Mary Robinson, the Trustee of the Robert Simon Robinson Trust, the Linda Dale Robinson Trust and the Evelyn Gertrude Robinson Trust, and Mary Robinson and Evelyn Gertrude Robinson, the Trustees of the Percival Samuel Robinson Trust v. Her Majesty the Queen, [1993] 2 CTC 2685, 93 DTC 1179

Beaubier, T.C.C.J.:—This matter was heard in Winnipeg, Manitoba on July 12, 1993. It is an appeal Pursuant to the general procedure of this Court. At the outset counsel agreed that appeals numbered 91-1777(IT), 91-1779(IT) and 91-1780(IT) would be determined on the basis of the decision in this appeal.

The evidence consisted of a book of agreed statement of facts and documents. The issue is whether the appellant, a limited partner, carried on an active business for its 1988 taxation year within the provisions of subsection 122(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The agreed statement of facts reads as follows:

1. The Percival Samuel Robinson Trust (hereinafter referred to as the appellant trust) is an inter vivos trust within the meaning of subsection 108(1) of the Income Tax Act, and was established by indenture made August 31, 1970;

2. Mary Robinson and Evelyn Gertrude Robinson were named as the trustees of the appellant trust in the said indenture and they remain as the trustees as at the date of this agreed statement of facts;

3. The appellant trust was resident in Canada on June 18, 1971 and without interruption thereafter until the end of the 1988 taxation year;

4. The appellant trust has not received any property by way of gift since June 18, 1971;

5. The appellant trust has not, after June 18, 1971, incurred any debt or any other obligation to pay an amount to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm's length;

6. By agreement made August 31, 1970, the appellant trust and other parties agreed to form a limited partnership in accordance with the laws of the Province of Manitoba;

7. The partners entered into the limited partnership for the purpose of carrying on the business of constructing and operating a nursing home called the Holiday Haven nursing home, and generally all matters connected with the nursing home business;

8. As required by the provisions of the Partnership Act of the Province of Manitoba, a declaration of limited partnership was made and registered as required under the provisions of The Business Names Registration Act of the Province of Manitoba on September 2, 1970 and such registration has been renewed from time to time as required by law and subsists as at the date of this notice of appeal;

9. The limited partnership constituted as above retained a corporation, Shaker Investments Ltd., to construct the nursing home;

10. The operation of the said nursing home has always been managed by a management corporation, pursuant to written management agreements. The current manager of the business operations of the limited partnership is Shaker Investments Ltd;

11. In the 1988 taxation year, the limited partnership, pursuant to the limited partnership agreement, carried on the business of operating a nursing home and all matters connected with the nursing home business;

12. At all relevant times, the appellant trust was a limited partner in the said limited partnership;

13. In its 1988 taxation year, the appellant derived income from the nursing home business:

14. The appellant prepared and filed its income tax return for the 1988 taxation year on the basis that the graduated rates of tax prescribed by section 117 of the Income Tax Act applied toit;

15. The Minister of National Revenue assessed the appellant's taxes payable based on the flat rate of 29 per cent prescribed by subsection 122(1) of the Income Tax Act.

16. The appellant served a notice of objection and, after review of the notice of objection, the said assessment was confirmed by the Minister.

Section 122 of the Income Tax Act states:

122(1) Notwithstanding section 117, the tax payable under this Part by an inter vivos trust upon its amount taxable for a taxation year shall be 29 per cent of its amount taxable for the year.

(1.1) No deduction may be made under section 118 in computing the tax payable by a trust for a taxation year.

(2) Subsection (1) is not applicable for a taxation year of an inter vivos trust other than a mutual fund trust if the trust

(a) was established before June 18, 1971,

(b) was resident in Canada on June 18, 1971 and without interruption thereafter until the end of the year,

(c) did not carry on any active business in the year,

(d) has not received any property by way of gift since June 18, 1971, and

(e) has not, after June 18, 1971, incurred

(i) any debt, or

(ii) any other obligation to pay an amount, to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm's length.

