Spire Freezers Ltd. v. R., [1999] 3 CTC 476, 99 DTC 5297

Linden J.A.:

I. Introduction

The issue in this appeal is whether the Tax Court Judge erred when he found that the appellant, who sought to create a partnership in order to take advantage of certain tax losses, failed to do so because the requirements of the definition of a partnership were not met on the objective facts.

The appellant is a corporate entity. A group of individuals associated with the appellant also sought to enter the partnership in question, and, like the appellant, were re-assessed by the Minister. It has therefore been agreed that the decision in this appeal will apply to the following cases: Patrick Gouveia v. The Queen, John O'Neill v. The Queen, Maroje Miloslavic v. The Queen, John Dobrei v. The Queen, Edward Butcher v. The Queen^ [1]

II. Facts

The transaction under consideration in this case was designed and presented to the appellants as a loss-purchase transaction by a tax-shelter vendor called CMF Enterprises Limited. That presentation is entitled “$7.1 Million Partnership Business Loss.” [2] It advertised a seven million dollar business loss which was for sale at approximately 20 cents on the dollar. The earliest documented contact between the loss vendor and the appellant was in the Spring of 1987, but the story in this case begins nine years earlier, in 1978. In that year a partnership was formed to develop a luxury residential condominium project on Santa Catalina Island off the coast of California (“HCP” or the “HCP project”). There were some variations in the partnership, but by late 1980, there were two partners remaining, both American corporations: BCE Development Inc. (“BDI”), and its subsidiary, Peninsula Cove Corporation. BDI is itself a subsidiary of Bell Canada Enterprises (“B.C.E.”), a well-known Canadian company. Each of the partners held a 50% share in the condominium.

In order to obtain government approvals, the partnership was required to build an apartment project known as the Tremont Apartments (“Tremont”) in Avalon on Catalina Island. This was a government-subsidized, low to moderate income rental project. Tremont was owned by a corporation called TSAC, which was in turn fully owned by the partnership.

By the end of 1986 the costs of the HCP condominium project being developed and built by the partnership exceeded the fair market value of the project by approximately $10 million U.S., which would potentially produce significant losses for HCP. Several Canadian parties, of whom the appellant was the largest, were informed by the tax shelter vendor of the opportunity to purchase the tax losses of the HCP project at 20 cents on the dollar. After sophisticated negotiations, the parties came to an agreement. Thus, on November 30, 1987, the following step transaction occurred (in the following order):

1. BDI and Peninsula amended their partnership agreement to keep the partnership operative regardless of the withdrawal of any of its partners.

2. TSAC sold Tremont to the partnership for approximately (U.S.) $2.9 million. The partnership borrowed these funds from BDI.

3. The partnership sold its shares of TSAC to BDI, which was paid by set-off against the loan from BDI.

4. The partnership sold 50% interest in the HCP project to the appellant and BDI sold a 25% interest in the HCP project to the appellant. For a brief instant, the de jure partners were BDI and the Canadian partners. The remaining 25% was then sold to Spire Group, a group made up of the individual Canadian parties other than the appellant. The total purchase price was (U.S.) $34,530,253.

5. The partnership immediately sold the HCP project to BDI for (U.S.) $33.3 million. The sale of the HCP project at this price gave rise to an operational loss of approximately $10.4 million (U.S.). BDI and Peninsula then withdrew from the partnership, which withdrawal was registered with the State of California.

6. The partnership changed its name to the Tremont Street Partnership.

The Canadian partners paid approximately (U.S.) $1.2 million for the losses of the partnership. The losses on the sale of the HCP project totalled about $10.4 million (U.S.). In the fiscal year ending December 31, 1987, the Partnership claimed a loss of (U.S.) $10 million in respect of the HCP project sale and a capital loss of (U.S.) $367,000 in respect of the sale of TSAC shares. Revenue Canada disallowed the losses. The appellant appealed.

Following the above transaction, the Tremont Street Partnership failed to report any profit from 1989 to 1993, but reported nominal operational income in the 1993, 1994, and 1995 taxation years, totalling approximately $167,000 (Can.). The Canadian parties, have, since 1989, withdrawn approximately $756,000 (Can.) from the partnership.

It should be noted that from the U.S. perspective, which is founded on substance over form, BDI distributed the HCP project to itself and Peninsula initially, and then later to itself alone, thereby retaining the HCP project and its associated losses. The Tax Court Judge summarized that testimony in this manner:

28. Effective ownership of the condominium project was always with BDI, stated Mr. Wagner [Director of Taxation for BDI], except for the moment it was owned by the Canadians. In his view the transaction was a distribution of property to a partner because BDI never ceased to effectively own HCP Condominium project notwithstanding the transactions that took place on November 30, 1987. [3]

It should be noted that BDI reported the transaction to U.S. authorities not as a partnership transaction, but as the sale of the Tremont Apartments in return for cash. [4] It should also be noted that the appellant’s U.S. reporting is consistent with BDI’s view of the transaction.

III. Tax Court of Canada Decision

The Tax Court of Canada Judge set out the facts and the arguments of the parties at considerable length, following which he outlined the law of partnership, quoting at length from the judgment of this Court in Continental Bank of Canada v. R.f* [5] The Tax Court Judge made a strong finding of fact that the parties in this case did not intend to carry on business in common with a view to profit, and on this basis he held that no partnership involving the appellant was created here:

72. In the appeals at bar ..., none of the appellants intended anything other than to obtain a tax loss. The retention of the Tremont Apartments was an afterthought the appellants were advised was necessary. The quantum of the initial loss anticipated by the appellants compared with any anticipated, or real, profits from the Tremont Apartments cannot, in my view, lead to the conclusion that the relationship subsisting between the appellants was to carry on a business in common with a view to profit or with a reasonable expectation of profit. ...Any profits from the Tremont Apartments compared to the initial loss requires an exaggerated imagination to conclude that the transactions were undertaken with a view to profit. Again, the relationship subsisting between the appellants was not that of carrying on a business in common with a view to profit; they did not associate themselves to carry on a business for profit. (Footnotes omitted)^ [6]

He accordingly dismissed the appeal.

