Cfto Tv Limited v. Minister of National Revenue, [1980] CTC 2052, 80 DTC 1066

The Assistant Chairman:—When CFTO TV Limited (hereinafter called the “appellant”) filed its income tax return for each of its fiscal years 1971, 1972, 1973 and 1974, on the statement entitled “Reconciliation of Net Income per Financial Statements with Taxable Income” to arrive at its taxable income it deducted in each year an amount under the caption “Share of Loss of CKLW TV partnership”. In addition, in the fiscal year 1974, it showed and reported a capital gain of $3,352,485, with a resulting taxable capital gain of $1,676,243, on the sale of its interest in that partnership to its former partner. The respondent, on assessing each year, disallowed the loss claimed by adding to the appellant’s taxable income the amount of the loss. In addition the respondent took the position that in the 1974 year there was no Capital gain (and consequently no taxable capital gain) and thereby reduced the quantum of taxable income by the amount of taxable capital gain previously reported. The appellant objected to the disallowance in each year of the partnership loss. The assessments were confirmed by the respondent on the basis that the appellant’s share of the loss in the partnership was nil. Hence the appeal.

It should be noted that the appellant was incorporated as Baton Broadcasting Limited and, for part of the period to which these reasons refer, it was known by that name. However, around 1971, its name was changed to its present appellation. These reasons are prepared on the basis that its name was always CFTO TV Limited.

In the 1960’s, if not earlier, a radio station and a television station were operated from the City of Windsor, in the Province of Ontario, using the call letters CKLW and CKLW TV respectively. Those stations were owned by an Ontario company known as Western Ontario Broadcasting Company Limited (hereinafter referred to as “Western”). Apparently in late 1960 the Canadian Radio Television Commission (CRTC) issued a regulation that there could not be foreign ownership of more than 20% or 25% in a radio or television station. In the case of Western there was foreign ownership greatly in excess of 25% with the result that, within the time frame of the CRTC regulation, Western had to dispose of those two stations. To this end officers of Western approached John Bassett who was and had been the Chairman of the Board and chief officer of Baton Broadcasting Incorporated (hereinafter referred to as “Baton”) since its incorporation in about 1960. Baton was the parent of the appellant. They endeavoured to have Mr Bassett buy both the radio and television business, but he was only interested in television. The situation in the Windsor area at that time was unique. In the words of Mr Bassett: “there was no cable television and the American producers considered the Windsor area as part of the Detroit market, which was the fifth largest in the United States.” Mr Bassett considered that the opportunity to own a television station in Windsor presented a challenge to his company. He discussed the possibility with a friend and business associate of his who was a director of CFTO TV, and also with an officer of Maclean-Hunter Limited (hereinafter referred to as “Maclean”), a company also in the communications field operating out of the City of Toronto in the said province, and the two agreed that their companies would take over CKLW TV if they could get the approval of the CRTC. An agreement between the appellant and Maclean on the one hand and Western on the other was entered into in September 1969 and an applica- tion was duly made to the CRTC to have the television licence transferred to the appellant and Maclean. The application was opposed by the Windsor Star, a local newspaper, and its contention was that the station should be a station operated by the Canadian Broadcasting Corporation (CBC). The CRTC orally indicated that possibly the purchasers should be CFTO TV, Maclean and the CBC. Maclean’s position was that it did not wish to be a partner of the CBC. CFTO TV’s position was that, while it preferred to be associated with Maclean, it thought it could proceed with the CBC. In the spring of 1970 an application was made for the sale of CKLW TV to CFTO TV and a company to be incorporated who would own the interest on behalf of the CBC. The CRTC granted a five-year licence to operate CKLW TV in Windsor to CFTO TV and St Clair River Broadcasting Limited (hereinafter referred to as “St Clair”), a wholly owned subsidiary of the CBC. The business was to be carried on in partnership and CFTO TV was to have a 75% interest and St Clair a 25% interest. According to the licence, there was to be a six person board of management, on which St Clair was to have two members. Shortly after the granting of the licence, an agreement was entered into between the appellant and St Clair (Exhibit A-5). Of course, in the Registry Office of the County of Essex on July 3, 1970, there was filed the appropriate document pursuant to The Partnership Registration Act, RSO 1960, c 289, showing that there was a business being carried on in the name of CKLW TV, a business in partnership, and the partners were the appellant and St Clair. The television station CKLW TV was purchased by the partnership for the sum of (approximately) $5,000,000, of which St Clair paid $1,250,000 cash as did the appellant, and the appellant gave a note for the balance to the vendor, which note called for interest. A bill of sale from the vendor to the partnership was given with respect to all the chattels. Likewise the vendor assigned to the partnership all contracts, trade accounts receivable, etc it had with respect to the television business and finally there was a conveyance to the partnership of all real property owned by the vendor. An Order from His Honour Judge Zuber of the County Court of the County of Essex was obtained exempting the sale by the vendor to the partnership from certain provisions of The Bulk Sales Act, RSO 1960, c 43.

