of the application of the rule in Maritime Electric and the many other cases to the same effect can have, in particular cases, unfortunate consequences for a taxpayer who, in good faith, relies upon a departmental interpretation that is subsequently changed. Nonetheless it is not in the interests of justice that the courts should be fettered by erroneous interpretations of the law by departmental officials. [7]

The appeal is dismissed.

Appeal dismissed.