IV. Submissions of the Appellant

To the appellant, the main issue in this appeal is whether it became a partner in the venture on November 30, 1987. The appellant refers to the

sale of the partnership interest the Canadians had reneged and not

sold the HCP Condominium, Mr. Harting wrote in his statement, BDI a) would have either a claim for specific performance or damages and b) would have demanded payment of the notes and claimed a default rate of interest if the notes were not paid.

This decision is now reported at (1997), 98 D.T.C. 1287. All citations are made to the appropriate paragraph number.

documentation and to the expert testimony of Professor Richard Buxbaum that, in his opinion, they did. The appellant also argues that the classic test for partnership is satisfied in this case, because of the expected and actual profitability of the Tremont Street apartments. In the appellant’s view, the Tax Court Judge erred by allowing his view of the parties’ motivation to influence his legal analysis. As all of these documents were legally effective, and the court need not look to the tax motivation of the parties here.

V. Submissions of the Respondent

The respondent cites the many times in which the Tax Court Judge found that there was no relationship between the alleged partners which consisted of carrying on business in common with a view to profit. The respondent notes the appellant’s repeated concession that the intention in this case was to accrue a tax loss on November 30, 1987. The respondent argues on this basis that the appellant and BDI were never really partners at the same time, but were only made to appear as partners for a brief moment before the last 25% of the HCP project was sold to the appellant.

The respondent notes that the appellant’s expert in U.S. law, Professor Buxbaum, assumed, for purposes of providing his opinion, that there was an intention on the part of the parties to become partners in law. The respondent argues that whether partnership existed is a question of fact, one which was answered by Rip J .T.C.C..

The respondent submits that the tax motivation of this transaction is relevant in this case because partnership is a question of intention. In response to the appellant’s argument that the Supreme Court’s decision in Continental Bank is dispositive of this appeal, the respondent argues that Continental Bank affirmed that for a partnership to be found, regard must be paid to the true intention of the parties in relation to that partnership, and that on the facts of that case there was no evidence other than that a profitable business would continue to be carried on. The respondent asserts that the facts were different here in that the appellant freely admitted that, in this case, it entered into the transaction with no intention to join with the U.S. corporations in order to conduct ongoing business in common with a view to profit. Mr. Gouveia, one of the appellant’s primary architects of this transaction, testified at trial that he first learned of the Tremont project while in Califor- nia, but that its existence “was not relevant” to the goal of obtaining the tax losses. [7]

The respondent also mentions that the appellant’s accountant spoke with Revenue Canada on six occasions and never told the Revenue Canada officers that the purpose of the transaction was to acquire losses. The appellant did not concede until trial that its primary interest or intention was to acquire the non-capital losses of the HCP project.

VI. Analysis

One common tax avoidance device is for a taxpayer to form a partnership with someone who has lost money in order to take advantage of that loss by offsetting it against the profits earned by the taxpayer in the taxation year. [8] This is a legitimate tax planning mechanism which is so widely used that certain individuals engage in lucrative business and professional activities which arrange for the sale and purchase of these tax losses. It is perfectly proper to use the partnership as a vehicle to obtain tax savings, but it is necessary to create a partnership in order to do so. One cannot participate in partnership losses unless one is a partner. In other words, one can enter a partnership for the purpose of avoiding tax, but one cannot enter a partnership without complying with the requirements of partnership law. There must be a partnership actually created between the profitable and unprofitable entities. This cannot be done on paper alone. One cannot insist in writing that a partnership has been created when the objective facts do not support that conclusion. It is similarly trite law that one cannot on paper deny the existence of a partnership when the objective facts demonstrate that a partnership has in fact been formed. [9] The paperwork is very important but it is not the whole story. Thus, a partnership in law requires a partnership in life.

Partnership is defined similarly in all common law jurisdictions: a partnership is a relationship existing between two or more people carrying on business in common with a view to profit. Partnership exists by virtue of agreement, and therefore requires a mutual intention on the part of the parties to form a partnership. In law, one cannot “buy” or “sell” partnership; partnership is a relationship which subsists when two or more people carry on business in common with a view to profit. A young law associate, for example, may pay money to “buy into” a partnership, but in law that person is not a partner unless he or she is part of a group of people carrying on business in common with a view to profit. [10] In Robert Porter & Sons Ltd. v. Armstrong, the Supreme Court wrote:

Partnership, it is needless to say, does not arise from ownership in common, or from joint ownership. Partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing. [11]

Since the Income Tax Act does not define partnership, the law of the jurisdiction involved is the basis on which any claim of partnership must be founded. In this case, the expert evidence of Professor Buxbaum, a distinguished and respected law professor from the University of California at Berkeley, indicated that the fundamental components of partnership are the same in California as in the Canadian jurisdictions.

against partnership will be ineffective when all the indicia of partnership are present, it may affect the interpretation of other clauses and, thereby, rebut inferences which could otherwise be drawn from them if they stood alone.”) The substantially similar predecessor to this passage from the 16 edition of Lindley & Banks on Partnership was quoted with approval in Munroe v. Clarke (1977), 23 N.S.R. (2d) 652 (N.S. T.D.) Hayes v. British Columbia Television Broadcasting Systems Ltd. (May 6, 1991), Doc. Vancouver C895342 (B.C. S.C.), aff'd (1992), 74 B.C.L.R. (2d) 120 (B.C. C.A.), application for leave to appeal to the Supreme Court denied [1993] 2 S.C.R. viii (S.C.C.). The substantially similar passage from the 1 l edition was quoted with approval in Minister of National Revenue v. Sedgwick, [1962] Ex. C.R. 337 (Can. Ex. Ct.). See also infra, note 12.