Since the assessments were on the basis that there was no partnership in which the appellant could suffer losses, counsel for the appellant endeavoured to establish that the appellant was in a partnership with St Clair for the purpose of carrying on business with the end in view of making a profit. In addition to the above documentation, counsel for the appellant called the following witnesses: John Bassett, as mentioned the chief executive officer of the appellant since its incorporation; E A Goodman, QC, who since incorporation has been a director of CFTO TV and its general counsel and the counsel who represented it on its application to the CRTC with respect to the CKLW TV licence; Michael Wright, FCA, a partner in Clarkson Gordon—which firm was the auditor for CFTO TV and the partnership CKLW TV (Mr Wright was the partner in charge of the CFTO TV audit while initially the audit of the partnership was done by their Windsor office); Gordon Ashworth, CA, who was a director of CFTO TV and, after the partnership agreement was signed, the head of the Board of Management of CKLW TV in Windsor; and George Quinn, CGA, who was the manager of Taxation and Equity Investments for the CBC and an officer and treasurer of St Clair from August 1970 until that company was dissolved in 1976. In summary fashion, in the individual opinion of each of those witnesses, the appellant was in partnership with St Clair in the operation of CKLW TV.

In June of 1974 the partnership came to an end when St Clair purchased all of the interest of the appellant, and to this end the parties signed an agreement dated June 1, 1974. At about the same time, the appellant and St Clair gave an indemnity agreement to each other. A dissolution of partnership agreement was signed by each dated June 27, 1974. The auditors’ report for the partnership for each of the fiscal years 1971, 1972, 1973 (ending August 31) and March 31, 1974, was filed as an exhibit. Each was prepared on the premise that the appellant and St Clair were in partnership and each showed the allocation of the loss in the profit-sharing ratio of the partnership agreement. Minutes of a meeting of the Board of Directors of the appellant of June 29, 1970, reflect the carried motion authorizing the appellant, in partnership with St Clair, to acquire the assets of Western. At the same meeting, another matter which was carried read in part as follows:

1. That the Company do form a partnership with St Clair for the purpose of carrying on business under the terms and conditions of the partnership agreement.

There was also filed as Exhibit A-28 a report of the Auditor General of Canada to the CBC and the Secretary of State on the examination of the accounts and financial statements of St Clair for the year ending March 31, 1971. Without quoting the report in its entirety, the Auditor General stated:

. . . in my opinion

(a) proper books of account have been kept by the Company .. .

One asset shown of St Clair was:

Investment in CKLW-TV partnership, at cost

Less: Share of accumulated loss on partnership operations.

The respondent in his reply to the notice of appeal, insofar as the “lossess” are concerned, stated as follows:

7. The Appellant has been assessed by the Respondent on the basis that the arrangement between the Appellant and St Clair was a partnership but that the Appellant’s share of the loss of the partnership was nil. However, in this appeal the Respondent takes the position that the arrangement between the Appellant and St Clair was not a partnership. The Appellant merely lent monies to St Clair on interest plus a share in profits, if any, of the venture. The maximum period for which the monies were to be thus advanced was five years commencing May 31, 1970. The monies advanced by the Appellant were to be returned by St Clair, and were in fact returned, with interest.

9. The Respondent submits that the Appellant’s agreement with St Clair did not amount to a partnership. The Appellant lent monies to St Clair which were to be returned, and were in fact returned, with interest thereon. The Appellant did not incur any loss on this transaction and therefore in computing its income for the taxation years under appeal is not entitled to deduct any portion of the losses in the operation of CKLW Television which were incurred solely by St Clair.

