Roger Dufresne v. Minister of National Revenue, [1983] CTC 2270, 83 DTC 238

Guy Tremblay [TRANSLATION]:—This appeal was heard January 10, 1983, in the City of Montreal (Quebec).

1. The Matter in Dispute

According to the appeal proceedings, in dispute is whether the appellant is justified in claiming that he operated a construction business in 1976 in partnership with his wife and that the sum of $10,000 paid to his wife in 1976 complies with the Income Tax Act.

2. The Burden of Proof

2.01 The burden of proof rests with the appellant, who must show that the assessment of the respondent is unjustified. This burden of proof derives not from any specific section of the Income Tax Act, SC 1970-71-72, c 63, as amended, but from a number of judicial decisions, including a decision handed down by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The allegations of the respondent are set forth in subparagraphs (a) to

(j) of paragraph 2 of the respondent’s reply to the notice of appeal. This paragraph reads as follows:

2. The respondent bases its assessment of the appellant on, inter alia, the following presumptions of fact:

(a) During the taxation year in question, and since 1974, the appellant operated a construction business;

(b) The appellant has already declared the income derived from this business in the capacity of sole proprietor;

(c) In computing his income for the 1976 taxation year, the appellant included in the sale cost a sum of $10,000 paid to his wife;

(d) In a Notice of Assessment of November 14, 1980, the respondent included the sum of $10,000 in the appellant’s income, pursuant to section 74(3) of the Act;

(e) The appellant has always been solely responsible for the smooth operation of this business;

(f) No written partnership agreement has been entered into between the appellant and his wife;

(g) Only the appellant has made a substantial contribution to the business;

(h) The parties had no intention of forming a partnership for the purposes of this business;

(i) In fact, nothing has changed to indicate to the respondent that during the 1976 taxation year the appellant was a partner with his wife for the purposes of the said business;

(j) The only objective in claiming partnership is to reduce the tax burden of the appellant.

3. The Facts

3.01 It has been proven and conceded that from 1962 to 1973, the appellant and Simone Dufresne, his wife, earned working incomes of $75,420.85 and $49,872.43 respectively.

3.02 In early 1974, the appellant and his wife decided to leave their respective jobs to start up a business in housing construction. The appellant was a carpenter and construction project manager. Owing to his limited formal education, he can barely read and knows little about bookkeeping. His wife, however, has a more formal education and, owing to the nature of her past employment, is better able to look after administration. After having consulted with their accountant about establishing a company, they decided not to become incorproated, at least not for the time being.

3.03 The profit and loss accounts for the 1974 to 1976 years pertaining to this buisness (Exhibit I-2) were filed for each year with the appellant’s income tax return. Profits were as follows:

3.04 There is nothing in these financial statements to indicate that they pertain to a partnership. Furthermore, the appellant continued to be taxed on the total profits. According to the accountant, the reason the partnership is not mentioned in the financial statements is that it is easier to meet the requirements of the Quebec Construction Office for obtaining a building permit. When someone is in partnership, the statement of account of his partner is required, and so on.

3.05 With regard to the 1976 year, the respondent’s assessor discovered that in the computation of the sales cost a sum of $10,000 was paid to the appellant’s wife. The appellant’s accountant explained that he had done this to deduct financial costs. The sum deducted was, in fact, used to purchase term deposits in the name of the appellant’s wife. These deposits were used as guarantees to the bank to cover advances to the business. The accountant, in any event, was unable to find the corresponding documents showing the withdrawal of funds from the current account. Furthermore, it was shown that as at December 31, 1975, Mrs Dufresne owned $14,500 in term deposits and that as at December 31, 1976, she owned $25,000 in term de- posits. The source of these funds has not been shown, other than the accountant’s claim regarding the $10,000 for the 1976 year.

3.06 The appellant and his wife have both testified that they each worked 10 to 12 hours a day in the business. The number of houses built in 1976 was 16.

3.07 The appellant testified that a sum of $15,000 was borrowed to start up the business. The Mascouche family residence was used as collateral for the loan. This house, which stands on property purchased by Mrs Rioux- Dufresne in 1969 (Exhibit A-2) and was sold for $1 to her husband in 1971, was built using the $10,000 profit (Exhibit A-1) made on the sale of their home in the city of Anjou.

Also, the wife put into the business the sum of $2,000 received when she left her job (pension fund withdrawal, vacation pay, etc) to take up the business (Exhibit A-10). This sum was transferred to the business’ current account (Exhibit A-11).

3.08 The appellant and his wife testified they had agreed to form a partnership and to have an equal interest as they had since their marriage. The couple, in effect, have always had a joint bank account and it is Mrs Dufresne who wrote the cheques: what belonged to one belonged to the other.

3.09 No declaration of partnership was registered with the office of the prothonotary.

3.10 As for the $10,000 received in 1976 by Mrs Dufresne, both witnesses categorically stated this was not by way of a salary. The wife says that for some time she had not had her share of the profits. In any event, she did not see the importance of taking or not taking profits, as in any case it all went back into the business.

3.11 The evidence has shown (admitted by the respondent) that there were numerous transfers of funds out of the business’ current account. Sums of $5,000, $10,000 or $20,000 were used to purchase term deposits.

3.12 In May 1977, the “Construction Roger Dufresne Inc” company was established. The two spouses each owned 50% of the shares. The 17 houses under construction were transferred to the corporation.

4. The Act—Case Law—Analysis

4.01 The Act

The main provisions involved in the present action are subsections 74(3) and (5) of the Income Tax Act, which read as follows:

74 (3) Where a person has received remuneration as an employee of his spouse, the amount thereof shall not be deducted in computing the spouse’s income and shall not be included in computing the employee’s income.