Although it has been said that “partnership or no partnership is a question of fact,” a finding of partnership is a mixed question of fact and law. [12] Most of the individual ingredients or elements of partnership, such as intention to make a profit, are questions of fact. The final conclusion as to partnership, however, requires the judicial evaluation of those facts in the light of a legal test, and is thus more than merely a factual conclusion. The existence of partnership, therefore, always depends on the necessary factual findings that the elements of partnership have been proven. Neither an agreement that there is a partnership nor a disclaimer of one, though significant, can be conclusively dispositive of the question in every case. [13]

The jurisprudence indicates that only those activities carried on with a view to profit, including an ancillary purpose of profit-making, may form the basis of partnership. [14] The leading text, Lindley and Banks on Partnership, summarizes the situation as follows:

If a partnership is formed with some other predominant motive [other than the acquisition of profit], e.g., tax avoidance, but there is also a real, albeit ancillary profit element, it may be permissible to infer that the business is being carried on “with a view of profit.” If, however, it could be shown that the sole reason for the creation of a partnership was to give a particular partner the “benefit” of, say, a tax loss, when there was no contemplation in the parties' minds that a profit … would be derived from carrying on the relevant business. the partnership could not in any real sense be said to have been formed with a view to profit. (Emphasis added) 1°? [15]

The leading Canadian case on the taxation of partnerships is now the Supreme Court’s decision in Continental Bank.' [16] In that decision, which was not path-breaking but merely consistent with pre-existing authority on this issue, Bastarache J. wrote, for a unanimous Court on the point, that partnership is traditionally defined as persons carrying on business in common with a view to profit:

22. Section 2 of the Partnerships Act defines partnership as “the relation that subsists between persons carrying on a business in common with a view to profit”. This wording, which is common to the majority of partnership statutes in the common law world, discloses three essential ingredients: (1) a business, (2) carried on in common, (3) with a view to profit. 1 will examine each of the ingredients in turn.

23. The existence of a partnership is dependent on the facts and circumstances ‘ ich articular ca It is also determined by what the parties actual intended. As stated in Lindley & Banks on Partnership (17th ed. 1995), at p. 73: “in determining the existence of a partnership ... regard must be paid to the true

written agreement to establish a partnership, and the fact that a venture is characterized as a partnership ... in a written agreement is not conclusive as to the nature of the arrangement.”); see also Canada Tax Service, supra, at pages 96-136 to 96-139 (collecting cases) (“As the existence of partnership is a question of fact, it would follow that neither an agreement nor a disclaimer can be decisive in the determination.”)

contract and intention of the parties as appearing from the whole facts of the case”.

24. The Partnerships Act does not set out the criteria for determining when a partnership exists. But since most of the case law dealing with partnerships results from disputes where one of the parties claims that a partnership does not exist, a number of criteria that indicate the existence of a partnership have been judicially recognized. The indicia of a partnership include the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts.

25. In cases such as this, where the parties have entered into a formal written agreement to govern their relationship and hold themselves out as partners, the courts should determine whether the agreement contains the type of provisions typically found in a partnership agreement, whether the agreement was acted upon and whether it actually governed the affairs of the parties: Mahon v. Minister of National Revenue. On the face of the agreements entered into by the parties, I have found that the parties created a valid partnership within the meaning of s. 2 of the Partnerships Act. I have also found that the parties acted upon the agreements and that the agreements governed their affairs (Emphasis added, citations omitted).

Having indicated that the documents could be legally effective to create a partnership, Bastarache J. considered further, as he was required to do, whether, on the objective facts of the case, the various indicia pointed to the conclusion that a business was in fact carried on in common by the partners. He summarized the law as follows:

29. If a partnership is to exist, it must be shown that two or more people carried on the business. It is also fundamental that the business is carried on in common: Lindley & Banks on Partnership, supra, at pp. 9-10....

Following this summary he concluded that, on the facts of the case, according to the relevant indicia, a business was carried on in common:

31. In the present instance, it is true that between December 24 and December 27, 1986, no meetings were held, no new transactions were entered into by the parties and no decisions were made. However, that is not determinative of the fact that no business was carried on by the Partnership. Prior to its entering the Partnership, Leasing carried on business. This business and its assets were transferred to the Partnership on December 24, 1986. There was no termination of Leasing’s contracts with its customers and the contracts continued during the period of December 24 to December 27.

32. Evidence that the business previously carried on by Leasing was carried on by the Partnership is contained in a letter dated December 24, 1986 from Air Canada, one of the Bank’s customers. In the letter, Air Canada acknowledges that “[Leasing| intends to sell and assign its interest in the Purchase Agreements, the Aircraft and the Leases to an Ontario partnership...”. Air Canada consented to the “sale and assignment of the Purchase Agreements, the Aircraft and the Leases” from the Bank to Leasing and consented “to the sale and assignment of the Purchase Agreements, the Aircraft and the Leases by [Leasing] to the Partnership”.