10. In the alternative, the Respondent submits that the Appellant’s arrangement with St Clair was merely an adventure in the nature of trade with the possibility of making a profit but in no circumstances could the Appellant incur a loss and did not in fact incur a loss and therefore is not entitled to make any deduction on that account in computing its income for the taxation years under appeal.

11. In the alternative, if the agreement between the Appellant and St Clair amounted to a partnership, which is not admitted and is denied, the Appellant’s share of loss of the partnership was nil and therefore under Section 6(1)(c) of the Income Tax Act, for the 1971 taxation year, and under paragraph 96(1)(g) of the Income Tax Act, for the 1972, 1973 and 1974 taxation years, the Appellant is not entitled to make any deduction on account of loss of the partnership in computing its income for those years.

There is no doubt that, if the respondent does not establish one of the positions set forth in those paragraphs, the appellant will be allowed those losses as there was a partnership. The real position of the respondent is that there was no partnership between the appellant and St Clair, but rather just a loan. The respondent also took two other positions: if there were a partnership, there was no provision in the agreement that the appellant would share the losses and so it had none; and, it was an adventure in the nature of trade with the possibility of profits but in no circumstances could it incur a loss.

It seems expedient to dispose of the two minor positions first. How can the relationship be an adventure in the nature of trade when there is no chance of incurring a loss? The mere fact of an adventure in the nature of trade is itself indicative of the possibility of making a profit and the risk of suffering a loss. As to there being no provision in the partnership agreement as to sharing losses, there is a provision as to sharing profits. That is clear and unequivocal. Of course, a partnership as per section 2 of The Partnerships Act, RSO 1970, c 339, states:

... is the relation that subsists between persons carrying on a business in common with a view to profit . ..

There is no specific provision in the partnership agreement that St Clair Shall bear all operating losses, nor is there a similar provision stating the appellant shall bear none of the operating losses. Section 24 of the said Act would clearly appear to cover this point:

24. The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:

1. All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm.

The result is that these two contentions are rejected. It is thus necessary to decide whether or not the relationship between the so-called partners was that of lender-borrower.

The respondent called no evidence but, in his cross-examination, directed his attack to the risk of loss, the finite provisions in the partnership agreement as to the terms of the partnership, the purchase price to be paid, and the notes to the financial statements. To all witnesses the suggestion on reading of the partnership agreement was that the appellant really took no risk of loss as the partnership would only continue to June 1, 1975, unless terminated earlier and the price for the purchase by St Clair of the appellant’s interest would be the amount advanced by the appellant together with interest together with the appellant’s share of profits. It was suggested that, with projections of revenue by the partnership (Exhibit A-25), for three years losses were expected and it was noted that the station, while owned by the vendor, had losses the last two years. The answer to this was that it was hoped that, with good management, an aggressive sales force, and the possibility of having the CRTC regulation changed for Windsor, a profit could be generated. While it was not suggested that St Clair of its own had the wherewithal to pay that price, the agreement, which was also signed by the CBC, contained the following clause:

19. CBC covenants and agrees as follows:

(ii) That it will make application for Governor-in-Council approval of the acquisition of such further shares in St Clair as will enable St Clair to fulfil its obligation under the provisions of these presents and that CBC will use its best efforts to obtain such Governor-in-Council approval.

which the respondent submitted was virtually an assurance by the CBC that St Clair would have the funds. It was countered that there was no assurance that the CBC would be granted such funds. Even Mr Quinn, the treasurer of St Clair, stated that they were not certain they could get the funds to buy. When St Clair’s losses mounted, the possibility of St Clair going bankrupt was discussed by some management.

The terms of the partnership and the purchase arrangement were pointed out as being indicative of no partnership. It is noted that a television licence was granted for only five years and the decision of the CRTC contains the following sentence:

The approval is further conditional upon the CBC entering into an agreement to become owner of the station prior to the expiration of the licence.

All financial statements of the appellant had notes referable to the CKLW TV partnership and, subject to amounts, the note for the 1971 year would appear to be typical. It reads:

4. Investment in CKLW-TV

The company has a 75% interest in CKLW-TV which was acquired at a cost of $3,750,000 US which was satisfied in part by the issue of $2,500,000 US 9% promissory notes due May 31, 1975 (note 7).

