Ingram Wessell v. Minister of National Revenue, [1985] 1 CTC 2192, 85 DTC 206

Taylor, TCJ:—This is an appeal heard in Belleville, Ontario, on January 8, 1985, against income tax assessments for the years 1977, 1978, 1979 and 1980 in which the Minister of National Revenue treated the appellant as a sole proprietor, not as one partner with his wife Joan Isabel as the other partner, in certain business operations. During the proceedings, the parties notified the Court that the appeal for the year 1977 should be quashed, since in that year the appellant had not claimed the “partners” status, and that the appeal for the 1980 year should also be quashed since it is from a “nil” assessment. The appeal consequently related only to the years 1978 and 1979 in which the appellant did claim such “partnership” arrangements existed, and filed accordingly. The issue remaining for determination was whether the appellant and his wife were business partners during the years 1978 and 1979 as claimed, in any or all of three distinct operations — (a) a trailer camp; (b) a construction business, and (c) a farming operation.

In the financial statements and ensuing tax returns for the years 1978 and 1979, the profit was divided and reported as follows:

With regard to the farming operations, the Court was not called upon to make a determination as to the “reasonable expectation of profit” aspects, since the Minister had already accorded to the appellant “restricted farm loss” of $5,000, based on the assumption that he was the sole operator of the farm. The significant aspect of the notice of appeal read:

My wife and I have operated our business in partnership ever since our marriage. My wife has contributed with me to the capital, labour and management expertise required for the enterprise, qualifying it as a partnership for all noted taxation years.

For the Minister this situation was summarized in the reply to notice of appeal:

In assessing as he did, the Minister of National Revenue relied, inter alia, on the following assumptions of fact:

there was no partnership agreement;

the Appellant had, until 1978, reported all the income from his farm, his construction and his campground businesses;

the Appellant’s wife had no outside employment since their marriage in 1962 and has never contributed any capital to the businesses;

the Appellant does all physical activities and negotiates all contracts;

the Appellant held himself out to the public as a sole proprietor.

The respondent relied, inter alia, on the provisions of sections 3, 9 and 31 of the Income Tax Act, RSC 1952, c 148, as amended by section 1 of SC 1970-71-72, c 63 as it applied to the 1977, 1978, 1979 and 1980 taxation years.

The testimony of the appellant, his wife, his bank manager and a hired man, established that Mrs Wessell did contribute to the physical requirements of all three businesses (in varying degrees) and negotiated contracts for them — thereby negating one of the major points in the reply to notice of appeal (supra). The Court expressed itself as satisfied that she took a serious role, responsibility, and involvement, in the management and operation of these businesses — but that such a situation was not of itself determinative of the issue before the Court. In addition, it was evident that to a substantial degree Mrs Wessell also was recognized and accepted by the public as an active and authoritative person in the operation. It could not clearly be said that the appellant had “held himself out to the public as a sole proprietor” (supra). At the same time the income tax returns of the appellant up to and including 1977 had regularly reported all income as belonging to the appellant; and somewhat conflicting information was on file with the appellant’s bank — one document of which was dated in 1971, reflecting a “partnership” assignment between the two parties, while loans and financial informations supplied, appeared to reflect the “sole proprietor” aspect

— albeit, that Mrs Wessell was usually “guarantor” on any loans. The real property again reflected a kind of mixture — some original 300 acres in the name of the appellant, dating back to before marriage, while a further 300 adjacent acres acquired subsequently was held in the joint names — hence the bank’s interest in Mrs Wessell as “guarantor”. It was demonstrated that in many aspects of the operations Mrs Wessell acted and functioned virtually independently of the appellant — her husband — indeed without even consulting him, while at the same time on many other aspects he consulted with her before signing contracts, buying equipment etc. It could well be said that in matters of finance she was actually in control of the funds. There was a bank account — signing authority in each name — respecting the operations of the camp grounds, another with similar signing authority respecting the farm and the contracting business; and a third — a savings account in Mrs Wessell’s own name. The same firm of accountants had provided service to the appellant for several years prior to 1978, advised and set up the “partnership” agreements starting in that year and represented the appellant at the hearing. With regard to the first three points from the reply to notice of appeal (supra), it was established that the second and third assumptions of the Minister would not be disputed, but again the Court pointed out that by themselves this could not be determinative against the appellant. That left the first point — “there was no partnership agreement”. Clearly there was no written partnership agreement — a discomfort readily admitted by the agent for the appellant — but the question remained — was there a “partnership agreement” — either oral or implied?