33. The fact that no new business was created during the period of Leasing and the Bank’s involvement in the Partnership does not negate the effect of the existing business that was continued during this time. The existence of a valid partnership does not depend on the creation of a new business. It is common that partnerships are formed when two parties agree to carry on the existing business of one of them, while the other contributes capital.

34. In addition, I am satisfied that the business that was carried on was carried on by the partners in common. Under the Partnership Agreement, the Partners “delegate to the Managing Partner full power and authority to manage, control, administer and operate the business and affairs of the Partnership and to represent and enter into transactions which bind the Partnership” (Art. 4.01). The fact that the management of the Partnership was given to the Managing Partner does not mandate a conclusion that the business was not carried on in common. Nor does the fact that Central, acting alone, was negotiating transactions relating to the lease portfolios prior to December 29, 1986. The respondent argues that the exclusion of Leasing and the Bank from any of those activities negates any claim that the Central entities and the Continental entities were actually carrying on business in common during that period. As Lindley & Banks on Partnership, supra, point out, at p. 9, one or more parties may in fact run the business on behalf of themselves and the others without jeopardizing the legal status of the arrangement.

Having found that the documents legally in order, and that there was a business carried on in common by the partners, Bastarache J. assessed the facts to determine whether there was a business carried on in common with a view to profit. He held that there was:

39. The Court of Appeal held that the parties intended to conduct a sale of assets through a device they chose to call a partnership. This intention did not include a view to profit and in fact “the idea to share profits was an afterthought when the parties originally put the deal together” (p. 731). This characterization by the Court of Appeal ignores the fact that the Partnership Agreement provided for the distribution of the profits from the leasing business being operated by the Partnership and that the Partnership continued to carry on the business operated for profit by Leasing. There is no evidence of any expectation other than that profits would continue to be generated during the predetermined term of Leasing’s involvement in the Partnership. The Court of Appeal also relied heavily on the fact that Leasing was not legally entitled to a share of the profits of the first fiscal year because its partnership interest had already been transferred to the Bank by the time the year end was triggered on December 27, 1986.This, however, is irrelevant to the determination of the issue.

40. To determine whether the business was carried on with a view to profit, it is necessary to look to the provisions of the Partnership Agreement governing the distribution of profits.

5.06 Allocation of Net Income or Loss. The net income or loss for each fiscal year of the Partnership shall be allocated to the current accounts of the Partners in proportion to their respective average capital accounts for the period for which the allocation is made.

5.09 Allocation of Income and Loss for Tax Purposes. The income or loss of the Partnership for the whole of a fiscal year for the purposes of the Income Tax Act shall be allocated to those Persons who are Partners on the last day of the fiscal year of the Partnership in the proportions set out in section 5.06. The income or loss of the Partnership which is allocated to those Partners shall be allocated among those Partners as of the time and in the proportions set out in this article.

41. These provisions clearly contemplate the distribution of profits in accordance with a partner’s interest in the Partnership. Profit was accumulated by the Partnership during the period of Leasing’s membership in that partnership and that profit was distributed.

In summary, then, Bastarache J. indicated that the factual circumstances of the case must be considered when deciding whether a valid partnership was created. First, the documents in question must be examined with a view to ensuring that they are legally effective to create a partnership. Second, the objective facts of the case must be analyzed in order to ascertain whether (a) a business (b) is carried on in common (c) with a view to profit. Attention should be paid to indicia such as those noted by Bastarache J. at paragraph 24 of his reasons and reproduced above. The parties in the purported partnership must act on and be governed by the agreement they entered into. Third, when analyzing whether a business is carried on in common, both the partnership agreement and the actual events are important. Fourth, when analyzing whether a business is carried on in common with a view to profit, both the partnership agreement and the intentions of the partners are relevant. Finally, quoting from Lindley and Banks on Partnership, supra, Bastarache J. reiterated that, even though tax avoidance is the overriding consideration in entering a partnership, that does not negate a potential ancillary purpose of generating profit being sufficient to satisfy the requirement that the parties be carrying on business in common with a view to profit. However, if the sole purpose of the transaction is tax avoidance, no partnership can be said to exist.

In the Continental Bank case, [17] the Supreme Court held that there were both the partnership agreement which expressly provided for profit-sharing, and an actual sharing of profits. Bastarache J. noted that the partnership agreement contemplated the distribution of profits among the partners, and that there was no factual evidence to the contrary, stating that “[t]here is no evidence of any expectation other than that profits would continue to be generated...”. [18] In contrast, the Tax Court Judge in this case made an unambiguous finding of fact that these parties, when they purported to become partners, had absolutely no intention to carry on business with a view to profit. “In the appeals at bar ... ,” he concluded, “none of the appellants intended anything other than to obtain a tax loss.” [19] In short, to use the words of Lindley & Banks on Partnership, that was their “sole reason for the creation of [the] partnership.”

Partnership arises from an agreement between two or more legal persons. While the determination of whether partnership exists is a question of mixed law and fact, the intention of the parties at the time of entering a contract (of partnership or otherwise) is a question of fact. [20] Lindley & Banks on Partnership describes the intention to make profit as being “at the very heart” of the partnership relationship. [21] This is not to say that parties must intend to be “partners” per se, but there must be a finding of fact that the parties carried on business in common with a view to profit. In this case, there was a contrary finding of fact to the effect that there was no business carried on in common with a view to profit. The Supreme Court has repeatedly made the point that, barring some palpable or overriding error, it is unwise for appeal courts to reverse findings of fact. For example, in R. v. Vanderpeet, Chief Justice Lamer wrote for the Court that

It is a well-settled principle of law that when an appellate court reviews the decision of a trial judge that court must give considerable deference to the trial judge’s findings of fact, particularly where those findings of fact are based on the trial judge’s assessment of the testimony and credibility of witnesses. In Stein v. The Ship “Kathy K”, Ritchie J., speaking for the Court, held at p. 808 that absent a “palpable and overriding error” affecting the trial judge’s assessment of the facts, an appellate court should not substitute its own findings of fact for those of the trial judge:

These authorities are not to be taken as meaning that the findings of fact made at trial are immutable, but rather that they are not to be reversed unless it can be established that the learned trial judge made some palpable and overriding error which affected his assessment of the facts. While the Court of Appeal is seized with the duty of re-examining the evidence in order to be satisfied that no such error occurred, it is not, in my view, a part of its function to substitute its assessment of the balance of probability for the findings of the judge who presided at the trial.