By agreement St Clair River Broadcasting Limited (St Clair), a subsidiary of the Canadian Broadcasting Corporation, must purchase the company’s interest in CKLW-TV prior to May 31,1975. The agreement provides for a selling price equal to the aggregate of the company’s investment in CKLW-TV at cost plus accrued interest and the company’s share of any accrued profits to the date of sale.

The funds required by St Clair to purchase its 25% interest in CKLW-TV were obtained by the Canadian Broadcasting Corporation from the Treasury Board. The Canadian Broadcasting Corporation has undertaken to use its best efforts to obtain from the Treasury Board the funds necessary for the purchase of the company’s interest.

The operating losses of CKLW-TV since the date of acquisition amounted to $2,435,000 and total losses after interest expense and extraordinary items amounted to $4,115,000.

In addition the company and St Clair have jointly and severally guaranteed bank loans made to CKLW-TV in the amount of $1,217,000 at August 31, 1971. Upon the purchase of the company’s interest by St Clair, the company will be released from its obligation under such guarantee.

Because this investment is not of a permanent nature the company’s 75% interest in the financial position and the operating results of CKLW-TV is not incorporated in these financial statements on the equity method and this investment is shown at cost plus accrued interest thereon.

The suggestion was that the loss was not claimed and the purchase was assured. The reply was that the purchase price had to be considered so that the loss had to be offset by the income in the purchase price. That position was taken as that was the agreement but the purchase was not assured. The appellant admitted that the interest due on the note to the vendor was paid by St Clair and not by it and this was explained on the basis that if the appellant paid it, when and if the purchase of its shares was made, St Clair would have to pay interest on the interest the appellant paid.

The appellant’s first position was that, since the respondent at the hearing was taking a position different from the one taken at the time of making the assessment, the onus is on the respondent to prove his position is correct, not on the appellant to prove the respondent’s position is incorrect and, in support thereof, relied on the well-known case of MNR v Pillsbury Holdings Limited, [1964] CTC 294; 64 DTC 5184. I agree with the appellant’s position. Counsel also referred to the cases of Lois Hollinger v MNR, [1972] CTC 592; 73 DTC 5003, and Northern Sales (1963) Limited v MNR, [1973] CTC 239; 73 DTC 5200, both decisions of the Federal Court, Trial Division.

In the former case Noël, ACJ, at 600 and 5009 respectively, stated with respect to partnership as follows:

A partnership, and this applies to the civil law as well as to the common law, is essentially a contractual relationship between two or more persons. The contract is usually in writing but need not be so. There must be a business carried on and, of course, this is what we have here. Each partner usually contributes either property, skill or labour but this is not essential and a partner may be a passive one who, such as here, merely supplies capital. There must be some arrangement for division of profits and usually an arrangement for the sharing of losses, although this also is not essential.

and

It is possible that, in some cases, the holding of property in joint tenancy, tenancy in common or other form of joint ownership, may not in itself create a partnership. However, when there is a clear business operation conducted and a receipt of a share of profits such as here, there can, in my view, be no question that the amounts received by the appellant are income from a business and not from property.

With respect to the contention that there was no partnership in the Northern Sales case, Collier, J at 245 and 5205 respectively stated as follows:

The appellant relies on the fact there was no contribution of capital, no common management, no common assets, no common facilities, no common bank account and no common firm name.

In my view, it is not necessary to have the above features for there to be a partnership, and conversely the absence of the features outlined, or any of them, does not necessarily lead to the conclusion there was no partnership. I quote from Lindley at page 65:

. . . As will appear more clearly hereafter, the main rule to be observed in determining the existence of a partnership, a rule which has been recognized ever since the case of Cox v Hickman, is that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. Although this principle is not expressed in the Act it is still law.

Counsel for the appellant reviewed all the evidence in substantial detail, pointing out in effect that everything indicated a partnership and stressing that not only was the relationship between the partners an arm’s-length agreement but also one of the partners was created by the Parliament of Canada and audited by the Auditor General of Canada. Then of course in 1974 there was the purchase by St Clair of the appellant’s interest. Was there a need for such a purchase if the relationship were only borrowerlender? While it was not stated by the appellant, as I recall, it would seem that, if one ignored all the agreements, documents, etc indicating a partnership to which St Clair was a party and were to hold the relationship was in reality borrower-lender, considering who in effect owned St Clair, one would virtually be suggesting that St Clair was party to a sham.

