George Luck v. Minister of National Revenue, [1980] CTC 2614, 80 DTC 1506

John B Goetz:—This is an appeal with respect to the reassessment of income tax for the appellant’s 1976 taxation year. The issue is whether the appellant was entitled to split, between him and his wife, the receipt of $3,000 by way of interest accruing from a mortgage on a farm jointly owned by the appellant and his wife. The respondent, in maintaining that the appellant was not entitled to split income between himself and his wife, relied, inter alia, upon sections 3, 9, 74 and subsection 103(1) of the Income Tax Act, SC 1970-71-72, c 63, as amended, and also upon section 3 of The Partnerships Act, RSO 1970, c 339, and amendments thereto.

In 1962 the appellant purchased a 100-acre farm with his wife as tenant in common. There was a shortage on the farm for this purchase which the appellant, in cross-examination, admitted he paid off from his work for a Mr Adams between 1962 and 1969 in hauling cattle. The farm consisted of 50 acres seeded to grain and 50 acres to hay. The appellant built up a herd of about 40-50 cows and calves. Mrs Luck stated that she cultivated the fields, grew the grain and fed the cattle, she also worked in the fields during the day. I find this hard to reconcile with the fact that at this point in time she had children of the ages of 16, 17, 29 and 20.

Mr Luck, in examination, admitted that he had to hire a man to help on the farm. Quite clearly, the appellant’s spouse would have certainly contributed something to the operation of the farm as a farm wife, but not to the extent whereby she can declare herself to be a full partner in the farming operation. Further, there is no evidence that appellant’s spouse contributed financially to the purchase of the farm.

Findings

At no time did the appellant’s wife, Mrs Donna Luck, file tax returns, until 1976 when she was advised by their counsel, Mrs Evans, to split their in- come on the premise that they were operating the farm as a partnership. In 1974 the appellant and his wife sold the farm property and received in cash $45,000 and the balance by way of mortgage in the sum of $40,000. In the appellant’s income tax return for the year 1974, he reported as his own the full amount of farming income from the aforesaid property, the full amount of capital gain in respect of the sale of the aforesaid property and the full amount of interest income received in respect of the mortgage referred to above. Further, in his income tax return for the 1975 taxation year, the appellant reported as his own the full amount of the 1975 reserve in respect of the sale of the aforesaid property and the full amount of interest income received in respect of the mortgage.

The respondent urges that the farming operation was not carried on as a partnership up until the property was sold in 1974. He relies on section 3 of The Partnerships Act, RSO 1970, c 339, and amendments thereto, which reads as follows:

In determining whether a partnership does or does not exist, regard shall be had to the following rules:

1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

Subsections 74(1), 74(5) and 103(1) of the Income Tax Act read as follows:

74.(1) Where a person has, on or after August 1, 1917, transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, by deemed to be income or a loss, as the case may be, of the transferor and not of the transferee.

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.

103.(1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the deduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.

I find from all the evidence adduced that the appellant’s spouse did not, in any substantial way at all, contribute to the purchase of the farm property, the subject matter in dispute. Admittedly, she gave considerable assistance to her husband in the operation of the farm, which is an accepted custom with a husband and wife living on a farm. I am sure she assisted her husband as much as she could extend such help, having the responsibility of raising four children.

Having had his income tax returns prepared by chartered accountants prior to 1976, and electing to declare all income from the farm and capital gain and interest on the mortgage in his own name, the appellant cannot suddenly decide, on the advice of a anew accountant in 1976, to split interest income between him and his spouse, for the purpose of reducing income tax payable. He clearly comes within the provisions of subsection 74(1) of the Act and I feel the Minister exercised his discretion properly under subsections 74(5) and 103(1) of the Act. See Tapani Nestor Valitalo and Jose Murillo v MNR, [1979] CTC 2320; 79 DTC 327.

For the above reasons, I dismiss the appeal.

Appeal dismissed.