Marc-André Peloquin v. Minister of National Revenue, [1984] CTC 2950

Tremblay, TCJ [TRANSLATION]:—This case was heard at Montreal, Quebec on June 30, 1983.

1. Issue

The issue is whether the appellant is entitled to claim the amount of $10,767.17 as a loss from the operation of a business by the name of Pélo Fencing Equipment Ltd in computing his income for the 1978 taxation year.

The respondent allowed only 50 per cent of this loss on the basis that the appellant’s spouse, a partner in the business was responsible for 50 per cent of the debts, and that therefore the appellant could claim only the other 50 per cent for which he himself was responsible.

2. Burden of Proof

2.01 The appellant has the burden of showing that the respondent’s assessment is incorrect. This burden of proof results not from a particular section of the Income Tax Act, but from several judicial decisions, including a judgment of the Supreme Court of Canada in Johnston v Minister of National Revenue, [1948] CTC 195; 3 DTC 1182.

2.02 The facts upon which the respondent relies are set out in subparagraphs (a) to (f) of paragraph 9 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

9. In reassessing the appellant for the 1978 taxation year, the respondent relied, inter alia, on the following facts:

(a) In the 1978 taxation year, “Pelo Fencing Equipment Ltd” reported an operating loss of some $10,767.17;

(b) In the 1978 taxation year, the appellant was an equal co-owner of the said business with his wife, now his ex-wife, Dame Denise Beaupré (Péloquin) under the terms of a partnership registration, which reads as follows:

Canada	Office of the Prothonotary
Province of Quebec	Names
District
	IN THE SUPERIOR COURT

We the undersigned declare that we intend to form a partnership specializing in the wholesale and retail sale of fencing equipment.

This company is owned equally by Mr Marc-André Péloquin, on the one hand, and his wife, Denise Beaupré, on the other hand, both residing at the same address, 3696 St-André St, Montreal, Quebec.

We have a marriage contract under the separation of property regime which was drawn up by Mr (?) Boivin, Notary and dated October 3, 1956.

Our company will be called

Pélo Équipement d’Escrime Co

Pélo Fencing Equipment Co

Its head office will be located at 3696 St-André St, Montreal, Quebec.

Marc-André Péloquin

Denise Beaupré

15-022721-73

December 20, 1973.

(c) However, despite the wording of the said registration, ‘‘Pelo Fencing Equipment Co”’ has never been properly incorporated, and is merely the name of a partnership;

(d) In the 1978 taxation year, there was no agreement between the appellant and Dame Denise Beaupré providing that the losses of Pélo Fencing Equipment Limited would be shared, either in respect of creditors or for tax purposes, in any manner other than that provided for by article 1848 of the Civil Code of the Province of Quebec, which reads as follows:

When there is no agreement concerning the shares of the partners in the profits and losses of the partnership, they share equally.

(e) Not only was there no provision for unequal division, but Dame Denise Beaupré also claimed one-half of the loss incurred by Pélo Fencing Equipment in the 1978 taxation year, on the basis of the following facts submitted by her to National Revenue:

Montreal

November 20, 1979

Dear Sir:

I have not lived with my husband, Marc-André Péloquin, since June 17, 1979. I have been legally separated pursuant to a court order since October 3, 1979. I enclose copies of the registration and dissolution of the Pélo Fencing Equipment Company, of which we were equal co-owners. Since my husband refused to include me in his business tax return, which was completed by Roger Valade, a Just of the Peace and an accountant (sic), I am not familiar with the profits and losses of the said business.

Please contact my husband’s accountant and amend my tax return.

Mini-Services Ltd

2030 Frontenac, Montreal

Tel: 521-8380	Roger Valade
	Denise Beaupré Péloquin
	5162 Juneau, CP 243
	Station Jean-Talon
	Montreal HIS 2Z2
	Montreal
	May 30, 1980
To whom it may concern:

I am awaiting information concerning my 1978 tax return. I am currently involved in divorce proceedings, in which my husband filed his return for 1978 showing a loss or deficit of $10,000 in respect of his business, Pélo Fencing Equipement Ltd, of which I was a co-partner. Moreover, my husband stated that he had received a $2,000 tax refund, of which I should have received a share.

My Social Insurance Number:

235-003-720 Denise Beaupré Peloquin

My husband’s Social Insurance Number:

201-453-685	Marc-André Péloquin
	Denise Beaupré Péloquin
	CP 243
	5162 Juneau
	Station Jean-Talon
	St-Léonard HIS 2Z2

(f) In the circumstances, it was reasonable to allow each partner, the appellant and his spouse, one-half of the loss for the 1978 taxation year.