Counsel for the respondent admitted that the business has losses and there is no dispute as to the quantum of them. However, one must look at the agreement, the other evidence and the entire period to put all facts in their proper perspective in order to come to the correct conclusion, which he contends is borrower-lender. In this respect he contended that the matter should be approached as stated by Megarry, J in the case of Inland Revenue Commissioners v Church, [1974] 3 All ER 529 at 549:

Before considering any further the substantive law established by the authorities, I propose to turn to the question of evidence: for in determining the nature of the payments I must decide what is admissible for the purpose. As a matter of principle, I cannot see on what ground it would be right on tax questions to exclude all evidence of negotiations between the parties or other matters extrinsic to the documents that create the contractual obligation. In determining what is the true meaning of the contract between the parties, no doubt many such matters may be inadmissible. But although the true construction of the bonds which bind the parties to each other is a factor, and a very important factor, in determining their liability to tax, it cannot be decisive. The parties are at liberty to make whatever bargain they please within the law. I see no reason why they should not, as a matter of contract, bind themselves to each other to treat a capital payment as if it were income or an income payment as if it were capital. But they have no power to alter the law or to bind the revenue authorities. If they strike a bargain for making a payment of an income nature within the taxing Acts and also agree that the obligation to make this payment is to be imposed by a written contract which not only binds them to treat the payment as being a capital payment but also does all that skilled drafting can do to give it a capital nature, then I do not think the parties can point to the resulting product of pluperfect draftsmanship and say to the inspector of taxes: “That is conclusive: you can look no further in determining the tax liability of either of us.’’ For the purposes of taxation, the question is always what is the true nature of the payment, paying due respect to the contractual obligations of the parties, on their true construction, but not according them conclusive effect.

Many references were made to “Lindley on Partnership” to show what could be a partnership and to show what is not a partnership. At p 68 the following paragraph was referred to:

But it does not follow that each of several persons who share profits and losses has all the rights which partners usually have. For example, a person may share profits and losses and yet have no right actively to interfere with the management of the business; or he may have no such right to dissolve as an ordinary partner has; or he may have no right to share the goodwill of the business on a dissolution; and other instances of restricted rights may be suggested. What in any given case the rights of a particular partner are depends on the agreement into which he has entered; but unless the word “partner” is to be deprived of all definite meaning its proper application to persons who share profits and losses in the sense referred to can hardly be questioned.

But an agreement to share profits and losses may not involve an obligation to make good all losses, eg, when an agent for sale shares the profits and losses made by his sales. The meaning may be only that he is to be paid by a share of profits, the losses of one year being deducted from the gains of another; and if this be the meaning, he will not be a partner with the person employing him.

Also at p 71:

CONTRACTS OF LOAN COMPARED WITH CONTRACTS OF PARTNERSHIP WITHOUT COMMUNITY OF LOSS

The true effect of such a complex agreement would it is apprehended, be to entitle each of the partners to a share of the excess of the returns over the advances, while some of the partners would be entitled to be indemnified by the others for all losses beyond the advances. If this were not the result of the agreement, and if the persons indemnified were indemnified not only against losses beyond the advances, but also against the loss of the advances themselves, the contract would lose its character of a contract of partnership, and become a contract of loan.

Also at p 72:

Whether a person advancing money and sharing profits is a creditor or a dormant partner is often a very difficult matter to determine, and can only be decided by a careful study of the whole agreement between the parties to the transaction, and especially by examining what rights are conferred on or taken from the person making the advance. The right of a lender is to be repaid his money with such interest or share of profits as he may have stipulated for; and his right to a share of profits involves a right to an account and to see the books of the borrower, unless such right is expressly excluded by agreement. If, however, his advance is risked in the business, or forms part of his capital in it, he ceases to be a mere lender, and becomes in effect a dormant partner, but the fact that he is to have the management of the business does not necessarily make him a partner.

