Marchand v. R., [1998] 3 CTC 2340

Lamarre T . C.J.:

These are appeals heard under the informal procedure from assessments made by the Minister of National Revenue (hereinafter “the Minister”) for the appellant’s 1993 and 1994 taxation years. In calculating her income, the appellant deducted the sums of $4,937 in 1993 and $1,145 in 1994 from her income as contributions to a Registered Retirement Savings Plan (hereinafter an “RRSP”).

In assessing the appellant the Minister reduced this deduction to $1,329 for 1993 and $1,054 for 1994. In making these assessments the Minister assumed the facts set out in Paragraph 4 of the Reply to the Notice of Appeal, which read as follows:

[TRANSLATION]

(a) the deduction for contribution to an RRSP in the 1993 taxation year was allowed at the maximum permitted by the Income Tax Act (“the Act”) and was calculated as follows:

1993 taxation

year

Calculation of 1992 earned income:

Income	$36,186
Less: union dues	(110)
Subtotal	36,076
Plus: R.R.Q. disability pension	8,368
farming profit	1,658
Subtotal	46,102
Less: rental loss	(1,151)
Total	44,951

1993 taxation

year
Rate	x 18%
RRSP deductible before adjustment	8,091
Less: 1992 pension adjustment	(6,762)
Maximum amount deductible for RRSP	$ 1,329
in 1993

(b) the deduction for contribution to an RRSP in 1994 taxation year was allowed at the maximum permitted by the Act and was calculated as follows:

1994 taxation

year

Calculation of 1994 earned income:

Income	$37,119
Less: union dues	(115)
Subtotal	37,004
Plus: R.R.Q. disability pension	8,519
Subtotal	45,523
Less: rental loss	(903)
farming loss	(214)
Total	44,406
Rate	x 18%
RRSP deductible before adjustment	7,993
Less: 1993 pension adjustment	(6,939)
Maximum amount deductible for RRSP	$1,054
in 1994

(c) on June 25, 1996 the Minister affirmed the appellant’s income tax assessments for each of the 1993 and 1994 taxation years.

Only the appellant testified. She challenged only certain points in the calculation of earned income to arrive at the maximum deduction for contribution to an RRSP. She considered that the earned income should not be reduced by rental losses since those losses were sustained by a company in which she was only a limited partner, and so only a passive participant not actively engaged in the business. She also rejected the reduction of earned income by the amount of the farming loss.

The amount of the rental losses and the farming loss for the years at issue was not in dispute. [1]

Section 146(1) of the Income Tax Act (hereinafter “the Act”) indicates how the maximum deductible for RRSPs in a taxation year should be calculated. The maximum deductible is calculated among other things from the taxpayer’s earned income for the preceding taxation year. The definition of earned income is to be found in the same subsection and the passages which are of interest here read as follows:

“earned income” of a taxpayer for a taxation year means the amount, if any, by which the total of all amounts each of which is

(a) the taxpayer’s income for a period in the year throughout which the taxpayer was resident in Canada from

(i) an office or employment, determined without reference to paragraphs 8(1 )(c), (m) and (m.2),

(ii) a business carried on by the taxpayer either alone or as a partner actively engaged in the business, or

(iii) property, where the income is derived from the rental of real property or from royalties in respect of a work or invention of which the taxpayer was the author or inventor,

exceeds the total of all amounts each of which is

(e) the taxpayer’s loss for a period in the year throughout which the taxpayer was resident in Canada from

(i) a business carried on by the taxpayer, either alone or as a partner actively engaged in the business, or

(ii) property, where the loss is sustained from the rental of real property...

On rental losses, the appellant maintained it was s. 146(l)(e)(i) which applied and that the losses were sustained by a company in which she was only a limited partner, not an active participant, so she did not have to reduce her earned income by the amount of those losses. I have already had the opportunity to render a decision on exactly the same point in Margue- rite C. Marchand v. Her Majesty the Queen?- [2] in which the appellant had appealed from assessments issued to her for the 1991 and 1992 taxation years. In that decision, I said the following:

From the appellant’s argument, I understand that she relied on subparagraph 146(1 )(e)(i) of the Act, whereas the Minister relied instead on subparagraph 146( 1 )(e)(ii). Under subparagraph 146( 1 )(e)(i), a taxpayer must reduce his earned income by the amount of a loss arising from a business that he carries on alone or as a partner actively engaged. From the appellant’s testimony, it can certainly be stated that the rental loss did not come from a partnership in which she was actively engaged. Moreover, nothing in the evidence enables me to conclude that the rental losses stemmed from the operation of a business. I cannot state that by the mere fact that those losses were incurred by a limited partnership, they automatically arose from the operation of a business in which the appellant was only a passive partner. Although the Supreme Court of Canada^ [3] has already confirmed that there was in the case of a business corporation a rebuttable presumption that income earned from an activity done in pursuit of an object stated in the corporation’s constating documents is income from a business, there must be evidence to establish the existence of a limited partnership and the nature of its activities and that the appellant invested in that limited partnership.