This principle has also been followed in more recent decisions of this Court: Beaudoin-Daigneault v. Richard; Laurentide Motels Ltd. v. Beauport (City); Hodgkinson v. Simms. In the recently released decision of Schwartz v. Canada, La Forest J. made the following observation at para. 32, with which I agree, regarding appellate court deference to findings of fact:

Unlimited intervention by appellate courts would greatly increase the number and the length of appeals generally. Substantial resources are allocated to trial courts to go through the process of assessing facts. The autonomy and integrity of the trial process must be preserved by exercising deference towards the trial courts’ findings of fact... This explains why the rule applies not only when the credibility of witnesses is at issue, although in such a case it may be more strictly applied, but also to all conclusions of fact made by the trial judge....

I would also note that the principle of appellate court deference has been held to apply equally to findings of fact made on the basis of the trial judge’s assess- ment of the credibility of the testimony of expert witnesses, N.V. Bocimar S.A. v. Century Insurance Co. of Canada. (Citations omitted) [22]

In this case, the Tax Court Judge heard and weighed the evidence of the parties and made a decisive finding of fact that, when the contract of partnership was entered into, there was no intention to carry on business in common with a view to profit. While Continental Bank, both in this Court and in the Supreme Court, reiterated that a secondary or ancillary intention to carry on business with a view to profit is enough — even if such intention was constructed for tax purposes as an afterthought — no such secondary or ancillary intention was found by the Tax Court Judge to be present here.

The law that a secondary or ancillary profit intention is sufficient in creating a partnership was known to the Tax Court Judge and was cited by him in his judgment. He reproduced the paragraph from Lindley, supra, at paragraph 71 of his judgment. [23] Despite this, the Tax Court Judge found, as a fact, that there was no intention on the part of the parties to conduct business in common with a view to profit. He correctly concluded, as a matter of law, that if there was no intention to carry on business with a view to profit, there could be no partnership. [24]

Given such a strong finding of fact that there was no intention other than to obtain a tax loss, one can only conclude that, if the appellant intended to carry on business, it was with a view to a loss, not a profit. That intention does not meet the standard required by Canadian — or California — law.

It has been suggested in this case that the Tax Court judge did not have the benefit of the decision in Continental Bank, supra, which decision introduced a new legal proposition to the analysis of partnership — that a secondary or ancillary intention to carry on a business with a view to a profit is sufficient to ground a partnership. That proposition was not new; it was settled before the Supreme Court decision in Continental Bank. At the risk of repeating, let me explain.

The quotation from Lindley & Banks on Partnership regarding ancillary intention was published before the Tax Court Judgment in this case, and was cited by the Tax Court Judge at paragraph 71 of his reasons. Additionally, in Hayes v. British Columbia Television Broadcasting Systems Ltd.^ [25] a case adjudicated over four years before the Tax Court decision in this case, Braidwood J. wrote for the British Columbia Supreme Court that

Where a. partnership is formed with some predominant motive other than the acquisition of profits, e.g. tax avoidance, but there is also a real, albeit ancillary, profit element, then it may be permissible to infer that the business is being carried on "with a view of profit.” But it is apprehended that if any partner entered the partnership solely with a view to being credited with a tax loss (or capital allowance), and it was contemplated from the outset that whilst he remained a partner, there would be no real profit (in the sense of an income profit), then he would not be a partner properly so called.

One must commence with the proposition that the main rule to be observed in determining the existence of a partnership is to determine what is the true contract or intention of the parties as appearing from the whole facts of the case... (Emphasis added).

The Supreme Court, therefore, did not add anything new to the law when it indicated that an ancillary profit motive is sufficient to ground a factual finding of carrying on business with a view to profit.

In any event, there is no persuasive evidence on the record to demonstrate an intention to earn profit, ancillary or otherwise. This is so for four reasons. First, a “view to profit” requires that there be a view to make profit. In this case, the Canadian parties contend that, for a brief instant, they were part of a partnership which owned an interest in a business with a ten million dollar operating loss. In that very instant, they claim to have crystallized that ten million dollar operating loss into an actual loss for their partnership. This, they freely admit, was their goal before entering into the transaction. Thus, by their own admission they planned and generated a ten million dollar loss with no intention of ever recouping that loss, or of ever making any profit. This cannot be evidence of a view to profit, real, ancillary, or otherwise.

Second, while it is true that the contract between the Canadian and U.S. parties appears to assign “future profits” from the HCP project to the partnership, that same contract is careful to spell out the ultimate intention of the parties to undertake a series of transactions which would result in the distribution of the Tremont project to the Canadians and the HCP project to the U.S. parties. Unlike Continental Bank, where the documents contemplated the sharing of future profits, the documents in this case expressly state the ultimate intention of the parties as being other than engaging in business in common with a view to profit. [26]

Third, major factual differences between the transaction in Continental Bank and this transaction convince me that there existed no view to profit here. The partners in the former case remained partners for three days of continuing business, during which profits were generated and shared in accordance with the partnership agreement. Here, the alleged joinder of the Canadian and U.S. parties existed only for minutes, during which a ten million dollar loss was realized. I do not see how this can constitute objective evidence that the parties conducted business in common with a view to profit.

