Fouad Mardini v. Minister of National Revenue, [1985] 2 CTC 2039, 85 DTC 434

Taylor, TC) [Translation]:—Mr Mardini appealed from the Minister’s notice of reassessment for the 1980 taxation year. His appeal was based on the facts and reasons alleged in his notice of appeal dated January 28, 1983 as follows:

In 1980, I realized a capital gain of $159,090.82, and the taxable amount was $79,545.41. I contracted an income-averaging annuity of $68,238.59 over a fifteen- year period.

In 1981, I realized a capital loss of $91,023.90, and the deductible loss was $45,511.95. I applied $2,000.00 in 1981, and the $43,511.95 balance was carried back to 1980 against the capital gains income.

I asked the Department to allow me to change my income-averaging annuity contract to show the loss sustained in 1981.

By not being allowed to adjust my annuity to the actual amount of the capital gain, I am being taxed over the next fifteen years on income that I have not realized. (The italics are mine.)

By having to carry to carry back my loss without being allowed to reduce my IAA, I am being taxed on unearned income for the next fifteen years.

Consequently, I ask the Court to kindly allow me to reduce my income-averaging annuity contract to $30,913.11, the amount allowed on a capital gain of $36,033.46

The respondent relied, inter alia, on section 61 of the Income Tax Act, SC 1970-71-72, c 63, as amended, by saying:

In his initial income tax return for the 1980 taxation year, the appellant asked to deduct the said sum of $68,238.00, and thus established his taxable income at $39,353.00. Having regard to the deduction in respect of taxable dividends under s 121 of the Income Tax Act, the appellant further declared that he had no tax payable for the 1980 taxation year.

By his initial assessment of September 21, 1981, the respondent assessed the appellant in accordance with the information contained in the initial tax return.

During the 1981 taxation year, the appellant sustained a deductible capital loss of $45,511.00. The appellant deducted this loss at the rate of $2,000.00 in 1981, and also filed an amended tax return for the 1980 taxation year, in which he asked to report a loss of $43,511.00 and to deduct $27,338.00 through the acquisition of an income-averaging annuity.

Total income for the 1980 taxation year				$144,011.00
Less:
QPP contributions				$ 212.00
Unemployment insurance premiums				204.00
RRSP				4,500.00
RHOSP				1,000.00
Financial costs		$24,474.00
IAA		27 ,338.00*
Other deductions	51,812.00		51,812.00	57,728.00
Net income				86,283.00
Personal exemptions	3,880.00
Charitable donations		150.00
Interest deduction	1,000.00
Capital loss carried
back from 1981	43,511.00			48,541.00
Taxable income				$37,742.00
*Point at issue

Having regard to the deduction in respect of taxable dividends under s 121 of the Income Tax Act, the appellant stated moreover in the said amended return that he had no tax payable for the 1980 taxation year.

By his reassessment of July 15, 1982, the respondent deducted from the appellant’s income the entire $68,238.00 paid for the acquisition of the income-averaging

The appellant and his wife were equally involved in all aspects of the operation. As is typical of a small mixed farm the number and variety of duties was endless. Cullen attended to all of the normal and usual tasks. Caroline for her part, in addition to looking after the family needs, milked the cows, attended to the separating process and marketed the dairy products. She looked after the poultry and the marketing of both eggs and fowl. She assisted in the seeding and harvesting and drove the truck for the baler and the combine. The evidence is that Caroline was fully involved in all decisions made with respect to the farm and it was her particular responsibility to maintain the necessary books and records. In addition, since the farm often failed to produce an adequate return, on several occasions between 1967 and 1970 to augment the family income Caroline accepted part- time work such as painting new homes for a local carpenter and stocking shelves at the Co-op store in Glenboro. Whatever salary she earned was deposited to their joint account and was used without discrimination to support the family and maintain the farm operation.

Both Cullens testified that from the time they were married it had been their intention to jointly own anything and everything they acquired in the way of material assets. They maintained one bank account, a joint savings account, into which all income regardless of source was deposited. Neither had personal accounts or savings or investments of any nature or kind.

