Rand Berg v. Minister of National Revenue, [1982] CTC 2558, 82 DTC 1571

The Chairman:—The appeals of Mr Rand Berg are from reassessments with respect to the 1976 and 1977 taxation years. By notices of reassessment dated March 19, 1979, the Minister of National Revenue added to the appellant’s farm income, the farm income reported by the appellant’s wife viz. $3,500 in 1976 and $4,200 in 1977.

In issue is whether there existed in the pertinent taxation years a reasonable basis for splitting the farm profits between the husband and wife.

Relying on sections 3 and 9 of the Income Tax Act, SC 1970-71-72, c 63, as amended, the respondent submitted that the appellant did not establish that a partnership agreement existed in fact or in law between his wife and himself.

Summary of'Evidence

The appellant was raised on a farm and took agricultural courses in plant sciences and animal husbandry. The appellant’s first holding of a half sec- tion of land registered in his own name was acquired in 1962 for the price of $16,000 which was borrowed from the Farm Credit Union for a term of 29 years at a 5% interest rate.

The farm operations at that time were mixed farming: grain and cattle raising. In 1962 the appellant’s assets were a $400 equity in the farm, a 1/2 ton truck on which $2,000 was still owing and 20 cows.

In 1963 the appellant married. His wife Norma, a bank teller at the Bank of Nova Scotia at a salary of $1,800 a year, brought to this marriage an amount of $200, household furnishings and 6 head of cattle which, at the time and subsequently, were branded with markings different from those of the appellant’s cattle (Exhibit A-4). At the time of marriage the couple opened a joint bank account into which farm income was deposited and from which expenses including mortgage payments on the farm and payments on the truck were made.

From 1963 to 1968 the appellant and his wife lived in a small three-room house which had no modern conveniences (Exhibit A-6). In 1968 the couple started to build a house but, owing to a crop failure and the consequential loss of income, only the basement was completed. The basement was simply covered over and the appellant, his wife and three children lived in the basement of the prospective home for some eight years. In 1972 Mr Ralph Ferguson, an uncle of the appellant’s wife, loaned her $10,000 to finish building the house. At about that time, a half section of land, contiguous with the appellant’s holdings, was open for bankruptcy bids. After discussion with her husband, it was decided that the $10,000 offered by Mr Ferguson be used to make a bid on the half section of land rather than completing the house. The said parcel of land was acquired for $25,000 and registered in the appellant’s name. The loan from Mr Ferguson and the $15,000 bank loan were repaid over the years from the couple’s joint bank account (Exhibit A-5).

From 1969 to 1972 both the appellant and his wife had to work part time to meet financial obligations. They nevertheless continued mixed farming of grain and cattle but also started to grow alfalfa seed. The complex process of sowing and reaping alfalfa seed, which required the use of leaf cutter bees for pollination, was learned from a neighbour and from the Department of Agriculture. The alfalfa seed business appeared to be more lucrative than other grains and the appellant and his wife decided to own their own leaf cutter bees and began the specialized cultivation of alfalfa seeds. By means of the third loan, the couple invested in one million bees in 1975 which now number 5 million. The formation of alfalfa seeds must be registered by the Department of Agriculture and must be pollinated yearly by means of bees for which several bee houses must be provided during the summer months. In the winter months, the bees must be kept at a constant temperature in a bee shed during the larvae and incubation process. The alfalfa seed, once reaped, is stored in metal bins (Exhibit A-9).

Along with her activities in relation to some 40 head of cattle and other grain crops, the apellant’s wife, who was a good, credible and knowledgeable witness, participated effectively in the alfalfa seed business, not only in caring for the bees but more particularly in the sale and marketing of alfalfa seed. She has an exceptionally sound business judgment and was a definitive asset to her husband in making a success of the family farming business. The question is whether the appellant’s wife was a partner in the appellant’s farm business.

Findings:

Counsel for the respondent’s position is that, for income tax purposes, the existence of a partnership is a legal issue and in the present instance there was, according to the respondent, no partnership agreement between the appellant and his wife in the strict legal sense in 1976 and in 1977.

Partnership under the Partnership Act of Alberta (to be found at Tab 13 of the appellant’s Book of Documents and Case Law) is defined in section 1, paragraph (d):

partnership means the relationship that subsists between persons carrying on a business in common with a view to profit.

Paragraph 4(c) of the Partnership Act of Alberta, to which counsel for the respondent also referred, reads.

(c) the receipt by a person of a share of the profits of a business is prima facie proof that that person is a partner in the business, but the receipt of the share or of a payment contingent on or varying with the profits of the business, does not of itself make the person receiving the share or payment a partner in the business . . .

It is common ground that the appellant was in the business of farming and that the presumption with respect to the appellant’s wife in paragraph 4(c) of the Partnership Act of Alberta is rebuttable. Nor is there any dispute that a written agreement is not essential for the existence of a partnership, providing that the declared intention of carrying on a business in common with a view to profit is clearly discernible from all the pertinent facts and surrounding circumstances. The respondent’s position is that the appellant and his wife had no intention of forming a partnership and there was no contractual intention of doing so at the time of marriage or at any subsequent time.

In support of this position, counsel for the respondent cited the Federal Court Trial Division decision in Robert Cornforth v The Queen, [1982] CTC 45; 82 DTC 6058. In that case, the appellant and his wife were qualified physiotherapists who claimed that a partnership existed between them in the practice of physiotherapy.