The respondent referred to many other cases to support his contention and an important one was No 47 (sometimes referred to as Mr W) v MNR, [1952] CTC 209; 52 DTC 1150. The issue in that case was whether or not the wives and daughters of former partners were partners in the present partnership. Mr Justice Cameron held that they were partners. Respondent’s counsel referred to a portion of the Reasons and the appellant’s counsel also referred to those Reasons. The portions referred to start by quoting from Lindley and continue:

The effect of sharing profits as prima facie evidence of partnership was considered by the Court of Appeal in the case of Badeley v Consolidated Bank, 38 Ch D 238, pp 250-258, and was there explained to be that if all that is known is that two persons are participating in the profits of a business, this, unless explained, leads to the conclusion that the business is the joint business of the two and that they are partners. But if the participation in profits is only one among other circumstances to be considered, it is wrong then to say that the participation in profits raises a presumption of partnership which has to be rebutted by something else; in such a case call the circumstances must be considered in order to ascertain the real intention of the parties before any conclusion is drawn.

In this case there are circumstances other than the mere participation in profits and therefore it is necessary to consider all the circumstances in order to ascertain the real intention of the parties before reaching my conclusion. One of such circumstances, and I think a very important one (although not by itself conclusive), is the fact that in the agreement of November 18, 1943, and in all the subsequent agreements, the word ‘partners’ is used not only in regard to “X”, “Y”, “W” and “T”, but also in regard to their respective wives and daughters. The agreements were prepared by counsel of very great experience and it must be assumed that in using that term they understood the full legal effect of designating their wives and daughters as “partners”, and the liabilities which, as partners, they would incur for partnership debts under RSO 1937, c 187, s 10. In the agreement of October 2, 1944, by which Mrs “X” entered the firm, there is a recital in which she stated her willingness to become a partner” and render herself responsible for the liabilities (of the firm) in consideration of a share in the profits thereof”. Then, by s 8 thereof, she could determine her interest in the partnership by three months’ notice, “and shall not be responsible for the liabilities thereof incurred after the date upon which the notice takes effect”. Similar provisions are found in the other agreement of October 2, 1944, by which the daughters of “X” entered the firm, and while in neither agreement is there any express covenant by Mrs “X” or the daughters of “X” to be liable for such liability, I have no doubt that if losses did occur they would be liable therefor as partners and in view of the recitals I have mentioned. It follows, therefore, that not only are the wives and daughters of “X” and “Y” entitled to share in the profits, but they are also liable for the losses incurred in the operation of the business. It is of no consequence to suggest that in this type of business losses are not likely to occur; they might occur and if they did, the wives and daughters would be liable therefor.

One of the points urged on me for the respondent is that you do not as a rule constitute or create or prove a partnership by saying that there is one, or merely by production of a document called a partnership agreement and in which the parties are referred to as partners, and with that submission I am in general agreement (CIR v Williamson (1928), 14 TC 335 at 340; Dickinson v Gross (1927), 11 TC 614).

Other cases referred to were: General Construction Co Ltd v MNR, [1959] CTC 300; 59 DTC 1169; No 623 v MNR, 22 Tax ABC 44; 59 DTC 266; and Edward Ulrich v MNR, 41 Tax ABC 405; 66 DTC 537.

Considerable reference was made to the “risk of loss” to the appellant suggesting that there was really none and, if there were a risk, it was just the normal risk of a lender that the borrower may go bankrupt. Also the sale agreement did not include a share in the goodwill of the business. The price was the same whether the business was a success or a failure. Considerable reference was made to the financial statements and manner of showing interest. Also there was the management by the appellant at a fee. It was stressed that there was no real hope of a profit.

The respondent contended that there was always risk of loss to the appellant as there was no assurance the CBC could get the money to buy and St Clair really was nothing more than a shell. As to the hope of a profit, the appellant it appears would have gone into the same venture with Maclean and on the same basis and there always was a five-year limit on the television licence. As to the selling price, is it not up to the parties to agree as they see fit in determining it. That is what arm’s-length parties did in this case. The losses were deducted in computing the appellant’s income but were offset by accrued capital gain.

As I view this case, while there are some indicia that the relationship between the appellant and St Clair could be that of lender and borrower, I am convinced that the real relationship is that of a partnership. The parties are really competitors—a private broadcaster and a public broadcaster, one partner a wholly-owned subsidiary of the CBC. I also consider all the formalities the arm’s-length parties followed and then consider the observation of Mr Justice Cameron in the Mr W case (supra)’.

The agreements were prepared by counsel of very great experience and it must be assumed that in using that term they understood the full legal effect of designating their wives and daughters as ‘partners’, and the liabilities which, as partners, they would incur for partnership debts under RSO 1937, c 187, s 10.