In 1970, a family friend (and the Imperial Oil agent in Glenboro) decided to move to Saskatchewan and suggested that the appellant and his wife consider buying the distributorship. By this time it had become apparent that farming would never be more than a marginal source of income. The price of agricultural land had become prohibitive and the Cullens were not in a position to expand their operation. As a result a decision was taken to sell the herd of cattle (which by this time had been built up to 70 head) and to buy the agency. Approval was received from Imperial Oil and arrangements were made with the vendor, Lawrence Loews, to buy the business assets. In addition to the agency the appellant and his wife acquired Loew's house in Glenboro, Manitoba. The purchase price came from the proceeds of the sale of their cattle and by way of a loan from the bank.

It is not disputed that the basic agreement entered into by Cullen and Imperial Oil and all subsequent renewals were executed only by those two parties (Ex A-2). The loan from the Royal Bank required to complete the purchase was obtained by Cullen alone and, excepting the fact that title to the farm appears to have been pledged as additional security, Caroline was not required to co-sign or to guarantee the loan. It was the evidence of both that Imperial Oil insisted on this arrangement and, in Caroline’s words, "did not allow a partner to sign".

As part of the Imperial Oil arrangement Cullen was required to open a bank account referred to as the “bank financing account” through which Imperial Oil was paid. A separate account was maintained by him at the same bank for all other agency business. Both of these accounts were in Cullen's name although in both instances Caroline Cullen was given signing authority. Cullen alone was required to provide a personal guarantee in the sum of $450,000 with respect to the line of credit provided to the Agency by the bank.

According to Caroline a factor in Imperial Oil's acceptance of Cullen as their agent was that she was prepared to act as office manager, bookkeeper and secretary. The nature of the business was such that at certain times, particularly prior to and during spring seeding Cullen would be required to spend all of his time away from the agency office either at the bulk warehouse or delivering the product to the purchasers. As a result Caroline was the person responsible for the day-to-day management of the agency. This included everything from answering the telephone to the preparing and rendering of accounts to customers. She did all of the banking, kept all the books of account, and in recent years has had the responsibility for the operation of the computer installed by Imperial Oil. It was her evidence that since 1970 she customarily worked five days a week from 8:30 in the morning to 5:00 in the afternoon (and often longer during the busy seasons). She has never been paid a salary. Although an impression was created that the business was conducted by Cullen and his wife without assistance I note from exhibits R-4, R-3 and R-1 that wages amounting to $9,799.86, $9,259.00 and $13,672.20 were paid in 1977, 1978 and 1979 respectively. No evidence was adduced as to whom these wages were paid or as to the nature of the services provided.

With the exception of the agency's bank account the family pattern of maintaining one joint account has continued to this day. Funds were withdrawn from the agency account as and when needed and were deposited into the joint family account in the same manner as income from the farm had been in prior years. No evidence was adduced as to the distribution (if any) of the surplus earnings of the agency.

Following the acquisition of the Imperial Oil agency, Cullen and his wife attempted to continue the mixed farming operation but after several years realized that the task was too arduous. As a result in 1973 a half section of land was leased to Valford Farms on a cash rent basis. All income derived from this source was deposited into a joint account maintained by them at the Glenboro Credit Union.

The divestiture of the farm enabled the Cullens to devote more time to the breeding and racing of standardbred horses. By 1979 they were able to expand their stable to six horses which they trained and raced on a rural circuit. Both are totally involved in all decisions taken in with respect to the breeding, training and claiming of their race horses. As was the case with the other businesses Caroline maintains all of the racing documents, breeding records and the books of account. All proceeds (and all costs) are dealt with through the Cullen’s joint account.

The appellant submits that these facts establish that Morley and Caroline Cullen were carrying on all of the businesses in partnership

By “The Partnership Act” (the Act) "partnership" has been defined as the relation which subsists between persons carrying on a business in common, with a view of profit.* [1] In addition to the statutory definition the Act sets out certain rules which are to be considered in determining whether a partnership does or does not exist. Section 5 of the Act reads:

Section 5: “‘in determining whether a partnership does or does not exist, regard shall be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in any property from which, or from the use of which, the returns are derived.