It was held that:

The taxpayer’s appeal was dismissed. The Court found that the prerequisites to a partnership, as set out in the Quebec Civil Code, had not been met, that no intention to or agreement to enter into a partnership existed and that despite the cumulative efforts of the husband and wife in the business, the wife’s contribution flowed from the marriage relationship and not from a partnership relationship. Therefore the taxpayer and his wife were not in partnership and the business income was properly that of the taxpayer.

Although the Quebec Civil Code is clearly not applicable to the issue in the appeals under review, the principles underlying the existence of a partnership herein are not essentially different from those of the Partnership Act of Alberta. Where I find a difference between the Cornforth case (Supra) and the instant appeals is in the facts.

While in both cases the wives gave invaluable help and assistance to their husbands in the conduct of their respective businesses, the treatment of the business income by the parties was very different in each case. Mrs Cornforth never filed an income tax return and was, for tax purposes, considered by the husband along with their children, as his dependants. Mr Cornforth consistently reported the income from his business as his personal income until the taxation years 1971 to 1976 inclusively for which Mr Cornforth was subjected to a net worth assessment.

It is during the course of the Department of National Revenue’s investigation and audit that the question of partnership first arose. Mr Cornforth, in a letter to the Department’s auditor, requested that the possibility of the existence of a partnership between his wife and himself be explored.

The Cornforths had no joint account or partnership account and the receipts from their practice were deposited partly in the appellant’s account and partly in the wife’s account. The cost of earning income was never ascertained and no evidence was adduced that Mrs Cornforth contributed in any way to capital or operational expenditures of the practice.

The assumptions on which the Minister based his assessment in the present appeals are:

1. No partnership agreement, written or otherwise, existed between the appellant and his wife.

I find that it is indeed unlikely that at the time of the marriage the pooling of the wife’s $200, the household furnishings and six cows with her husband’s assets was intended to be anything other than the formation of a family unit. The formation of a partnership may not even have been conceived at that time. That fact however does not, in my opinion, preclude the formation and the existence of a partnership within the definition of that term in the Partnership Act of Alberta at some future time during the marriage, even though the agreement may never have been formalized in writing.

2. The Minister’s second assumption is that the appellant’s wife did not contribute any substantial amount to the farming business.

The wife’s contribution to the farming business was more than the $200, furniture and six cows which she brought to the marriage. The evidence is that the couple’s only bank account was a joint account into which the wife’s income as a bank teller during the period of 1969 to 1972, as well as that of the husband were deposited and from which the farm’s operational expenses, carrying charges and the repayment of loans were made.

Mr Ferguson’s loan of $10,000 was made to the appellant’s wife. After hearing her testimony and being in a position to appreciate her business acumen, I have no difficulty in believing that it is the appellant’s wife who decided that the loan should be invested in acquiring an additional half section of land rather than completing the family home. There can be no question that the appellant’s wife contributed substantially to the expenses of the farming operations since her marriage with the appellant, even though she may not have received her share of farm income prior to 1973.

The Minister’s final assumption is:

3. The appellant’s wife had no expertise and was not actively engaged in the farming business.

I am not at all certain that there exist guidelines to help determine the degree of activity or expertise required before a taxpayer can be considered to be a bona fide partner. In the present instance, the appellant’s wife is a mother of three who looked after her children and carried on her household chores as well. These activities of course have no direct relationship with the farm operations.

However, her activities which she stated under oath she did daily, whether it be taking care of the cattle, looking after the bees, marketing the grain and alfalfa seeds, keeping farm records and accomplishing other farm chores, are indeed related to the farm operations and extend well beyond what is normally required or expected from an ordinary housewife and mother.

The appellant’s wife was very knowledgeable in all aspects of cattle and grain farming and was active in both. The detailed evidence she gave with respect to all the phases of growing alfalfa seeds was comparable to that of an expert. She testified that she also looked after the marketing of alfalfa seeds as well as other grains.

On the basis of the evidence, I am satisfied that the appellant’s wife was not only knowledgeable but active in all aspects of the farming operations.

The legal question is whether there existed a contractual intention on the part of the appellant and his wife to form a partnership. Although there may not have been any such intention in the early days of their marriage, the comportment of the appellant and his wife in the operation and financing of the farming business throughout the marriage went beyond the ordinary requirements of a family unit and had the earmarks of a veritable partnership.

The purchase of the second half acre of land, the decision to specialize in alfalfa seed crops in 1969, the financing of the first million bees and the appellant’s wife’s knowledge and activity in marketing their new product come very close to meeting all the requirements of a partnership. Indeed both the appellant and his wife were publicly recognized as growers of alfalfa seed and forage. In the 22nd Report on Farming dated January 1982, the following is to be found:

Rand and Norma Berg have been growing alfalfa for seed and forage for the past 15 years on their section of land near Millicent, Alta, where last year they pollinated about 350 acres of certified Rambler and Canada 1.

When the appellant’s wife’s share of the relatively small farm income was determined and included in her 1973 tax returns, the contractual intention of the appellant and his wife to form a partnership was, in my opinion, formally expressed and at least since that time a legal partnership existed between them. The Minister of National Revenue did not question the existence of a partnership between the husband and his wife for the 1974 and 1975 taxation years.

For these reasons, judgment will go allowing the appeals and referring the matter back to the Minister for reassessment on the basis that the appellant has shown that a partnership agreement existed between his wife and himself in the 1976 and 1977 taxation years.

Appeal allowed.