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Citation: 2005TCC156
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Date: 20050224
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Docket: 2003-2293(GST)I
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BETWEEN:
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MOHINDER BAINS and HARBHAJAN BAINS,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Sarchuk J.
[1] This appeal by Mohinder Bains and
Harbhajan Bains is from an assessment by the Minister of National
Revenue dated September 30, 2002 for unreported net tax, penalty
and interest, calculated to September 27, 2002, of $22,501.59,
$6,466.60 and $5,306.97, respectively. The assessment was based
on annual taxable commercial rental revenues above the $30,000
threshold reported since late 1991 for income tax purposes which
led the Minister to register the Appellant as a partnership on
October 1, 2001 under Part IX of the Excise Tax Act, (the
Act) effective January 1, 1993 and assigned the
partnership a registration number.
Factual Background
[2] For a number of years prior to the
acquisition of the property in issue, Harbhajan was employed as a
real estate agent. In 1979, he purchased a 50% interest in
commercial real property located at 801 Deloume Road, Mill Bay,
British Columbia (the "property"). In 1980, he and
Mohinder, acquired the remaining half interest and in November
1980, they were registered with the Land Titles Office as joint
tenants of the property. At the time of purchase, the property
consisted of two "units", one occupied by a grocery
store and the other by a Post Office. The purpose of the purchase
was to acquire the grocery store which they intended to continue
as a business in which the family would be involved. The evidence
of both Harbhajan and Mohinder indicates that their roles and
functions in carrying on the grocery business were virtually
interchangeable and each of them did "what needed to be
done, wherever we were needed". During the period 1980 to
1989, their main concern was the operation of the grocery store
as well as maintenance of the portion leased to the Post Office.
In or about 1989, a large shopping centre was constructed nearby
and as a result, the competition effectively put the grocery
store out of business. As well at some point of time in that
year, the Post Office ceased to be a tenant. Harbhajan's
testimony was less than clear regarding the sequence of events
that followed but it appears that for a time the grocery store
area was leased to another party which carried on a restaurant
business. At another point in his testimony, Harbhajan said that
after the Post Office moved, the whole of the building was
subdivided into three units, one of which was occupied. As well,
at some point of time during this period, the Canadian Imperial
Bank of Commerce (CIBC) showed interest in leasing a portion of
the building. In due course, an agreement was reached and a 2,500
square foot area of the building was renovated to comply with the
Bank's requirements and a lease[1] for a term of five years to commence
on August 1, 1992 was executed by the parties. This lease was
renewed for a further five-year term in 1997. Mohinder testified
that she and her husband discussed leasing the property to CIBC
and that a decision to do so was taken by them. Both also
confirmed that all of the rent receivable from CIBC went into
their joint bank account and that all expenses relating to this
property including mortgage, property taxes, maintenance and
repairs were paid from this account as well. Harbhajan went on to
say that in the event that he used his own "separate
account" for some expenses, that amount would be reimbursed
from the joint account.[2]
Appellant's position
[3] At the outset of counsel's
submission, reference was made to several provisions of the
Act which were considered to be relevant to the issues
before the Court. First the definition of "person" in
the Act states:
"person" means individual, a partnership, a
corporation, the estate of a deceased individual, a trust, or a
body that is a society, union, club, association, commission or
other organization of any kind;"
Thus, for the purposes of this appeal, a person can be either
an individual or a partnership. Counsel noted that section 240
requires that every person making a taxable supply, other than a
small supplier, must be registered for goods and services tax and
in this context referred to the definition of joint ventures in
the Canadian Goods & Services Tax Reports which
reads:
Joint Ventures
A joint venture is not a legal entity and is not defined as a
"person" under the Excise Tax Act. Therefore, it
is the joint venture participants, and not the joint venture
that
· must
register if carrying on a commercial activity;
· must
collect a proportionate share of tax on taxable supplies; and
· may claim a
proportionate share of allowable ITCs for tax paid on
expenses.
He submitted that the taxpayers in this appeal are individuals
and accordingly come within the scope of the "small supplier
rule" and are not subject to reporting or registering and
remitting GST. This being the case, it is necessary to turn to
the provincial Partnership Act[3] to determine whether a partnership
existed in this instance. The Act provides that a
"Partnership is the relation which exists between persons
carrying on business in common with a view of profit."
With respect to the matter before the Court, counsel contends
that the relationship between Mohinder and Harbhajan is more
consistent with that of husband and wife than that of a
partnership. Mohinder was not a licensed realtor and the Bains
did not hold themselves out in any fashion to the public at large
as carrying on a partnership. They did not have a registered
business name, any form of partnership agreement nor did their
tenants believe they were dealing with them as a partnership.[4] Counsel further
noted that documents before the Court including the various
leases and mortgages were signed by both but nothing in those
documents reflects the existence of a partnership. Reference was
made to Robert Cornforth v. The Queen,[5] a decision of the
Federal Court, Trial Division, in support of the
proposition that it is common for a husband and wife to hold
property as joint tenants and that in the present case, as it was
in Cornforth, Mrs. Bains' contribution flowed
from the marriage relationship and not from a partnership
relationship.
[4] For the foregoing reasons, each of
Mr. Bains and Mrs. Bains, who owned the property in question long
before the inception of the Excise Tax Act, should be
treated separately as co-owners of the property but not as a
partnership and taxed as small suppliers, exempt from collecting
and remitting GST.