(c) the receipt by a person of a share of the profits of a business is prima facie proof that he is a partner in the business; but the receipt of such a share, or of a payment contingent on, or varying with, the profits of the business, does not of itself make him a partner in the business, and, in particular

(i) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such;

(ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share or the profits of the business does not of itself make the servant or agent a partner in the business or liable as such;

(iii) a person being the widow or a child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of that receipt a partner in the business or liable as such;

(iv) the advance of money by way of loan to a person engaged, or about to engage, in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, if the contract is in writing, and signed by or on behalf of all the parties thereto;

(v) a person receiving by way of annuity, or otherwise, a portion of the profits of a business in consideration of sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.”

A partnership has been held to be the result of an express or implied agreement. As Duff, J stated in Porter v Armstrong, [1926] SCR 328 at 329:

Partnership, it is needless to say, does not arise from ownership in common, or from joint ownership. Partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing. It is not sufficient there should be community of interest; there must be contract.

The foundation of the appellant's case rests on the testimony of the appellant and his wife that when they married they agreed to carry on the business of farming in common and to share all profits. The appellant submits that these profits were pooled and that after the expenses, including personal living expenses, were paid, the residue, if any, formed their respective capital contribution to the farm business. It was emphasized that there was common management of the farm, that the farm was a common asset and that they had a common bank account.

The absence of a formal partnership agreement and the failure of the appellant and his wife to deal with the farm income as partnership income (which would have included the filing of separate income tax returns, etc) should not, according to the appellant, be given much weight. The failure to take these steps should instead be attributed to the fact that the Cullens were not professional people and to the fact that they lacked commercial sophistication. Their failure to seek the advice and counsel of their accountants and their failure to disclose the existence of partnership when reporting the farm income throughout the years should not be determinative of the issue of partnership.

It was submitted that the sale of the farm assets enabled Morley and Caroline to invest their respective capital into the acquisition of the Imperial Oil agency. Counsel urged the Court to disregard the fact that the agreements and all banking and borrowing documents were executed only by the appellant Cullen, and to find that Imperial Oil, the Royal Bank and indeed all persons who dealt with the agency were entitled to consider Caroline Cullen to be a dormant partner. According to counsel Caroline was a dormant partner not in the sense of a partner who does not do anything but in the sense that the public was not aware of the partnership agreement. In support of the validity of this concept counsel cited Lindley on Partnership (14th Ed) at page 340 et seq.

If the appellant is to be successful in this appeal it is necessary for him to establish that there was an intention to create a partnership within the meaning of The Partnership Act with all of its benefits and consequences. Although the appellant and his wife testified that at the time of their marriage they formed the intention to share equally in the fruits of their labour and to be equally responsible for any liabilities incurred I do not take their evidence to mean that there was any formal dialogue between them on the subject. What is alleged to exist is a tacit agreement, not just to work towards a common goal but rather to carry on business in common with a view of profit. Such an agreement must be found to have existed from the time of marriage since there was no suggestion by the appellant that a partnership agreement was entered into at some later point of time such as the time of the acquisition of the Imperial Oil agency.

A tacit agreement may be found in the conduct, the daily behaviour and actions of the parties. However, as was stipulated by Mr Justice Lamer in Beaudoin v Daigneault, [1984] 1 SCR 2, the courts must be careful not to attribute to the parties intentions which they never had and which are not supported by the evidence. In his decision Mr Justice Lamer suggested that a trial judge must be satisfied, first, that each partner has made contributions to the common fund either in money or property or by his work. In the case at bar, imprecise as the arrangement may have been, I have no difficulty in finding that both parties made contributions to the common fund principally by their work.

Secondly, their conduct must disclose how losses and gains were distributed (or were intended to be distributed). While it might be sufficient in certain cases for such a division to be made by the use of the earnings for the support of the partners, in my opinion, there must be something more substantial where multiple commercial endeavours are alleged to be conducted as partnerships.

In addition it is necessary to consider the parties' conduct in a general sense. The fact that the appellant and his wife describe themselves as partners is not conclusive, not is the fact that the farm was owned by them as joint tenants. In cases such as the case at bar where no written partnership agreement exists the intention of the parties may be ascertained from their conduct, the mode in which they have dealt with each other, and the mode in which each has, with the knowledge of the other, dealt with other people. This can be shown by books of account, by the testimony of clerks, agents, and other persons, by letters and admissions, and, in short, by any of the modes by which facts can be established.* [2] It seems appropriate in this context to note that no independent evidence was adduced to corroborate the statements of the appellant and his wife.

