Citation: 2010TCC349
Date: 20100623
Docket: 2009-3208(IT)I
BETWEEN:
LEWIS PERELMUTTER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
V.A. Miller, J.
[1]
The Appellant has
appealed the reassessments for his 2005 and 2006 taxation years which
disallowed his claim for capital losses of $42,930 and $8,627 respectively. On
reassessment, the Minister of National Revenue (the “Minister”) allowed a
capital loss of $1,552 and nil in 2005 and 2006 respectively. In the Reply to
Notice of Appeal, the Minister conceded that the Appellant is entitled to a capital
loss of $8,627 for his 2006 taxation year.
[2]
The issues in this
appeal are:
2005
a)
whether the Appellant
and Drupatty Rupnarain carried on business in partnership for the acquisition
of the property at 34 Burnley
Court in Nepean (the “Burnley Property”);
b)
whether the loss on the
disposition of the Burnley Property was a terminal loss or a capital loss;
c)
what was the quantum of
the loss on the Burnley Property;
2006
a) whether the Appellant is entitled
to a business loss or a capital loss with respect to the property at Lucinda Palm Court in Florida (the “Florida Property”).
2005 – Burnley Property
[3]
The witnesses at the
hearing were the Appellant, Drupatty Rupnarain and Robert Taylor, an officer
with the CRA.
[4]
In 1999 or 2000, the
Appellant hired Rupnarain, a nurse’s assistant, to care for his wife who was
bedridden with Parkinson’s disease.
[5]
The Appellant and
Rupnarain explained their relationship and how they came to be joint tenants with
respect to the Burnley Property.
[6]
Rupnarain testified
that it was her idea to someday own and operate a seniors’ residence as she
enjoyed working with seniors. She stated that she spoke to the Appellant about
her plan and he asked if they could go into business together as he would have
nothing to do after his wife died. Rupnarain consented and they started to look
for a suitable property. They engaged a real estate agent who found the Burnley
Property.
[7]
The Appellant and
Rupnarain acquired the Burnley Property as joint tenants on January 7, 2005.
They advertised the seniors’ residence by posting flyers in various places,
speaking to doctors and social workers and at retirement homes and hospitals.
[8]
Both the Appellant and
Rupnarain thought that the Burnley Property was suitable for their purposes as
it had an elevator. However, the house was in poor repair. Rupnarain and her
husband personally did all of the renovations to the Burnley Property. They
constructed two bathrooms and an extra bedroom in the basement. They laid
laminate and tile floors in the basement. They removed old carpet and laid
laminate floors upstairs. They cleaned the backyard. Rupnarain had draperies
made for the house.
[9]
It was Rupnarain’s
evidence that she paid for all expenses associated with the renovations of the
Burnley Property. She gave the receipts to the Appellant as they had agreed
that he would prepare the books for the business.
[10]
The Burnley Property
was zoned residential and the Appellant and Rupnarain were unable to get it
rezoned to carry on their business of a seniors’ residence. They sold the
Burnley Property on July 15, 2005.
[11]
It was the Appellant’s
position that he and Rupnarain were not business partners. It was not his
intention to be partners in the business or the Burnley Property as he paid for
all expenses that were incurred save for $5,000 which was paid by Rupnarain.
[12]
The Appellant stated
that it was out of kindness that he had Rupnarain’s name placed on the deed for
the Burnley Property.
[13]
The documentary
evidence contradicts the Appellant’s evidence. According to the Mortgage Commitment,
the Scotiabank instructed the solicitor who would complete the property
transaction that both the Appellant and Rupnarain “are to be registered on
title”.
[14]
The term partnership is
not defined in the Income Tax Act (the “Act”)[1]. The Supreme
Court of Canada has held that partnership is a legal term and Parliament must
have intended that the term be given its legal meaning as found in various
provincial and territorial partnership statutes[2].
[15]
Section 2 of the
Ontario Partnerships Act[3]
defines partnership as “the relation that subsists between persons carrying on
a business in common with a view to profit”.
[16]
The Supreme Court of
Canada in Backman[4]
discussed some of the relevant factors that must be analysed when a court is
determining if a partnership exists. It stated:
19 In
law, the meaning of "carrying on a business" may differ depending on
the context in which it is used. Provincial partnership acts typically define
"business" as including "every trade, occupation and
profession". The kinds of factors that may be relevant to determining
whether there is a business are contained in the existing legal definitions.
One simple definition of "carrying on trade or business" is given in Black's
Law Dictionary (6th ed. 1990), at p. 214: "To hold one's self out to
others as engaged in the selling of goods or services." Another definition
requires at least three elements to be present: (1) the occupation of time,
attention and labour; (2) the incurring of liabilities to other persons; and
(3) the purpose of a livelihood or profit: see R. v. Gordon, [1961]
S.C.R. 592 (S.C.C.) per Cartwright J., dissenting but not on this point,
at p. 603.