3. Facts

3.01 At the commencement of the hearing, counsel for the appellant admitted paragraphs 6, 7 and 8 of the reply to the notice of appeal. They read as follows:

6. In the 1978 taxation year, the appellant claimed a deduction of $10,767.17 as a loss from carrying on a business under the name of Pélo Fencing Equipment;

7. The respondent reassessed the appellant on August 29, 1980 and allowed only one- half of the loss claimed, or $5,383.59, as a loss from carrying on a business (business loss);

8. The appellant, through counsel, objected to the October 27, 1980 reassessment, which was confirmed by the respondent on August 18, 1981, in a Notification of Confirmation;

3.02 Counsel for the appellant also admitted subparagraphs (a), (c) and (b), except for the words “à part égale” (equal) of paragraph 9 of the reply to the notice of appeal. He did not, however, admit subparagraphs (d), (e) and (f).

3.03 In his testimony, the appellant stated that

(a) He was a professor of orthopedics at CECM;

(b) He had taken up fencing around 1961. He became Montreal champion, then provincial champion for Quebec, Canadian champion (1966) and finally world champion (1967);

(c) He taught at the national Palaestra for four years;

(d) Toward the end of 1973, he met a Mr Sudre, who sold fencing equipment in New York. Thinking that the market might become profitable in Quebec, he and his wife decided to start a business of this kind in his home at 3696 St-André St, Montreal. On December 20, 1973, he registered the partnership formed by him and his wife under the name of Pélo Fencing Equipment Ltd (Exhibit A-1). The partnership ended in 1979 with the divorce;

(e) His job was to assemble and repair the weapons and to manufacture electronic fencing equipment;

(f) His wife took care of accounts, sales, customs, the household and the children (four daughters who were, respectively, 26, 25, 22 and 17 years old in 1983);

(g) for both bank accounts (BCN and Royal Bank of Canada) both signatures were required;

(h) Less than 25 per cent of the sales were made at the office, the rest were made in various CEGEPS and at the fencing school;

(i) in 1973, the partnership began with less than nothing, that is, $1,500 worth of equipment purchased on credit. It had six months to pay. Both partners were eager to succeed, because they did not wish to lose their house or their summer cottage. In fact, they never made an investment at all. They operated on credit.

(j) Neither partner ever drew a salary. The financial results were as follows: losses (1974, 1975 and 1978) and income (1976 and 1977) as follows: 1974 — ($4,702.01); 1975 — ($3,814.71); 1976 — $570.20; 1977 — $226.15; and 1978

— ($10,767.17);

(k) In 1979, following marital difficulties, divorce proceedings and, in particular, a petition for corollary relief, an interim agreement dated August 29, 1979 was concluded by the parties (Exhibit A-2); paragraphs 5 and 6 of which read as follows:

5. The respondent (Mr M-A Péloquin) and the petitioner (Mrs Denise Beaupré- Péloquin) both undertake to sign, upon request, a declaration dissolving Pélo Fencing Equipment Ltd.

6. The respondent (Mr M-A Péloquin) undertakes to be solely responsible for all debts relating to the said partnership and the petitioner (Mrs Denise Beaupré- Péloquin) agrees to renounce her rights to future and past profits, if any.

(l) On the same date, August 29, 1979, a declaration dissolving the said partnership (Exhibit A-3) was also signed. it was registered on September 7, 1979 as number 023730. In addition, on August 29, 1979, a declaration of change of name was signed by Mr M-A Péloquin stating that he intended henceforth to carry on business alone under the name of Pélo Fencing Equipment. This was registered on September 7, 1979 as number 023731. However, the business was not carried on after that time because of the appellant’s poor health;

(m) He stated that in 1979 he asked his wife whether she wished to use part of the loss in her return, but according to him she refused. Later, he said she agreed and then refused again.

(n) His wife also learned fencing toward the end of the sixties. She began to teach at the Ahuntsic CEGEP in 1975;

(o) His wife charged the furniture as security for the partnership debts, and when she signed the bank form, she did so on behalf of the registered partnership. The bank’s “guarantee and postponement of claim’’ form, was signed by the appellant and his wife on November 30, 1978 at the Royal Bank of Canada and filed as Exhibit I-1.

3.04 The testimony of Anne-Marie Péloquin substantially confirmed that of her father with regard to the division of labour between her parents. She stated that the children also answered the telephone on occasion and dealt with customers. She knew nothing of the financial situation of the company.

