George P Goodrick v. Minister of National Revenue, [1982] CTC 2673, 82 DTC 1681

The Assistant Chairman:—The appellant appeals from an income tax assessment with respect to his 1978 taxation year. He was, for a period of time commencing in February 1977 and terminating in January 1978, in partnership with A Peter Sawler, carrying on a business known as “Adventure Sports”. There was no written partnership agreement, nor was there an agreement as to the sharing of profit and, consequently, by the operation of the Partnership Act, RSNS 1967, c 224, the profit sharing ratio was 50-50.

The business commenced and was carried on, but soon differences arose between the partners, with the result that a dissolution agreement (Exhibit R-1) was entered into between the partners on January 12, 1978. The unaudited financial statements for the period of the partnership operation showed a net profit of $21,594. The appellant made a few adjustments to that figure, which adjustments were shown on a statement called “T1 Information — 1978”, and ended up with his share of that profit as $16,435. One of these adjustments was the adding back to him of his wife’s wages from the operations. His income tax return for 1978 reflected as his income from the partnership the sum of $16,435.

The Minister looked into the partnership — apparently on a desk audit basis as, by the time of reassessing the appellant, no one had been to see him — and adjusted his income from the partnership by adding to it the sum of $15,488 so that all the income of the partnership was assessed in the hands of the appellant. The T7W-C which accompanied the Notice of Reas-

sessment in this respect stated: “Add: Additional Partnership Income allocated to you $15,488”.

The appellant was active in the partnership business. Mr Sawler, while not nearly as active from a time point of view, did spend time virtually every day at the business. The appellant could not understand why he had been assessed Mr Sawler’s share of the partnership profit and so objected and, following confirmation of the assessment, appealed to this Board.

The issue comes down to the question of why the amount which one would assume would be Mr Sawler’s income should be added to the appellant’s income. Counsel for the Crown relied on paragraph 96(1)(f) of the Income Tax Act and the agreement dissolving the partnership.

Paragraph 96(1 )(f), excluding the irrelevant portions, reads as follows:

96. (1) Where a taxpayer is a member of a partnership, his income .. . for a taxation year.. . shall be computed as if

(f) the amount of income of the partnership for a taxation year. . . for the taxation year of the taxpayer in which the partnership’s taxation year ends to the extent of the taxpayer’s share thereof.

Reference was made to the agreement at paragraph 1 which reads as follows:

The Vendor hereby sells, transfers and assigns and the Purchaser hereby buys all the Vendor’s interest in the assets of Adventure Sports, including but not so as to limit the generality of the foregoing all of the goodwill, business name, stock-in- trade, fixtures, furniture, equipment, vehicles and accounts receivable.

Note was also made of a non-compete clause. No reference was made to any other provision of the Income Tax Act. Counsel’s submission was that the concluding words of paragraph 96(1 )(f), “to the extent of the taxpayer’s share thereof”, and paragraph 1 of the agreement make all the income of the partnership the income of the appellant. The contention was that all of the vendor’s interest in the assets of Adventure Sports were sold to the appellant and one of those asets was the vendor’s income and so the vendor’s income from the partnership became the appellant’s income. Counsel stated, when asked, that at the beginning of the first fiscal year, based on the provincial Partnership Act, one would say that the two partners would share the profit equally. While submitting that at the year-end, based on his interpretation, all the profit was to be taxed to the appellant, he could not point to any provision in the Income Tax Act which would, in the circumstances, say Mr Sawler’s share is not his income. On the same interpretation, could one not also say that all of the profit of the partnership should be used to determine Mr Sawler’s income and ultimately his tax. Neither the word “vendor” nor the word “purchaser” appears in paragraph 96(1 )(f). The effect, according to counsel, is that Mr Sawler sold or assigned his income so that that sum was not taxable to him but became taxable to the appellant. Yet subsection 56(2) of the Income Tax Act reads as follows:

(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

It would appear that, in the circumstances, counsel says the result is different from that which would flow from subsection 56(2).

As I view the matter, Mr Sawler could only sell and did only sell his interest in the partnership assets as clause 2 of the said Agreement commences “The sale and purchase of the said assets”. It does not say “said assets and his share of the profit”. Is the partnership income a tangible asset like accounts receivable or equipment, or is it just a figure computed according to the provisions of the Income Tax Act and good accounting principles?

I am of the view that not only could Mr Sawler not sell or assign his share of the profit to anyone, but he did not sell or assign and likewise the appellant did not buy Mr Sawler’s “1978 partnership income”.

In the result judgment will go allowing the appeal and referring the assessment back to the respondent for variation to reduce the income previously assessed the appellant by the sum of $15,488.

Appeal allowed.