Fourth, the appellant argues that the parties intended to carry on the business with a view to profit, as evidenced by the purchase and subsequent management of the Tremont project. The Tax Court Judge responded to this argument by pointing out that a view to profit must at some level mean a view to make profit:

The quantum of the initial loss anticipated by the appellants compared with any anticipated, or real, profits from the Tremont Apartments cannot, in my view, lead to the conclusion that the relationship subsisting between the appellants was to carry on a business in common with a view to profit or with a reasonable expectation of profit.... Any profits from the Tremont Apartments compared to the initial loss requires an exaggerated imagination to conclude that the transactions were undertaken with a view to profit. [27]

It is said that the partnership continued for ten years and that the Tremont Apartments ultimately made modest profits. The Canadian parties contend for this result as follows: in November of 1987 they entered into partnership with the U.S. parties, which partnership realized large losses shortly after their entry. The U.S. partners then left the partnership, leaving a large loss and a small apartment building, which has generated small but real profits over the years. In reality, however, the Canadian and U.S. parties were, on paper, co-owners of the HCP project for a fleeting moment. For the appellant’s view to be correct, it is necessary that, in that brief moment when the Canadians allegedly entered into the partnership, all the parties must have possessed a view to profit. No such common intention existed here.

The intention to make profit is a necessary component of the partnership relationship, though profits need not actually arise in order to sufficiently ground a finding of partnership. Similarly, where this necessary intention to make profit is lacking, the resulting relationship cannot be properly characterized as partnership, regardless of whether or how profits arise.

There is another basis for saying that there is no partnership here. You cannot be a partner of someone who is not a partner with you. As a matter of law, the intention of the Canadian parties to enter a relationship amounting to partnership is necessary but not sufficient. As discussed above, partnership is based on agreement and thus requires a mutual intention on the part of all the parties to form a relationship that amounts to partnership. [28] Even if the Canadian parties intended to become partners, which the findings of fact deny, no partnership can exist if the American parties did not so intend. In this case, the intention of the U.S. parties is plain on the face of their tax reporting: they viewed the transaction as the sale of the Tremont apartments. As far as they were concerned, they never entered any partnership with the Canadians and BDI never divested itself of the HCP project. From their point of view, they sold the Tremont project to the Canadians. [29] BDI stated to the U.S. Internal Revenue Service (“IRS ”’) that:

In the view of BCE Development Inc., the effective nature of the transaction with Spire Freezers Limited..., while structured as a sale of the partnership interest and of the Hamilton Cove condominium project was, with respect to the Hamilton Cove condominiums, not a sale but a distribution of the Hamilton Cove condominium development to BCE Development Inc..

BDI further represented to the 1RS that:

Although elaborate from BCE Development’s U.S. Income Tax perspective, the series of transactions resulted in the sale of the low-income apartment project to the Canadians for $1.2 million. The title change to the Hamilton Cove condominium was merely to create the desired structure.

While the foreign tax treatment of this transaction has no consequence to this appeal, the tax reporting of the U.S. parties is strong evidence of their view of the transaction and their true intention at the time that the agreements were made. It would, of course, be illegal for the U.S. parties to misrepresent this transaction to the IRS.

Further, there is no evidence of these parties carrying on business in common in this case. In this case none of the indicia of partnership listed by Bastarache J. in Continental Bank™ [30] are present. There was no contribution of resources to a common undertaking, no sharing of profits and losses by the parties, [31] no mutual right of control or management, and no filing of income tax returns as a partnership — as noted above, the U.S. parties reported to the I.R.S. that the transaction constituted the sale of the Tremont project to the Canadians. While there may have been joint ownership of the HCP project which gave rise to the claimed losses, that joint ownership was designed to be — and was — only momentary. It is therefore hard to see how the parties could have acted in accordance with, or have been governed by, the partnership documents. The parties here were governed solely by their pre-arranged deal, which falls far short of establishing this necessary ingredient of partnership. Thus, there is no basis on which to challenge the Tax Court Judge’s conclusion that there was no business being carried on in common on these facts.

The appellant asks this Court to vacate a finding of fact below and substitute a finding that both the Canadian parties and the U.S. parties intended to carry on a business, the Tremont apartments, in common with a view to profit. How can this be if the U.S. parties believed themselves to be selling the Tremont apartments, and so reported to the U.S. authorities? It is the expressed view of BDI that, even for the fleeting moment that the appellant and BDI co-owned the HCP, there was no intention to carry on business in common with a view to profit. The appellant asks us to find intention where the trier of fact found none, and to find mutuality where the alleged partners reported none. That cannot be done.