Following these general guidelines I have concluded that the evidence does not support the existence of a partnership. When one analyses the Cullens’ conduct, particularly in terms of the manner in which they dealt with third parties, I note that all of the agency transactions were carried on by Morley Cullen in his own personal name; all agreements were executed by him; all of the bank loans and guarantees were his responsibility; all chattels and motor vehicles were registered in his name; the agency insurance, the listing in the phone book were in Cullen’s name and all commission cheques were paid to the agency in Morley Cullen’s name; and of course prior to 1979 all income was reported by him as a sole proprietor.

In the years when the farm was being operated on an active basis the Wheat Board quota books were in Cullen’s name and the grain stabilization payments were made to him (notwithstanding the fact that the farm was held in joint tenancy). With respect to the horse racing business from 1973 onward the race horses were, according to the records, owned and registered by Morley Cullen.

The evidence of the appellant was replete with statements such as “I was operating the farm at the time of the marriage on a rental basis; . . . I had five or six head of cattle at marriage; ... l built the herd from there; ... I had a deal with a friend, he bought cattle and I took some on shares”, and made no reference to partnership except in response to a direct question from counsel.

Although professional accounting services had been utilized by the Cullens for many years the existence of the alleged partnership had never been brought to their attention, and although the Cullens had retained counsel in 1970 at the time the Imperial Oil agency was acquired the issue of partnership had not been raised with him nor did Caroline seek his counsel with respect to the alleged refusal of Imperial Oil to deal with her as a partner in the purchase. The failure to seek advice from the solicitor with respect to the partnership question seems inconsistent with Caroline’s testimony that this was an issue which was of substantial concern to her.

In my view Caroline Cullen’s evidence failed to support the existence of a partnership. She conceded that they never had any discussions as to sharing of profits either from the farm or from the agency. There had never been any mention of the alleged partnership to their accountants. Since she was, according to all of the evidence, responsible for maintaining all of the books of account from which income tax returns and financial statements were prepared many opportunities must have presented themselves to raise the subject. If indeed Caroline considered herself a partner and if partnership was a concern of hers particularly at the time of the acquisition of the agency her failure to raise this issue with the accountants seems odd. There is no corroborative evidence of an agreement. There was not a shred of evidence that “outsiders” considered Caroline a partner.

No evidence was adduced as to any accounting for or division of profits earned by the agency from 1970 to 1978 inclusive. No evidence was adduced as to any intended method of distribution of surplus earnings. Furthermore, I can not find, on the evidence before me that there was an equal contribution to the alleged partnerships particularly given Morley Cullen’s absolute personal liability for the debts of the agency.

Under the Partnership Act the receipt by a person of the share of the profits of the business is prima facie evidence that he is a partner. While absence of this feature is not conclusive the circumstances of this case when examined do not indicate any intention or agreement to provide for the sharing of profits or losses as would be characteristic of a true partnership.

The main rule to be observed in determining the existence of a partnership, a rule which has been recognized ever since the case of Cox v Hickman, is that regard must be paid to the true contract and intentions of the parties as appearing from the whole facts of the case. Although this principle is not expressed in the Act it is still law. (Lindley on Partnership) (supra).

The facts in the case at bar do not support a finding that a partnership agreement existed. There was at the time of marriage a pooling of whatever assets existed but in my view this was incidental to the formation of the family unit. There was, no doubt, a community of interest; as well Caroline may, at this time, have a basis for an argument that her involvement raises the presumption of a resulting trust in her favour; or that in other circumstances under the marital property regime extant in Manitoba she is entitled to an equal division of assets. That such possibilities may exist are of no assistance to the appellant and his wife since these are issues not dependent upon the existence of a contractual relationship while the issue of partnership is.

On balance the evidence adduced does not satisfy me that all of the elements necessary to establish a partnership are present in this case. Accordingly, the appeal is dismissed.

Appeal dismissed.