Arthur H Channer v. Minister of National Revenue, [1982] CTC 2047, 82 DTC 1068

MJ Bonner:—The appellant appeals from assessments of income tax for the 1976 and 1977 taxation years, which assessments were made on the basis that amounts received by the appellant from Louis Allore in those years formed part of his income for those years. The Minister found that no partnership existed between the appellant and Mr Allore giving rise to the non-capital losses claimed by the appellant. The appellant contended that he and Mr Allore practised law in partnership and that, in the alternative, there existed an arrangement between them whereby the two practised in association with each other, each bearing his own share of expenses. The latter argument was, I observe, raised for the first time at the hearing of these appeals.

The appellant’s association with Mr Allore in the practice of law at Oshawa commenced with the signing of a so-called counsel Agreement on October 13, 1976. That agreement recited that Mr Allore carried on the practice of law by a sole proprietorship and it provided for the engagement of the appellant as Counsel for the period November 1, 1976, to October 31, 1978. Remuneration was to be at a fee of $20,000 per annum. The Agreement provided further that the appellant would “assist the Proprietor” by guarantee of the indebtedness of the practice to a maximum of $25,000.

By the time the appellant arrived in Oshawa on November 1, Mr Allore’s financial situation was such that he could not have been financially able to carry on practice for long. Mr Allore had been expelled from his former partnership a short time before and financial problems arising as a result of that placed him in a position of insolvency. An application to the Canadian Imperial Bank of Commerce for a line of credit was, for that reason, rejected around the end of 1976 or early January of 1977.

Another application to a different bank, the Bank of Montreal, led to the granting of credit on January 13, 1977, because the application was made not as that of an insolvent proprietor, but rather as that of a partnership between Mr Allore and the appellant. Subsequently the apellant signed documentation which made him liable to the Federal Business Development Bank on a chattel mortgage given in connection with the acquisition of office furnishings and, as well, liable to the lessor of the office premises. The chattel mortgage was made by the two as persons “carrying on business under the firm name and style of ALLORE, CHANNER”. Those are words which, in my mind, were plainly calculated to indicate that both were proprietors.

It appears that the appellant desired a partnership arrangement. He testified that he asked for one in succeeding months and that he even prepared a draft agreement. Mr Allore denies the request and asserts that if the appellant prepared a partnership agreement he never saw it.

In June of 1977 the appellant and Mr Allore signed an agreement, Exhibit R-2, which purports to negative the existence of a partnership either at that time or prior. The appellant explains this action by saying that Mr Allore had sued his former partners for damages arising out of his expulsion from the earlier partnership and that he signed Exhibit R-2 to assist Allore in maximizing the apparent damages by indicating that Allore alone was suffering the losses arising from the setting up of a new practice. Mr Allore denies any such purpose and asserts that the purpose of the agreement was simply to “clarify the paper record” following the misrepresentations to the bank. Allore admitted in evidence, or during his testimony, that the agreement in question had something to do with the lawsuit, but I really do not understand his explanation as to what it had to do with the lawsuit.

The appellant interpreted the manner in which the office was run and in which its financial records were kept as indicators of the existence of a partnership. I have considered the often conflicting evidence given by the appellant and Mr Allore on these topics and I find that even if I accept the appellant’s version of the facts there is little which clearly points to a conclusion that the two acted as if they were carrying on business in common.

I am not prepared to accord much weight to the evidence of Mr Allore, a man who admitted that he misled the bank on the question of the existence of a partnership, and a man who, as well, prepared the misleading Federal Business Development Bank Chattel Mortgage. Equally, I am not prepared to accord much weight to the evidence of the appellant who joined in that charade when, taking his position at best, it was not at all clear that an agreement to practise in partnership existed.

Another pointer or indicator which leads me to doubt the appellant’s evidence was his allegation that he signed the June, 1977, agreement to assist Mr Allore in asserting an inflated claim in the latter’s lawsuit.

A partnership is a relationship founded on an agreement to carry on business in common. That agreement may be established by evidence of actions consistent with the existence of such a relationship.

The appellant did not assert that Mr Allore ever expressly agreed to practise in partnership. Rather, he took the position that the relationship evolved when circumstances entirely different from those in contemplation at the time the Counsel Agreement was signed arose and dictated a changed relationship involving a vastly greater degree of financial involvement on his part.

In reaching a conclusion when faced with viva voce evidence so conflicting and so unsatisfactory as was given here I must, I feel, rely most heavily on the documents prepared during the relevant period. Even if I accept the appellant’s changed circumstances thesis and thus ignore the Counsel Agreement, I must find that the Agreement of June, 1977, is plainly inconsistent with the existence of a partnership. I place considerable reliance on the June 1977, document which was, after all, signed by the appellant after the supposed new relationship evolved.

Equally, I rely heavily on an even later contemporary document, namely the letter, Exhibit R-8, of November 22, 1977. It was a letter written by the appellant to Allore and it asserts — it uses expressions such as, “If I am a pure employee . ..“ It makes no mention at all of any supposed new arrangement. The appellant was, at the time Exhibit R-8 was written, a lawyer and well able to analyze his own position and to assert the existence of the supposed new arrangement had one existed. He made no attempt to do so.

Further, and of considerable significance in my view, is the fact that in the agreement drawn on the appellant’s departure the appellant undertook to pay to Allore a portion of the billing on files which the appellant took with him for subsequent completion which portion represented work done on such files prior to the dissolution of the association between the appellant and Allore.

I am not unmindful of the evidence given as to the manner in which office accounts were kept and in which the appellant was remunerated. The accounts may well be unreliable. There is no evidence that any or all of the six bookkeepers who worked at the office during the period in question had any clear picture of the relationship.

The evidence as to how the appellant was paid is as consistent with Al- lore’s view of the relationship as with the appellant’s view of it.

On all of the evidence I am unable to reach the conclusion, on the balance of probabilities, that the appellant practised law in partnership with Allore. It seems far more likely that the appellant was simply an employee of Allore who, notwithstanding an employer-employee relationship, improvidently exposed himself to substantial liability.

The alternative point advanced by the appellant fails as well. There is simply no evidence of any agreement that each of the two was to bear his own expenses. Exhibit R-6, the Termination Agreement, contains none of the terms which one would expect if such a relationship existed.

For the foregoing reasons the appeals will be dismissed.

Appeal dismissed.