In Continental Bank, it was clear that both sides viewed the partnership transaction similarly. Even if one were to hold, contrary to the Tax Court Judge’s finding of fact, that the Canadian parties intended to be partners, there is no evidence on which to base the necessary finding that the U.S. parties intended to enter an arrangement that resembled a partnership. Even the partnership agreement, which for an instant gave the Canadian parties an interest in the HCP project, including “rights to future profits”, was careful to point out that the HCP project would not be operated or managed by the Canadian parties. That agreement describes the transaction with stark Clarity:

As expressed in the letter agreement dated June 2, 1987 (the “Letter Agreement”) between BDI, Peninsula Cove, Assignee, and Spire Investors Group Li mi ted..., this Assignment is part of a series of transactions designed to transfer the [Tremont] Apartment project to the Partnership and the [HCP] Condo Project to BDI.,. Flit is the intent of the parties that only the Apartment Project and related property remain assets of the Partnership and that the Condo Project and related property, and, in addition, any other property unrelated to the Apartment Project which may later be discovered to have been owned by the Partnership on the date of this Assignment, shall be transferred to BDI. (Emphasis added)^^ [32]

While it is not central to my conclusions, the appellant’s view is tantamount to an argument that the legal form of partnership documents alone is sufficient to create a partnership in law. This argument attempts to undo the common law jurisprudence of virtually every jurisdiction. Courts determine whether or not partnership exists on the facts of each case. The interpréta- tion of Continental Bank contended for by the appellant would overturn those cases in which partnership was found despite insufficient documentation, as well as those cases in which no partnership is found despite some documentation. The Supreme Court in Continental Bank did not intend to remove from the analysis of partnership any reference to the factual setting. The Supreme Court did not say that the intention expressed in a document is always, by itself, sufficient to create a partnership. Bastarache J. commenced his analysis reconfirming that “[t]he existence of a partnership is dependent on the facts and circumstances of each particular case ... [and] determined by what the parties actually intended ... as appearing from the whole facts of the case”A [33] Bastarache J. quoted the same passage from Lindley & Banks on Partnership reproduced above, which expressly states that a transaction motivated entirely by tax losses could not in any real sense be said to have been formed with a view to profit.

Despite not having the benefit of the reasons of Bastarache J. in Continental Bank, the Tax Court Judge was cognizant that partnerships must exist in fact as well as on paper. He was aware that tax planning may properly be the primary factor motivating partners. He heard the evidence and determined that, on the facts of this case, no intention to carry on business in common with a view to profit existed. I am not persuaded that this is a perverse or capricious finding of fact. As was so forcefully argued by Ms. Van Der Hout, no business person or reasonably informed lay-person would conclude that, on these facts, there was a partnership created here; only an overly technical tax counsel would even contend that there was.

It is true that the taxpayer’s expert, Professor Richard Buxbaum, wrote in his report that a partnership was created among the Canadian and US. parties. This conclusion, however, was based on an assumption that the parties intended to become partners. In the Letter of Instruction seeking Professor Buxbaum’s advice, counsel for the appellant wrote that the object of the original partnership was to construct the HCP condominium, and was silent on the issue of the Canadians’ intentions. [34] Professor Buxbaum’s opinion acknowledges his assumptions regarding intention:

I have also been advised by counsel that all of the persons named in the following paragraph ... intended to become partners in that partnership. [35]

This fact was reiterated during the Crown’s cross-examination of Professor Buxbaum:

Q. Now 1 take it, sir, that in forming your opinion you assumed this [the intention to form a partnership] as a fact?

A. That’s correct.

Q. But I put it to you, sir, that you have no means of knowing what the appellants’ intentions were.

A. That’s correct.

Q. But yet the intention of the appellants was obviously relevant for the purposes of your opinion.

A. Well, it’s one of the facts stated here.

Q. It’s ---

A. Primarily, I was asked to go on the objective fact that they did become partners.

Q. But you —

A. Intention is relevant. In case they had not intended to become partners, then you’d have to go through the document more carefully to determine whether as a conclusion of law they nevertheless became partners.

Q. Sir, in forming this opinion you assumed that it was the intention of the appellants to become partners —

A. That is correct.

Q. — in this partnership? You assumed that as a fact?

A. Yes, I did. ^ [36]

These vital facts cannot be assumed. They must be based on evidence, which, according to the expert as well as the trier of fact, was not sufficient to prove the requisite intention.

The respondent also submits in written argument that (a) the HCP condominium was not a source of income from which losses could be deducted, (b) there was no real loss in this situation; (c) ITA s. 245(1) applies in this situation; (d) the amount was an unreasonable deduction contrary to section 67 of the ITA; and, (e) the transaction was a sham. Since the adjudication of the central issue is sufficient to dispose of this case, I would decline to deal with them in these reasons.

I would therefore dismiss the appeal, with costs to the respondent.

Robertson J.A. (dissenting):

Introduction

The appellant taxpayer, together with other Canadian residents, participated in a series of step transactions with the principal objective of gaining access to an unrealized non-capital loss of $10 million (U.S.). That loss accrued with the disposition of a condominium development owned by a California partnership, which disposition occurred immediately after the taxpayers’ admission to that partnership. As expected, the non-capital loss greatly exceeds the $1.2 million (U.S.) invested by the Canadian taxpayers who now seek to import that foreign loss into Canada for the purpose of reducing their income tax liability. By agreement, the outcome of this appeal will be dispositive with respect to the other Canadian participants.

The Tax Court Judge ruled in favour of the Minister of National Revenue on two grounds. First, he held that a valid partnership had not been established because there was no intention “to carry on business in common with a view to profit”. In the opinion of the Tax Court Judge, the taxpayer’s “single overriding consideration” was to obtain a tax loss. The second ground advanced by the Tax Court Judge is related to the first. He held that because the non-capital loss was significantly greater than the profits to be derived from the apartment building which the partnership continued to own after the sale of the condominium development, the business was not being carried on “with a view to profit or with a reasonable expectation of profit”. The Tax Court Judge did rule in the taxpayers’ favour on three issues. He held that the transaction in question was not a sham, neither was it caught by two of the Income Tax Act’s anti-avoidance provisions, namely, sections 67 and 245.