74 (5) Where a husband and wife were partners in a business, the income of one spouse from the business for a taxation year may, in the discretion of the Minister, be deemed to belong to the other spouse.

4.02 Case Law

The Board was referred to the following case law:

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

2. Kenneth H Wright v MNR, [1982] CTC 2744; 82 DTC 1766;

3. Victor Tarasow v MNR, [1981] CTC 2466; 81 DTC 462;

4. Clifford E McCall v MNR, [1980] CTC 2572; 80 DTC 1503;

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

6. George Marinis v MNR, [1978] CTC 2821; 78 DTC 1609;

7. MNR v Samuel L Shields, [1962] CTC 548; 62 DTC 1343.

4.03 Analysis

4.03.1 The notion of partnership is provided for in the Quebec Civil Code. The Code, however, does not define partnership. Doctrine, however, defines it as being:

A contract whereby two or more persons agree among themselves to pool assets in order to use them for common profit. One of the principal characteristics of the partnership is, then, the necessary plurality of the parties. It is a consensual, reciprocal and onerous contract. It is consensual in that the consent of the parties is sufficient; it is reciprocal in that it reciprocally binds the contracting parties to each other; it is onerous in that each partner pursues the realization of a common profit by effecting a contribution. (Traité de droit civil du Québec, Vol 13 — H Roch, R Pare, page 335)

The contribution of the partner to the partnership pursuant to Article 1830 of the Civil Code may consist of property, credit, skill or industry. In this regard, the above-cited Traité de droit civil du Québec states on page 336:

What is first necessary is a pooling on the part of each of the partners, that is each of them must contribute something to the common fund. This may be property, either real or personal, tangible or intangible, owned or merely used. In the terms of the article, the contribution may also be in the form of credit, but the authors point out that this refers to commercial credit and not political credit. Finally, a partner may, as a contribution to the partnership, provide his work, skill or industry. In short, the contribution of a partner may consist of anything that can produce and enhance the value of the pooled property.

4.03.2 Articles 1830 and 1831 of the Civil Code 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 its 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 Based on the evidence, the Board is of the view that the appellant and his wife fulfilled the legal conditions pertaining to the contribution of finances and skill (para 3.05, 3.06 and 3.07). The evidence is not as clear, however, with respect to the actual intent to form a partnership and the determination of profit sharing. With respect to this second point, the financial statements of the accountant pertaining to the supposed partnership far from confirm the 50-50 claim of the witnesses. All of the profit for the years 1974 to 1977 (para 3.04) is shown to be the profit of the appellant only. The appellant alone was taxed on the entire profit in his income tax return. The accountant, who claimed to be aware of their desire to share profits 50-50, did not even take this into account when preparing their financial statements. Furthermore, the transfer in 1976 of $10,000 to the wife by way of sale costs on the pretext of financial expenses (para 3.05) is less an explanation than an admission of a hidden transfer of a sum to someone who is not entitled to it. The explanation that the partnership was not officially declared in the tax return because of the requirement of the Quebec Construction Office that the partner file a statement of account (para 3.04) is hardley acceptable. In fact, it would not have been any more difficult to prepare a statement for the wife of the appellant than it was to prepare one for the appellant himself. The fact that when the “Construction Roger Dufresne Inc” company was established in 1977 (para 3.12), the appellant and his wife had equal shares does not constitute proof that there was equal profit sharing in the years 1974 to 1977 and makes even less likely a partnership for the previous years.

4.03.4 A capital element for the establishment of the partnership is intent. According to Mignault, its existence cannot be presumed. The Traite de droit civil du Quebec bears this out. Considerable case law is cited in this regard: Joseph Lohé v MNR, (supra), and so on. Based on the evidence, was there an intent to form a partnership between the appellant and his wife?

The evidence seems to show that the appellant and his wife, in this construction business, did not go beyond the combining of interests (para 3.08). The existence of a joint account has never proven the existence of a partnership.

Article 1834 of the Civil Code creates the obligation to declare a partnership to the prothonotary, even though the omission to deliver such declaration does not render the partnership null. The delivery of such declaration is, however, by far the best proof of intent. The evidence shows that such declaration was not filed with the prothonotary (para 3.09).

4.03.5 The preponderant inference from the evidence is not to the effect that there was a sharing of profits, or even that there was intent to form a partnership, essential conditions for establishment of a partnership.

The abundant case law cited above confirms the conclusion in the present case. The quotation of Mr Justice Cattanach in the case of Robert Cornforth (Supra) appears to me to be conclusive:

There is no doubt that Mrs Cornforth, by reason of her qualification as a physiotherapist and by her deliberate choice prior to her marriage to the plaintiff, contributed to the operation and success of the practice and that she worked as long hours as her other matrimonial obligations permitted. The explanation of her contribution is not to be found in the relationship of partnership, but in the relationship of husband and wife.

The consistent theme throughout these reasons has been that partnership is a contractual relationship and an agreement, express or implied, is the source of that relationship.

I am not satisfied on a consideration of all of the evidence that it was the intention of the plaintiff and his wife to enter into a partnership in the legal sense but on the contrary the natural and preponderant inference from the evidence is that no such intention was present to their minds.

They entered into their marriage with the concept of mutual dependence and reciprocal obligations paramount in their minds and, as I have previously said, the unstinting efforts and devotion of all Mrs Cornforth’s available time to the success of the business is better explainable by the relationship of husband and wife rather than as crass business partners.

5. Conclusion

The appeal is dismissed based on the reasons for judgment outlined above.

Appeal dismissed.