The appellant filed its 1988 income tax return on the basis that subsection 122(1) was not applicable to it because it fell within the provisions of subsection 122(2). In particular, its position is that it was not in active business and its limited partnership interest did not cause it to be in the nursing home business. The respondent's position is summarized in assumptions 7(d), (e) and (f) as follows:

7(d) in the 1988 taxation year, the partnership, pursuant to the partnership agreement, carried on the business of operating a nursing home and all matters connected with the nursing home business;

(e) the partnership carried on an active business in the 1988 taxation year;

(f) the appellant, being a limited partner in the partnership, carried on an active business in the 1988 taxation year;

This is the only question in issue between the parties in relation to subsection 122(2).

Limited partnership is a statutory concept. Section 3 of the Partnership Act of Manitoba, R.S.M. 1987, c. P-30 reads:

Partnership is the relation which subsists between persons carrying on a business in common, with a view of profit: but the relationship between members of an incorporated company or association is not a partnership within the meaning of this Act.

Part Il of the Partnership Act of Manitoba applies only to limited partnerships and begins at section 51. Sections 52, 53 and subsection 54(1) read:

52. A limited partnership may consist of one or more persons, who shall be called "general partners", and of one or more persons who contribute a specific or determinable amount, whether in cash, kind, specie, or money's worth or by any other means whatsoever, as capital of the partnership, who shall be called“ limited partners”.

53. Subject to section 63, general partners are jointly and severally responsible as general partners are by law: but limited partners are not liable for the debts of a limited partnership beyond the amounts by them respectively contributed to the capital of the limited partnership; except that where a limited partner has already paid into the capital of the limited partnership the amount of his contribution, he shall not be further liable for any of the debts of the partnership.

54(1) The general partners only are authorized to bind the partnership; but where a limited partner, to the knowledge of the general partners, takes part in the management of the partnership business, he has power to bind the partnership.

Section 62 and subsection 63(1) read:

62. A limited partner may, by himself or his agent inspect the books of the firm and examine into the state and progress of the partnership business, and may advise as to its management.

63(1) Where a limited partner takes an active part in the business of the partnership, he is liable as if he were a general partner, to any person with whom he deals on behalf of the partnership and who does not know that he is a limited partner for all debts of the partnership.

Thus a common law partnership is the relationship between persons carrying on a business in common with a view to profit. In a limited partnership one or more persons, the "general partners", are partners within the common law concept. A limited partner contributes capital to the partnership but is not liable for its debts beyond his or her specific capital contribution unless the limited partner takes part in the management of the partnership to the knowledge of the general partners. Then the limited partner has the power to bind the partnership” pursuant to subsection 54(1). Taking part in the management of the partnership within subsection 54(1) is synonymous with taking"an active part in the business of the partnership" as stated in subsection 63(1).

Thus in the Partnership Act of Manitoba a management role in the partnership is equivalent to an active role in the business of the partnership.

This view is confirmed by the following quotations from Lyle R. Hepburn, Limited Partnership (Scarborough: Carswell, 1992) at page 1-1:

A limited partnership consists of one or more general partners and one or more limited partners formed for the purpose of carrying on a business, which must be carried on by the general partner.

With respect to Manitoba, he states at pages 4-14A and 15:

Under the Manitoba Act, the limited partner is given the right to advise as to management. It is only when the limited partner takes an “active part” in the business of the partnership that he becomes liable as a general partner: and then, only to any person with whom he deals on behalf of the partnership and who does not have actual knowledge that he is a limited partner.

The evidence is that the appellant never exercised a management role in the partnership. Nor did the appellant take any part in the business of the partnership. Thus the appellant did not carry on an active business in its 1988 taxation year.

The appeal is allowed and this matter is referred to the Minister of National Revenue for reconsideration and reassessment.

The appellant is awarded its party and party costs.

Appeal allowed