Furthermore, despite that presumption, the question whether a given income constitutes income from a business or income from property is still a question of fact. However, nothing in the evidence permits me to conclude that the rental losses arose from the operation of a business. I conclude that those losses arose from an asset in that they resulted from the rental of real property. Consequently, the Minister was correct in relying on subparagraph 146(1 )(e)(ii) of the Act in order to reduce the earned income by the amount of those rental losses. If the rental losses did not arise from the operation of a business, it is subparagraph 146(1 )(e)(ii) that applies, since it concerned losses arising from an asset. In the latter case nothing requires that the appellant had taken an active part in the partnership that incurred those rental losses.

At the hearing the appellant mentioned that the rental losses suffered by the limited partnership came from a multiple-unit residential building (M.U.R.B.). Accordingly, I asked the appellant to submit to the Court the prospectus issued by the limited partnership and asked each of the parties to submit written comments on whether it could be inferred that the rental income was not income from property but income from a business.

The appellant provided this Court and the respondent with prospectuses from the limited partnerships “Le Riverain” (Exhibit A-4) and “Des Châteaux” (Exhibit A-5).

The limited partnership Le Riverain was created to acquire and manage, alone or in association with others, a real estate complex known and designated as “La Marina Centre”, located at Rivière-des-Prairies in the province of Quebec. It does not appear that the property in question was a M.U.R.B. [4]

The limited partnership Des Chateaux was created to acquire, administer and manage immovable properties. The prospectus clearly indicated that the properties in question were M.U.R.B.s. [5]

In the course of his analysis counsel for the respondent referred to a decision of this Court by Judge Bowman in Goldstein v. R. (1995), 96 D.T.C. 1029 (T.C.C.). In that case the issue was whether the losses suffered by a taxpayer as a limited partner in two limited partnerships holding multiple-unit residential buildings should be deducted in calculating earned income as defined in the Act. After quickly ruling out the application of s. 146( 1 )(e)(i), [6] since the rental losses did not originate from a business which the taxpayer operated alone or actively as a partner, Judge Bowman discussed the application of s. 146(1 )(e)(ii). [7] He put the question as follows:

Since clause 146(l)(c)(v)(A) refers specifically to partnerships in the business of which the taxpayer is actively engaged, does this necessarily exclude losses sustained by a limited partner in a partnership where that partner’s involvement is purely passive? Before attempting to answer this question two subsidiary questions arise:

(a) Is a commercial activity of a partnership necessarily always a source of income that is a business or can it be property?

(b) Assuming the source referred to in question (a) above can be property, does the interposition of a partnership between the taxpayer and the rental operation necessarily exclude the operation of clause 146(l)(c)(v)(B)? [8]

After admitting that the definition of a partnership under applicable pro- vincial legislation refers to the relationship that subsists between persons carrying on a business in common with a view to profit, [9] Judge Bowman said the following:

If it is suggested that one is to conclude that the use of the word “business” in the definition of partnership in a provincial partnership act means that a partnership’s source of income cannot, for the purposes of the Canadian Income Tax Act, be property, as opposed to a business, then I think that this conclusion ascribes to a definition in a provincial statute an effect that goes beyond its purpose ...

The result, in my view, is that:

(i) a source of income that is property if owned by one person does not become a business merely because it is owned by a partnership; and

(ii) even if any commercial pursuit of a partnership must be characterized as the carrying on of a business, there is no reason why that business cannot consist in the holding of property for the purpose of deriving rental income therefrom. While there may be cases in which it is necessary to decide whether a source of income is business and not property, or vice versa 0 there is no reason in principle for assuming that the two concepts are mutually exclusive or that they exist in watertight compartments.^ ! [11]

The mere fact that a building is operated through a limited partnership does not suffice to support the conclusion that the partnership receives business income rather than property income from the building.

Additionally, Judge Bowman said the following about the definition of “earned income” in s. 146: [12]

The purpose of that definition appears to be to exclude from it certain types of passive income such as interest and dividends, but not rental income which may also be passive. To interpret the definition as including losses from a direct interest in a MURB, but not one held through a partnership would seem an unduly mechanical one, and one which would lead to an absurdity. [13]

I entirely concur in the conclusion to which Judge Bowman came in Goldstein, that the loss came from a M.U.R.B. or the rental of any other real estate complex.

I accordingly conclude that the rental losses should be deducted from income earned under s. 146(l)(e)(ii) of the Act.

As regards the farming loss, nothing in the evidence submitted indicates that the Minister was not correct in deducting this loss for purposes of calculating the appellant’s earned income for the 1993 taxation year.

I therefore conclude that the Minister did not err in calculating the earned income in order to determine the maximum deductions for RRSP contributions.

The appeals are therefore dismissed.

Appeals dismissed.

Durnford in an article in the Canadian Tax Journal, 1991, Volume 39, Issue No. 5, p. 1131, The Distinction Between Income from Business and Income from Property, and the Concept of Carrying on Business.