In argument, the agent for the appellant stressed that, in his view, the agreements between this appellant and his wife with respect to the business at issue went well beyond the normally expected “marital” relationship and responsibilities and that a “business partnership” had been superimposed on the marriage for the express purpose of making a profit. This is the distinction he saw and highlighted between this case and the several other cases of jurisprudence he cited, most of which were decided against the appellant, as follows: Robert Corn- forth v The Queen, [1982] CTC 45; 82 DTC 6058; Jeannine Bédard v MNR, [1984] CTC 2239; 84 DTC 1204; Rand Berg v MNR, [1982] CTC 2558; 82 DTC 1571; Peter Flicke v MNR, [1980] CTC 2538; 80 DTC 1473; Amos Barzilay v MNR, [1984] CTC 2353; 84 DTC 1290; Kenneth H Wright v MNR, [1982] CTC 2744; 82 DTC 1766; Lucien Venne v The Queen, [1984] CTC 223; 84 DTC 6247; Jean B Pelletier v MNR, [1982] CTC 2500; 82 DTC 1498.

Counsel for the Minister relied upon the legal provisions of the Partnership Act of the province of Ontario, as well as the following: Northern Sales (1963) Ltd v MNR, [1973] CTC 239; 73 DTC 5200; Pearl Zabitsky v MNR, 31 Tax ABC 170; 63 DTC 200; Robert Cornforth v The Queen, [1982] CTC 45; 82 DTC 6058; Victor Tarasow v MNR, [1981] CTC 2466; 81 DTC 462; Phillip Brunell v MNR, 20 Tax ABC 163; 58 DTC 545; Mrs W v MNR, 2 Tax ABC 360; 52 DTC 1150; Ralph Ferracuti v MNR, 25 Tax ABC 53; 60 DTC 473.

As I read the above case law, the Courts have been very reluctant to accept an “oral” or “implied” contract of partnership as sufficient base for splitting total business income for tax purposes, in the acknowledged absence of any written legal record or document attesting to the existence of such a partnership agreement. At the same time I do not read the jurisprudence as assuring the acceptance of a “partnership” arrangement as adequate proof of its legal existence, merely because the written agreement purports to be such a contract of partnership. As I comprehend the agent for the appellant in this matter, he was of the view that if only, the appellant (or perhaps his accounting firm) had taken a few minutes to draw up some kind of written statement of interest — everything would be all right and there would be no need for this hearing. I would hasten to disabuse the agent of such an opinion, since the mere provision of such minimal written record would not in my view mandate that result, if the Courts were faced with contrary evidence or conduct on the part of the appellant and/or his alleged partner. Accordingly, while decidedly an advantage, (and as I noted earlier, its absence is seriously regarded by the Courts) a written partnership agreement (or that alleged as such) of itself may not demonstrate the existence of a partnership, for income tax purposes, any better than that kind of contract which may be asserted from the conduct of the parties and the evidence available. This is certainly true when the parties are dealing at arm’s length, and I must therefore assume that a set of circumstances can be conceived wherein the evidence and conduct of the parties exhibit a partnership arrangement, even when the parties are not dealing at arm’s length. I can accept that the demonstration and the proof of the existence of the partnership agreement in the latter case may be subject to a more detailed scrutiny by the Minister, than in the former case, but I am not aware of either jurisprudence or practice which would prohibit it. When the rights (to tax) of a third party, the Minister of National Revenue, may be adversely affected by such an arrangement, I recognize that it would be all to the advantage of the parties to be circumspect and minutely cautious in dotting all the “i”s and crossing all the “t”s so that the Minister’s understandable skepticism would be maintained at a minimum. However, when such detailed procedures have not been followed, the courts must look at all the surrounding circumstances to determine if indeed a “partnership” did exist.