3.05 In her testimony, Mrs Denise Beaupré stated that:

(a) She was a fencing teacher at the Ahuntsic CEGEP and she also taught at the national Palaestra and at the Paul Sauvé Centre;

(b) It was completely untrue that in 1979 she had refused to use the partnership losses in her 1978 return, which she demonstrated by tendering her tax return. In previous years, the accountant was supposed to care of this in an equitable manner.As Exhibit 1-2 she filed a letter dated November 20, 1979, addressed to the respondent. This letter is reproduced in the reply to the notice of appeal in subparagraph (e) of paragraph 9 (see para 2.02 above);

(c) She made a financial contribution by paying for heating and electricity. The business did not contribute its share of these expenses.

(d) In 1978 sales were $19,500, the most important of which were made at the following institutions: The Ahuntsic CEGEP, the University of Montreal and the University of Quebec. The fact that she taught at the Ahuntsic CEGEP explains how she obtained the contract;

(e) In 1976, she and the appellant had already signed a guarantee similar to I-1, which was signed in 1978. A photocopy of a bank document (Exhibit I-3) shows that a $10,000 loan was made to Pélo Fencing Equipment Ltd in February 1976;

3.06 The appellant testified again and alleged that in 1983 he had been sued by the Royal Bank of Canada for an amount between $4,500 and $5,000, which he had had to pay. His wife was not named in the action.

He stated that the business paid for the car, which was transferred to his wife at the time of the agreement arising from the divorce proceedings.

4. Law — Case Law — Analysis

4.01 Law

The sections relevant to this case are subsections 103(1) and (2) of the Income Tax Act. Articles 1830, 1835 and 1848 of the Civil Code are also relevant. They will be cited in the analysis as required.

4.02 Commentary and Case Law

The Court considered the following commentary and case law:

1. Interpretation Bulletin IT-23R of November 21, 1977;

2. Robert Cornforth v The Queen, [1982] CTC 45; 82 DTC 6058;

3. Joseph Lohé v MNR, [1979] CTC 3107; 79 DTC 880;

4. Traité de Droit civil du Québec, Vol 13, de la Société, pp 335 to 347, de Obligations des Associés, pp 401 to 403.

4.03 Analysis

4.03.1 One of the most important provisions of the Civil Code of the province of Quebec (article 1844) relating to partnerships provides for the filing of the partnership declaration in writing with the prothonotary of the Superior Court. This condition was complied with as is shown by Exhibit A-l [para 303 d) reproduced in full in para (b) of subsection 9 of the reply to the notice of appeal cited in paragraph 2.02 above.

4.03.2 The Civil Code of the province of Quebec does not define “partnership”, but as the courts including Cattanach, J in Cornforth, (supra), at [1982] CTC 50 and 82 DTC 6062 have recently made clear, the essential elements are set out in articles 1830 and 1831 of the Civil Code. They read as follows:

Art. 1830. It is essential to the contract of partnership that it should be for the common profit of the partners, each of whom must contribute to it property, credit, skill or industry.

Art. 1831. Participation in the profits of a partnership carries with it an obligation to contribute to the losses.

Any agreement by which one of the partners is excluded from participation in the profits is null.

An agreement by which one partner is exempt from liability for the losses of the partnership is null only as to third persons.

4.03.3 The evidence shows that both made substantial contributions to the partnership through their work (paras 3.03(e) and (f) and 3.05(c), their pledging of credit (para 3.05(e)) and by using their influence in obtaining contracts (para 3.05(d)).

Although the appellant’s work (repair and manufacture of the weapons) could be performed only by him, the other part of the business was just as necessary. The Court could only conclude that the profits and losses must be divided on a 50/50 basis.

4.03.4 Did the agreement Exhibit A-2 paragraph 3.03(k)(6) have the tax consequences claimed by the appellant? Under this agreement, the appellant undertook to be solely liable for all partnership debts, and his wife renounced any share in past and future profits (if any).

According to article 1831 of the Civil Code, such an agreement is valid between the two parties, but not with respect to third parties. Thus, if the Royal Bank of Canada asked the appellant’s wife to repay the partnership debt outstanding of between $4,500 and $5,000, she would be obliged to pay, but under the agreement A-2 she could claim what she had thus paid out from the appellant.

4.03.5 The Minister of National Revenue is also a third party. He is entitled to have article 1831 CC applied in his favour, if he moves that the A-2 agreement not be held to apply to him.

The Court confirms the assessment and dismisses the appeal.

5. Conclusion

The appeal is dismissed in accordance with the reasons for judgment above.

Appeal dismissed.