Respondent's submissions
[5] The Respondent's position is
that the relationship between Mr. and Mrs. Bains during the
entirety of their ownership of the building in issue was a
partnership. More specifically, an assessment of the nature of
the undertaking, the conduct of the parties, and other
circumstances of the arrangement warrant this conclusion even in
the absence of a written agreement. Furthermore, although a joint
tenancy, the sharing of gross returns, or the receipt by an
individual of a share of the profits, individually do not
necessarily establish the existence of a partnership. All of
these factors considered in the context of the evidence in this
particular case commencing with the operation of the grocery
store to its ultimate use as a rental property can only lead to
the existence of a partnership and, more specifically, to a
partnership in the rental business during the relevant period of
time. Counsel specifically noted that each of the two
participants contributed resources for use in the performance of
the partnership activities. This would not necessarily reflect a
monetary contribution and could have been satisfied by providing
labour, or as in this case, by each taking an active role in the
management and operation of the grocery store and subsequently
similarly assisting in the operation of the rental business.
[6] The Respondent also maintains that
there was an equal expectation of benefits from this partnership
and that in fact the expenses and profits were shared by them
equally which is in stark contrast to a joint venture.
Furthermore, there were other indicators of partnership such as
contributions of effort, knowledge, skill and property. According
to counsel, it is important to note that a joint property
interest was in fact the subject matter of the partnership and
that each of the partners was jointly and severally liable and
each reported 50% of the gross income from the rental business
for income tax purpose. Thus, considering the criteria usually
applied to the determination of the existence of a partnership,
counsel contends that all of the facts support the conclusion
arrived at by the Minister that Mohinder and Harbhajan carried on
a business in common with a view to profit as partners.
Conclusion
[7] In his submission, counsel for the
Appellant implied that the relationship between the Bains was
tantamount to a "joint venture" which by definition is not a
legal entity, i.e. not a "person", and as such only the
individual participants would be required to register if carrying
on a common activity and were not "small suppliers". The facts
before the Court do not support a conclusion that a joint venture
existed. Whether a joint venture exists for the purposes of
section 273 of the Act must be determined on
the basis of conduct between the parties, the nature of their
intentions, the facts and circumstances of their situation, and
the agreement between them. In my view, the conduct of the
parties in this appeal falls far short of establishing the
existence of a joint venture.
[8] The Appellant's position is
that during the relevant period of time, the Bains had carried on
a rental business as husband and wife and not as business
partners. Counsel adopted the words of Cattanach J. in
Cornforth to describe Mohinder's contribution to the
business as being founded not in the relationship of partnership,
but in the relationship of husband and wife. In that case,
Cattanach J. observed that "the unstinting efforts and
devotion of all Mrs. Cornforth's available time to the
success of the business is better explainable by the relationship
of husband and wife rather than as crass business partners".
I am unable to apply the same rationale to the facts before me
since there are a number of elements present in this appeal which
did not exist in Cornforth and which establish a
partnership between Mohinder and Harbhajan. I specifically note
that the receipts of Mr. Cornforth's practice were not
deposited in a partnership account but partly in his account and
partly in his wife's with his approval. The Court
observed:
"... That would be equally consistent with the
regime of community of property as with the distribution of the
receipts of a partnership. It is difficult to ascertain whether
this could be a participation in profits because the profits
cannot be ascertained until the costs of earning receipts is
known. That might be done at a subsequent time but there was no
evidence that this was ever done or that there was any
rationalization by way of set-off or otherwise".
Furthermore, in the Cornforth case, the husband
reported the totality of income from his business as his personal
income and his wife was consistently claimed as a dependant. All
of which is in direct contrast to the facts in this appeal.
[9] In Continental Bank Leasing
Corp. v. Canada,[6] the Court made the following comments on the existence
of a partnership:
23 The existence of
a partnership is dependent on the facts and circumstances of each
particular case. It is also determined by what the parties
actually intended. As stated in Lindley & Banks on
Partnership (17th ed. 1995) at p. 73: "in determining
the existence of a partnership ... regard must be paid to the
true contract and intention of the parties as appearing from the
whole facts of the case".
24 ... The indicia
of a partnership include the contribution by the parties of
money, property, effort, knowledge, skill or other assets to a
common undertaking, a joint property interest in the
subject-matter of the adventure, the sharing of profits
and losses, a mutual right of control or management of the
enterprise, and the filing of income tax returns as a
partnership and joint bank
accounts.
(Emphasis added)
With these principles in mind, I have concluded that there was
a partnership in existence during the relevant period of time.
The evidence established that both of the partners (a) had an
interest in the joint property; (b) a mutual right of management
of the enterprise; and (c) had the authority to bind the
partnership. I further note that paragraph 4(c) of the relevant
Partnership Act specifies in part 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 or she is a
partner in the business, ...". That exists in the present
case since the income from the rental property was divided
equally between the two and was channelled into a joint bank
account. Furthermore, they filed separate income tax returns
reporting this income after taking their respective shares of the
expenses into account. It is not possible in the circumstances to
conclude that there has been no distribution of partnership
funds.
[10] For the foregoing reason, the appeal is
dismissed.
Signed at Ottawa, Canada, this 24th day of February, 2005.
Sarchuk J.
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