To hold that the relationship was lender and borrower is tantamount to saying that a subsidiary of the CBC was out to protect and give a benefit to the appellant. In addition when the appellant with Maclean first applied to the CRTC to obtain its approval of the purchase of CKLW TV, the CBC was not in the picture. It was the CRTC who made that proposal and it was the CRTC who suggested the partnership, the profit-sharing ratio and it was the CRTC who set the purchase date by St Clair. As mentioned, all things being considered, I hold that the appellant was in partnership with St Clair in the operation of CKLW TV in Windsor.

This however does not conclude the appeal. Paragraph 12 of the reply to the notice of appeal reads as follows:

12. In the alternative, if the amounts claimed by the Appellant in paragraph 7 of the Notice of Appeal are held to be deductible, the Appellant (sic) submits that the amount of the taxable capital gain on the disposition of its interest in the partnership pursuant to Sections 38 and 40 and subsection 100(2) of the Income Tax Act was $3,042,522.50 and should be included in computing its income for the 1974 taxation year.

It is to be recalled that when the appellant claimed its share of the operating losses of the partnership as a deduction in computing its income in 1971 to 1974 inclusive, it also reported a 1974 taxable capital gain of $1,676,243 in connection with the sale of its interest in CKLW TV to St Clair. It is also to be recalled that the respondent disallowed those losses and assessed on the basis that the appellant had no taxable capital gain. Now the respondent is contending that he may establish what the taxable capital gain is in 1974 and (assuming it is greater than $1,001,643—the loss disallowed and now allowed in 1974) I should allow the appeal and remit the assessment to the respondent to vary the assessment to tax a taxable capital gain in excess of $1,001,643. That is, in effect, allow the respondent to appeal from his own assessment. The appellant’s position clearly was that if the respondent wishes to increase tax he may do what is permitted by the Income Tax Act if he can satisfy the requirements of the Income Tax Act. The appellant continued that he did not appeal so that the respondent could increase his tax but rather he appealed so that this Board would direct the respondent to reduce his tax. The appellant advised that, if the Board does not increase the tax for 1974, it will not challenge the quantum of the capital gain.

There are several cases which have been faced with the same problem and all have, with one possible exception, taken the position that the tax assessed a taxpayer by the Minister cannot be increased on an appeal. In Louis J Harris v MNR, [1964] CTC 562; 64 DTC 5332, the Exchequer Court decision, Thurlow, J (as he then was) stated at 571 and 5337 respectively:

I do not think, however, that this is the correct way to deal with the matter. On a taxpayer’s appeal to the Court the matter for determination is basically whether the assessment is too high. This may depend on what deductions are allowable in computing income and what are not but as I see it the determination of these questions is involved only for the purpose of reaching a conclusion on the basic question. No appeal to this Court from the assessment is given by the statute to the Minister and since in the circumstances of this case the disallowance of the $775.02 while allowing $525 would result in an increase in the assessment the effect of referring the matter back to the Minister for that purpose would be to increase the assessment and thus in substance allow an appeal by him to this Court. The application for leave to amend is therefore refused.

Mr Justice Cattanach, in the appeal of Vineland Quarries and Crushed Stone Limited v MNR, [1970] CTC 12, 70 DTC 6043, at 15 and 6045 respectively, on the same point stated:

It was also the position taken by Counsel for the appellant that the Minister cannot appeal from his own assessment with which position I am in complete agreement. He said that when the Minister seeks to amend his Reply to the Notice of Appeal to raise an alternative plea, he is, in effect, launching a cross-appeal to his own assessment. I am not in agreement with this latter submission.

Other cases were referred to on this point but they all appear to come to the same conclusion. Counsel for the respondent pointed out that these cases pertained to one year whereas the instant case refers to four years. The one case which might suggest that this Board (in that case the Exchequer Court) could increase tax was Ralph K Farris v MNR, [1963] CTC 345; 63 DTC 1221, a decision of Mr Justice Kearney. In that case the Minister had added a sum to the appellant’s income for 1952, namely $55,393.10. After the appeal and the reply had been filed the respondent received an order from the court. Kearney, J referred to that motion and the effect at trial as follows:

More than two years after the respondent’s reply, namely, on February 2,1962, pursuant to an order granted by Dumoulin J, the Minister filed a further reply to the appellant’s notice of appeal wherein, apart from reiterating the allegations of the Original reply, he sought to include as additional taxable income a sum of $45,754.60 which, allegedly, the appellant received in 1952 as profit as a result of trading operations in the shares of Charter Oil Co Ltd which he had acquired in 1950.

