Henrietta J. Cedergren v. Minister of National Revenue, [1991] 2 CTC 2068, 91 DTC 920

Lamarre Proulx, T.CJ.:—This is an appeal from a reassessment of income tax made by the respondent, the Minister of National Revenue, for the years 1980 and 1981.

The question in issue is whether the appellant and her husband were members of a partnership having for [its] object farming activities, within the meaning of section 96 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

If I were to find that there was a partnership between the appellant and her husband, she could, as her husband could in the calculation of his income for the years 1980 and 1981, deduct from her income the restricted farm losses to which she would be entitled.

Henrietta and Robert Cedergren were married in 1965 in the State of New York. They moved to Montréal in 1967 where they both worked as university professors. In 1974, with a Mr. Charles Sylvestre, Mr. Cedergren purchased a farm in Ste-Barbe, Québec. This was to be, in those years, a country place for the couple and their children, though the couple kept in mind the idea of developing it eventually as a farming enterprise. In 1977, Mr. Sylvestre left for Vancouver and sold his share to Mr. Cedergren for an amount of $10,000. This amount was paid as follows: Mr. Cedergren borrowed $5,000 from his parents, he had $3,000 from his own savings ana the appellant contributed $2,000.

When Mr. Cedergren was asked why the land had not been purchased jointly with his wife, he said that for the first purchase he was under the impression that what he owned was also his wife's property, in light of the matrimonial regime in the State of New York. There was no evidence adduced as to this regime. In Exhibit A-7, an agreement executed in the year 1984, Mr. Cedergren is described as being séparé de biens de Dame Henrietta Jonas en vertu des lois de New York, U.S.A. où il était domicilié lors de son mariage. At the time of the second purchase, the one concerning Mr. Sylvestre's part, he said that there were some provisions in the Quebec Agricultural Land Act that prevented his wife [from becoming] the owner of that parcel of land sold by Mr. Sylvestre. The fact that there is no joint ownership is not by itself determinant though it would seem that in a partnership, this factor would be taken into consideration in the sharing of expenses and income, and it has not.

It is at the time of the sale by Mr. Sylvestre that the couple decided that farming activities would be undertaken on a large scale. They had for some years experimented on a few species of grapevines, vegetables, and berries in a large garden situated on the farm. In 1979 the son of a trusted neighbour was hired on a permanent basis. He testified on behalf of the appellant, saying that the appellant had the same input in the farming activities, if not greater that her husband's.

For the year 1979, the farming activities appear only on Mr. Cedergren's income tax return. There was no mention of a former partnership between the spouse at that time.

The evidence adduced shows that the appellant was indeed keenly interested in the farming experiment. It is she, apparently, who had [experimented] with different types of grapevines and vegetables in the garden before the larger scale operations. The appellant, however, does not say that her husband was not interested in these experiments. Her husband is a biochemist and was also deeply interested in the experiments.

In 1979, there is no evidence of any financial contribution by the appellant to the farming activities. In 1980, the appellant seems to have contributed the amount of $2,000 as per Exhibit A-2. In the spring of 1981, two pieces of equipment were purchased: a small tractor for an amount of $6,629 and a rotating tiller for $1,255. These purchases would have been made with the assistance of the appellant as per Exhibits A-1, A-2 and A-3. The appellant would have contributed an amount of $5,000 in the spring of 1981, and an amount of $1,500 in the fall of 1981. The appellant also produced one invoice from HydroQuebec in the amount of $64.42, and one from Bell Canada in the amount of $46.02 (invoices both made to the name of R. Cedergren), Exhibits A-9 and A-10, invoices that the appellant had paid. Nothing was said as to whether she was required to make these contributions or why she made them. The evidence was that she made some financial contributions.

The spouses had separate bank accounts where they deposited their professional earnings and from which they drew cheques for personal and family purposes. There was no evidence that the appellant deposited the money to feed the Ste-Barbe bank account. The evidence showed that all farming activities were done under the husband's name: the bank account in Ste-Barbe (though there was a mention entitled procuration where the appellant's name appeared) and the invoices for the utilities, the taxes and the supplies, including the plants, were made in the husband's name. Grants and subsidies were also made in his name. Apparently the books of account were kept by the appellant; however, they were not produced as evidence. Though all these farming activities being done in the husband's name would be indicative that there was no formal partnership, this is not, either, in itself determinative.

In 1984, an agreement was signed by the appellant and her spouse before a notary, (Exhibit A-7). This agreement says at articles 2 and 3:

2. Toutes les dépenses, en intérêts, frais et accessoires, ainsi que toutes les pertes d'exploitation à ce jour ont été supportées, en parts égales, par les deux parties.

3. Toutes les dépenses et les pertes d'exploitation futurs, de même que tous les profits futurs d'exploitation seront partagés en parts égales entre les deux parties. Aux fins d'administration de la présente disposition, les parties conviennent de dresser annuellement un état des revenus et dépenses concernant les résultats d'opération pour l’année qui vient de se terminer. Tous les apports de fonds requis deviendront dus et exigibles lors d'une demande faite à cet effet par une des parties intéressées, et chacune des parties pourra exiger sa quote part des profits d'opérations d’une année dès la fin de l'exercice financier de l’année en cours.

Article 2 is not supported by the evidence adduced. Article 3 which requires the establishment of accounts between partners, as to the expenses made and income earned, has not been done for the years 1980 and 1981.