20 The
existence of a valid partnership does not depend on the creation of a new
business because it is sufficient that an existing business was continued.
Partnerships may be formed where two parties agree to carry on the existing
business of one of them. It is not necessary to show that the partners carried
on a business for a long period of time. A partnership may be formed for a
single transaction. As was noted by this Court in Continental Bank, supra,
at para. 48, "[a]s long as the parties do not create what amounts to an
empty shell that does not in fact carry on business, the fact that the
partnership was created for a single transaction is of no consequence."
Furthermore, to establish the carrying on of a business, it is not necessary to
show that the parties held meetings, entered into new transactions, or made
decisions: Continental Bank, supra, at paras. 31-33 …
21 In determining whether a business is
carried on "in common", it should be kept in mind that partnerships
arise out of contract. The common purpose required for establishing a
partnership will usually exist where the parties entered into a valid partnership
agreement setting out their respective rights and obligations as partners. As
was noted in Continental Bank, supra, at paras. 34-35, a
recognition of the authority of any partner to bind the partnership is
relevant, but the fact that the management of a partnership rests with a single
partner does not mandate the conclusion that the business was not carried on in
common. This is confirmed in Lindley & Banks on Partnership (17th
ed. 1995), at p. 9, where it is pointed out that one or more parties may in
fact run the business on behalf of themselves and the others without
jeopardizing the legal status of the arrangement. It may be relevant if the
parties held themselves out to third parties as partners, but it is also
relevant if the parties did not hold themselves out to third parties as being
partners. Other evidence consistent with an intention to carry on business in
common includes: the contribution of skill, knowledge or assets to a common
undertaking, a joint property interest in the subject-matter of the adventure,
the sharing of profits and losses, the filing of income tax returns as a
partnership, financial statements and joint bank accounts, as well as
correspondence with third parties: see Continental Bank, supra,
at paras. 24 and 36.
[17]
I have considered those
factors and I find that the Appellant and Rupnarain were in partnership with
respect to the Burnley Property. They operated a seniors’ residence in
partnership and they were equal partners. I have relied on the following facts
in making this decision:
a)
The Appellant and
Rupnarain held themselves out to others that they were engaged in the business
of operating a seniors’ residence;
b)
They purchased the
Burnley Property as joint tenants and they were jointly responsible for a
mortgage loan to Scotiabank;
c)
They both participated
in the advertisement of the seniors’ residence. I believe Rupnarain when she
stated that they used her car to drive to the various places where they
advertised the seniors’ residence;
d)
They opened a joint
bank account at the TD Bank and they applied for and received a joint TD Visa;
e)
Rupnarain gave the
Appellant money which he deposited into their joint account. The Appellant
stated that Rupnarain gave him $5,000 whereas Rupnarain said it was $4,000;
f)
The Appellant paid the
down payment and some of the expenses associated with the Burnley Property.
Rupnarain and her husband personally made the renovations to the property and
paid for the materials used in the renovations;
g)
The gas and hydro
connections for the Burnley Property were registered to both the Appellant and
Rupnarain;
h)
I accept Rupnarain’s
evidence that they had intended that the Appellant would take care of the books
for the business and she would run the business by living in the house and
actually caring for the seniors on a 24/7 basis;
i)
The Appellant stated
that any profit made by the business would be divided equally between them.
[18]
Mr. Koshy, agent for
the Appellant argued that since the Appellant paid most of the money for the
Burnley Property, there was no partnership. He stated that the Appellant paid
the down payment of $34,750 and made the mortgage payments. It was his position
that the Appellant was responsible for the mortgage loan on the property. He
argued that Rupnarain did not have the means to pay the mortgage loan if there
was a default. He insinuated that Scotiabank did not do a credit check on
Rupnarain.
[19]
I disagree with the
agent and I find his statements to be condescending. Both the Appellant and
Rupnarain signed the Mortgage Agreement and both were jointly responsible for
the loan. I note that on exhibit R-5, the Mortgage Commitment, Rupnarain had to
give verification of her income for the 2003 and 2004 taxation years. According
to this document, Scotiabank instructed the solicitor who acted on behalf of
the Appellant and Rupnarain to ensure that they each owned their homes “Free
and Clear” and that both of them were to be registered on title, but only
Rupnarain was to occupy the Burnley Property.
[20]
In conclusion, the Appellant
and Rupnarain did carry on business in common with a view to profit and they
were partners with respect to the Burnley Property.
[21]
Between January 7 and
July 15, 2005, the Appellant and Rupnarain held the Burnley Property as a
capital property in their business. They sustained a loss on the sale of the
property. As the building was depreciable property, it gave rise to a terminal
loss whereas the land was non-depreciable property and it gave rise to a
capital loss.