I might here add that I think, for reasons which appear later, I do not propose to deal with the aforementioned item on its merits nor with the appellant’s defense that the Minister erred in assuming that the appellant obtained the said shares for nothing, whereas he had been given valuable consideration for them. The respondent in the aforesaid reply declares that in calculating the appellant’s income he had erred in not including the said amount and consequently he prayed that the appeal be allowed and the so-called reassessment of October 3, 1958, be referred back to the Minister for reassessment so as to include as income the further sum of $45,754.60.

It is not to be assumed from this prayer that if I were to grant it the appellant would be freed from liability in respect of the sum of $55,393.10 previously considered.

In my opinion, the item of $45,754.60 is not properly before this Court for adjudication on the merits. The aforesaid item is not included in any so-called reassessment and is not the subject matter of the appellant’s notice of appeal. Counsel for the respondent suggested that the Minister’s first and second reply were something in the nature of a cross-appeal. There is no provision that I know of in the Act whereby the Minister is empowered to file a cross-appeal from his own assessment. A cross-appeal lies to this Court only from a decision of the Income Tax Appeal Board upon notice given to the opposite party as provided in s 99(1a) of the Act which reads as follows:

If the respondent desires to appeal from the decision of the Income Tax Appeal Board, he may, instead of filing a notice of appeal under section 98, give notice of his reply (notwithstanding that it is filed and served after the expiration of the time for appeal fixed by section 60) by way of cross-appeal of his intention to contend that the decision of the Income Tax Appeal Board should be varied and set out therein a statement of such further allegations of fact and of such statutory provisions and reasons as he intends to rely on in support of the contention.

Consequently, at the request of the respondent, the appeal is allowed and the so- called reassessment referred back to the Minister so that he may include for further reassessment the sum of $45,754.60 with the sum of $55,393.10 above- mentioned but not otherwise.

If, as and when the Minister makes such reassessment in respect of the appellant’s income for 1952 it will be open to the appellant to object thereto insofar as the sum of $45,754.60 is concerned.

It is noted that the learned judge did not allow the appeal and refer the matter back to the Minister to increase tax, but to let the Minister make an assessment which would be open to objection. Since the Minister is given power to assess and reassess if he can meet the requirements of the Income Tax Act (section 152), I see no need for this Board to authorize him to do so.

The respondent contended that, were this Board to hold that there was a taxable capital gain in excess of $1,001,643, the Board would not be increasing the tax of the appellant as there would be no increase in the appellant’s assessed tax for the four years (1971 to 1974 inclusive) unless the taxable capital gain in 1974 was held to exceed the total partnership losses in those four years. Hence the Board could do as the respondent requests and in so doing would not be going contrary to the decisions in the Harris or Vineland Quarries cases. The appellant’s reply to this submission was that this is something akin to averaging the income of a farmer or fisherman and there is a specific provision to do that in the Income Tax Act. His submission continued that, subject to a specific provision in the Income Tax Act, each year is complete in itself and in the present situation we are looking at the tax for 1974 and 1974 alone. He submitted that following the Harris case and the Vineland Quarries case the Board cannot increase the tax of the appellant.

I agree with the submission of the appellant. It is the Minister who assesses tax. The Board can only adjudicate on an appeal of a taxpayer and I am certain no taxpayer would appeal to have his income increased with a resultant increase in tax. If the Minister wishes to have an appellant’s tax increased he only has to issue an assessment for the total tax and the taxpayer has the right to dispute the same before this Board or in the Federal Court.

With respect to the appeals, Judgment will go allowing the appeals for the years 1971, 1972 and 1973 and referring the assessments back to the Minister for variation to permit the appellant to include as a source of income its losses from the partnership CKLW TV. As to 1974, of course the partnership loss is to be allowed to the appellant. However, the appellant did have a taxable capital gain in an amount equal to that loss in that year. The result is that the taxable income is in the same amount as the Minister assessed. The result is that judgment will go dismissing the 1974 appeal.

Appeal allowed.