The resolution of this matter then comes down to the view this Court is prepared to take of the conduct of the alleged partners (Mr and Mrs Wessell) and the evidence of their intentions and objectives with regard to that alleged partnership. It is perfectly clear to me that, at least to the extent of the 300 acres of land acquired subject to the marriage (supra), the two individuals were operating in concert, and acquired and used the property in joint ownership for the purpose of gaining or producing income therefrom — to whatever degree that property could serve the underlying capital purpose of any or all three of the businesses noted earlier — the camp ground, the construction and the farm. I am equally convinced with regard to the main 300 acres (the “home place” — acquired by the appellant before marriage) that there is no evidence of either effort or intention on Mr Wessell’s part to regard this as a commonly held asset, or to designate it as such. To whatever degree it may have served a purpose somewhat similar to the second 300 acres (supra), that purpose was being served at the appellant’s pleasure and was subject to his determination. As I understand it the major farm operation was conducted on, or in direct relationship to the original 300 acres — the “home place” and that does put into question, not necessarily the “partnership” aspect of the farm operation, but the division of profits as outlined and reported by the appellant. With regard to the construction business, the appellant was the major element, and his wife did provide substantial assistance. For the “trailer park”, as I see it, that situation is reversed — Mrs Wessell was the major motivator, consulted and aided by Mr Wessell. None of the above (essentially the proportion of the contributions) is of consequence unless they were “partners”.

On that point, (the basic “partnership” question) I must ask myself — which elements existed as at January 1, 1978 which would have militated against, or prohibited the two parties — Mr and Mrs Wessell from going into a business partnership. I can think of none. As I see it, suppose they had decided to open an ice cream stand — as a separate business — they could have agreed on any arrangement between them (subject to section 101 of the Income Tax Act) and proceeded to do so. Just so, they could have decided to operate as partners on January 1, 1978 in the trailer park, the construction business and/or the farm — no matter what had been their previous arrangements. As between each other, in my view, they may well have been business partners for many years before that. Putting the Minister of National Revenue in juxtaposition to that of January 1, 1978, they needed only to do one thing — notify him — which they did by filing the 1978 tax return separately — as business partners — that they had operated that way since January 1, 1978. I am certainly not suggesting, they could easily have claimed that status for some prior taxation years — but J can think of no further obligation they had to the Minister. I am not aware that there is any formal document or certificate, either available or required to be filed with the Minister, as of January 1, 1978, to put the Minister on guard, that as of that date the partnership, for income tax purposes, had commenced. It might be useful and prudent to do so (under the delicate “non-arm’s length” relationship) but not doing so, can hardly be regarded as fatal. They had the capital, they had the assets, they had the experience, and they already had a successful business record. Certainly the Minister had the right to challenge their assertion — which he did — but I ask, on what grounds. Capital contributed? — the appellant was willing to, and did, credit his wife with a portion of capital to whatever extent advised by his accountants. (Those “capital” contributions may have created another possible tax problem for one or both of the parties — but that issue is not before the Court.) Purpose? — clearly their purpose separately and jointly was to make a profit. Risk? — they were both already at risk for banking obligations and were signing contracts or making commitments, without consultation, virtually every day. Share of Profits? — that the profits were shared is the very essence of the issue before the Court.

No, the parties (Mr and Mrs Wessell) formed a business partnership — or one might argue validated an already existing business partnership — by their conduct in dealing with their financial affairs and income reports. Filing the income tax returns, as they did, in my view, was the critical and determinative element in this appeal. They were partners, for purposes of the Income Tax Act, from January 1, 1978. The Minister can quite rightly take exception to the division of profits for imposition of taxes, but he can’t take umbrage with their own private business decisions, or to the manner in which they wish to conduct their affairs for purposes of earning income, upon which to pay that tax.

With regard to that secondary question — the division of profits — I am not impressed with the results of the 50-50 proportion asserted for the farm, but counsel for the Minister did not press this particular aspect of the issue, and lacking the benefit of the Minister’s views thereon, I am not prepared to determine any other proportions.

The appeal is therefore allowed — the appellant was correct in reporting the income for the three business ventures — trailer park, construction, and farm as one of the two partners thereon, his wife being the other partner. According to the agent for the appellant, such a result could only entail the reassessment of the tax returns of Mrs Wessell, at least to the extent of allowing her the benefit of the “restricted farm loss” also. However, Mrs Wessell, was not an appellant before the Court, and was not joined to the hearing by the Minister in any way, so the Court leaves that problem unattended. This judgment does require that the reassessments at issue for the years 1978 and 1979 for Ingram Wessell be referred back to the Minister of National Revenue, for review and reassessment, on the basis that he was in a business partnership with his wife. The appellant is entitled to party and party costs.

Appeal allowed.