[22]
The Minister assumed
that the purchase price and proceeds of disposition for the Burnley Property
were attributable to the land and building in the ratio 25/75. Agent for the
Appellant agreed with this allocation for the purchase price. He argued that
the proceeds of disposition should be wholly allocated to the building as the
value of the land remained constant. The Appellant gave no evidence to support
this position. I find that this argument is not correct because even if the
value of the land remained constant, the entire proceeds of disposition would
not be allocated to the building.
[23]
In order to calculate
the terminal loss on the building and the capital loss on the land I have
determined from the exhibits that the building was under renovation for three
months. The terminal and capital losses are as follows:
|
Purchase Price
|
|
|
$347,500
|
|
+ Closing costs
|
|
|
5,081
|
|
|
|
|
$352,581
|
|
|
Building
75%
|
Land 25%
|
|
|
|
$264,
436
|
$88,145
|
|
|
|
|
|
|
|
Renovations
|
$ 2,709
|
|
|
|
Mortgage Interest
|
2,551
|
|
|
|
Property Taxes
|
983
|
|
|
|
Gas
|
584
|
|
|
|
Hydro
|
108
|
|
|
|
Total Cost:
|
$271,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale Price
|
|
|
$361,014
|
|
Less:
|
|
|
|
|
Real Estate Commission
|
15,494
|
|
|
|
Legal Fees
|
724
|
|
|
|
Mortgage Discharge
|
4,405
|
|
20,623
|
|
|
|
|
$340,391
|
|
|
Building 75%
|
Land 25%
|
|
|
|
$255,293
|
$85,098
|
|
|
|
|
|
|
|
Terminal Loss
|
$ 16,078
|
|
|
|
Capital Loss
|
|
$ 3,047
|
|
The Appellant’s share of the terminal loss is $8,039
and his share of the capital loss is $1,524.
[24]
The Appellant is
entitled to claim one half of the current expenses associated with the Burnley
Property. I have calculated his share of those expenses to be $3,305.
2006 – Florida Property
[25]
In 2005, the Appellant
and Steven Smith decided to purchase a property in Florida.
It was their intention to have a single family home built. They put a deposit
of $29,244.27US on Lot #107C in Carlsberg Estates, in Lake Wales, Florida. The purchase price of the home was
$194,961.80.
[26]
The Appellant and his
partner did not close on the property. It was the Appellant’s evidence that
they did not acquire the property as the area had been hit by Hurricane Katrina
and there was a downturn in the American housing system. He and his partner decided
to reduce their losses by not closing the transaction and thus forfeiting their
deposit.
[27]
Steven Smith lived in Florida and was a professional colleague and friend of the
Appellant’s. The Appellant visited Florida each winter
for four months.
[28]
It is the Appellant’s
position that his purchase of an interest in the Florida Property was an
adventure in the nature of a trade. He stated that it was his intention to keep
the property for a while and then to sell it.
[29]
In Canada Safeway
Limited v. The Queen[5]
Nadon J.A. stated:
43 I
agree entirely with the authors of Principles of Canadian Income Tax Law,
supra, when they say, at page 334, that although the courts have used
various factors to determine whether a transaction constituted an adventure in
the nature of trade or a capital transaction, namely, those found in IT-218R,
the most determinative factor is the intention of the taxpayer at the time of
acquiring the property. If that intention reveals a scheme for profit-making,
then the Court will conclude that the transaction is an adventure in the nature
of trade.
[30]
The Appellant gave no
evidence to support his declared intention that this transaction was an
adventure in the nature of trade. On cross examination the Appellant stated
that he never saw the Florida property but Steven Smith did see the
model home in the project. Counsel for the Respondent asked the Appellant what
his intention was when he signed the Agreement of Purchase and Sale. His answer was that he was not sure; he may have
rented the home but he was not sure. He did not do a market study with respect
to the feasibility of renting or selling the Florida Property. I find that there
was no evidence that revealed a scheme for profit-making with respect to the Florida property.
[31]
It is not enough that a
taxpayer state that he had a primary or a secondary intention at the time of
purchase to sell a property. He must give some evidence, either oral or
documentary, that will support his statement. I am not persuaded that the
Appellant was engaged in an adventure in the nature of trade with respect to
the Florida Property.
[32]
The Appellant’s agent
has calculated that the Appellant’s share of the deposit in Canadian funds is
$17,488. I accept his calculations. In 2006, the Appellant is entitled to a capital
loss in this amount.
[33]
The appeal is allowed
in accordance with these reasons.
Signed at Ottawa, Canada, this 23rd day of June 2010.
“V.A. Miller”
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