From my review of the case law and the authors, the determination of a partnership between spouses is made by examining whether there is an agreement between the spouses relating to some specific activities that is different from the general agreement of the spouses concerning the family activities of the husband and wife. This partnership agreement does not need to be in writing, it may be verbal, but it must be specific to the partnership activities and must contain the essential elements of a partnership agreement that is, the sharing of the expenses, the determination of who contributes what, the value given to this contribution, and the sharing of the income.

C'est un contrat consensuel synallagmatique et onéreux. Il est consensuel en ce que le consentement des parties suffit; il est synallagmatique, en ce que les contractants s'obligent réciproquement les uns envers les autres; il est à titre onéreux, en ce que chaque associé poursuit la réalisation d'un bénéfice commun à charge d’effectuer un apport. [1]

There was no evidence adduced before me of an understanding between the spouses of how the expenses relating to the farming activities would be apportioned between them. I have not been shown any difference in the manner in which the spouses conducted their affairs respecting the farm from the manner in which they conducted their activities in their common life. They continued to assist each other in a loose way without any structure that resembled business relations. It is long after the fact that the appellant dug out some receipts of money loaned or contributed to the farming activities. The balance sheet attached to the tax returns did not show the respective contributions of the alleged partners.

On the facts of the case at bar, I cannot but find that there is no evidence of a formal agreement superimposing itself on their general marriage agreement and regarding this, I would like to quote the words of Mr. Justice Cattanach in Cornforth v. The Queen, [1982] C.T.C. 45; 82 D.T.C. 6058 at pages 48 and 50 (D.T.C. 6060 and 6062):

That they approached their marriage with the concept of equal independence, mutual dependence and reciprocal obligations has been made equally clear.

That Mrs. Cornforth gave to her husband the utmost assistance, and invaluable help and advice in the conduct of the business cannot be denied nor does the Minister attempt to do so. What the Minister does contend is that no partnership existed between them.

Partnership is the relationship which subsists between parties carrying on business in common with a view to profit. That relationship results from contract. The fundamental rule to be observed in determining the existence of a partner- ship is that regard must be paid to the true contract and the intention of the parties as appearing from all the facts of the case. The contract may be evidenced by express words or by conduct from which partnership may be inferred. Joint ownership or ownership in common is not enough. The question as to whether partnership exists can only be decided on the whole of the evidence, the conduct of the parties, the mode in which they dealt with each other and the mode in which each has, with the knowledge of the other, dealt with other people.

As I have said previously there is no impediment to a husband and wife superimposing upon their marriage relationship the further relationship of partnership, but whether there is a partnership in the technical legal sense in fact must be determined by the real intentions of the parties.

In the answer to that question lies the determination of the issue here to be resolved.

[Emphasis added.]

There may be agreements of partnership between spouses but then, they have to differ from the marital relationship. In a partnership, between partners dealing at arm's length, the intention of the parties to constitute a partnership would come out clearly. In the case at bar, I do not see it.

Counsel for the appellant referred me to the case of Northern Sales (1963) Ltd. v. M.N.R., [1973] C.T.C. 239; 73 D.T.C. 5200 (F.C.T.D.) at 244 (D.T.C. 5204) where it is said:

There was no common set of books and records nor any central accounting system. There was no common bank account. All purchases and sales were made by the individual companies, and the only expenses incurred in common were the shipping rates. There was no common management, although the parties communicated with each other as to the state of the market. Each company used its own office facilities and their overhead costs, which might be attributable to the rapeseed marketing, were absorbed by the individual companies.

It is true that all these elements, taken one by one, are not necessary to conclude to the evidence of a formal commercial partnership; there is however a need of some evidence. In that aforementioned case, for example, there was an elaborate agreement between the parties as to who would pay the expenses, who would accomplish the various required activities, and how the profits would be shared.

Counsel for the appellant referred me also to the case of Rand Berg v. M.N.R., [1982] C.T.C. 2558; 82 D.T.C. 1571 at 2561 (D.T.C. 1574). In that case, Mr. Chairman Cardin found that there was a partnership between the spouses on facts different from those of the case at bar and I quote:

The wife's contribution to the farming business was more than the $200, furniture and six cows which she brought to the marriage. The evidence is that the couple's only bank account was a joint account into which the wife's income as a bank teller during the period of 1969 to 1972, as well as that of the husband were deposited and from which the farm's operational expenses, carrying charges and the repayment of loans were made.

Mr. Ferguson's loan of $10,000 was made to the appellant's wife. After hearing her testimony and in a position to appreciate her business acumen, I have no difficulty in believing that it is the appellant's wife who decided that the loan should be invested in acquiring an additional half section of land rather than completing the family home. There can be no question that the appellant's wife contributed substantially to the expenses of the farming operations since her marriage with the appellant, even though she may not have received her share of farm income prior to 1973.

Counsel for the respondent referred me to the recent case of Mike Kuchirka v. Canada, [1991] 1 C.T.C. 339; 91 D.T.C. 5156. In that case as in the case at bar (at page 341 (D.T.C. 5157)): ”. . . the plaintiff said that he just took it for granted that they were partners but never discussed it very much".

Mr. Justice Strayer states the following, supra:

From a survey of a number of similar cases it becomes obvious that each must turn on its own facts. While the fact that the alleged partners are also married should not automatically exclude the existence of a business partnership between them, one must take care to see if the conduct allegedly establishing the partnership is not simply attributable to the fact of the marriage relationship.

As the case at bar dwelt only on whether there was a partnership agreement between the appellant and her husband superimposing itself on the marriage relationship, in respect of the farming activities, and as I have found that there was none, consequently, the appeal is dismissed.

Appeal dismissed.