My colleague, Justice Linden, is prepared to uphold the decision below on the basis that the issue before us, namely, whether the parties had an intention to profit, is simply a question of fact; therefore, deference is owed to the trier of fact and there is no basis in law to interfere with his findings. With great respect, I must distance myself from both the reasons and the result proffered by my colleague. In my view, the Supreme Court’s recent decision in Continental Bank of Canada v. R.^ [37] is dispositive of the issue as to whether a valid partnership had been formed. This becomes evident once it is recognized that the Tax Court Judge applied this Court’s decision in Continental Bank, which was subsequently overruled by the Supreme Court. [38] I hasten to add that, in Continental Bank, this Court relied on its own decision in Hickman Motors Ltd, v. R.^, [39] which was also overruled by the Supreme Court.

I assume that the critical finding of fact made by the Tax Court Judge and referred to by my colleague is that found at paragraph 72 of the Tax Court Judge’s reasons, wherein it is observed that “none of the taxpayers intended anything other than to obtain a tax loss”. Standing alone, this passage is open to several interpretations. If it is construed to mean that the taxpayers’ subjective intentions reveal only an intention to garner a tax loss, that construction is contrary to the analytical framework prescribed by the Supreme Court in Continental Bank for determining whether a valid partnership was formed. According to the Supreme Court, intention cannot be based solely on the subjective intentions of the parties; it must also be based on objective evidence.

I have always believed that tax law is more concerned with the actual conduct of taxpayers, than with their oral testimony. Clear, objective evidence as to intention always trumps the subjective ruminations of witnesses who are naturally reticent to offer testimony which may be prejudicial to their interests. Moreover, the influence which legal and tax advisors exercise over their clients cannot be ignored when assessing the parties’ intentions. In the present case, that influence was apparent. As will be discussed below, I find the fact that the partnership carried on business in a manner consistent with the written agreements more compelling evidence of the parties’ intentions than their oral testimony. I need only add that the fact that the taxpayers did not concede that the transaction was motivated by the tax loss until the date of trial does not constitute the type of “deceit” envisaged by the sham doctrine. It does, however, constitute convincing evidence that the Minister should spend more time evaluating what the parties did than what they were prepared to concede at discovery or at trial. The folly of the Minister’s position stems from his apparent belief that the only evi- dence relevant to establishing the intention of the taxpayers is their thoughts. In future, it may be convenient in tax law to distinguish between that which motivates a taxpayer to do something, and that which is intended, as evidenced by what a taxpayer actually does. [40]

Alternatively, if the Tax Court Judge meant to imply that there is no objective evidence that the taxpayers intended to carry on business with a view to profit, then the relevant passage contradicts the fact that the partnership continued to hold title to a profit-generating asset, namely, the apartment building, for at least a decade after the sale of the condominium development.

I pause here to note that at no time have the taxpayers sought to establish a valid partnership on the basis of documentary evidence alone, as suggested by my colleague at paragraph 46 of his reasons. The evidence on which the taxpayers rely includes consideration of whether that documentary evidence was acted upon and governed the parties’ affairs. As stated above, the issue before us is not to be decided solely by reference to what the parties thought or said on the witness stand. Evidence of intention has always been measured by another yardstick, namely, what the parties actually did.

A final interpretation of the passage in paragraph 72 is that the taxpayers’ predominant motive was to gain access to a tax loss. This interpretation is consistent with paragraph 70 of the Tax Court Judge’s reasons, in which he states that “[t]he appellants got together to obtain a tax loss; this was the single overriding motivation to their relationship”. That passage clearly reveals that, while other considerations may have influenced the taxpayers’ decision to enter into the California partnership, the taxpayers’ primary motive was to gain access to a tax loss. In the Tax Court Judge’s view, that meant that a valid partnership had not been formed. At the time of his decision, that view of the law was fully supported by this Court’s decision in Continental Bank, which the Tax Court Judge quoted extensively at paragraph 71 of his reasons.

However, the Tax Court Judge was also aware that, according to Lindley & Banks on Partnership,^ [41] a valid partnership may subsist even if the taxpayer’s predominant motive is tax avoidance, provided that there is an ancillary or secondary intention of carrying on business with a view to profit. If the Tax Court Judge’s reasons are to be interpreted as finding that there was no such secondary or ancillary intention, that finding is clearly incorrect, since the documentary evidence demonstrates that the partnership acquired an income-earning asset which became profitable within a relatively short time. Admittedly, Lindley & Banks goes on to suggest that if a taxpayer’s sole purpose for entering into a partnership is to obtain a tax loss, and it was contemplated from the outset that no profits would be derived from the business, then the requisite secondary intention would be lacking.

In my view, the Tax Court Judge was acutely aware of the significance of objective evidence to support a finding that there was a secondary intention to profit. He was also aware that the tax avoidance scheme had been deliberately structured to ensure that the partnership would continue once the condominium development was sold. This fact alone is sufficient to demonstrate the taxpayers’ secondary intention to establish a valid partnership. This is true even though the decision to acquire the apartment building was not contemplated when the taxpayers were first informed of the tax shelter. It was an “afterthought”, undertaken to satisfy the requirement of partnership law and the Income Tax Act that there be an on-going business carried on in common with a view to profit. Nonetheless, this secondary intention existed as of November 30, 1987, the date the “step transactions” were carried out. This may explain why the Tax Court Judge went on to hold that, because of the magnitude of the non-capital loss compared to the profits to be generated by the apartment building, the business was not being carried on “with a view to profit or with a reasonable expectation of profit”. This is one finding which I cannot ignore, as it negates the taxpayers’ argument that there was a secondary intention to profit from the transactions.

Finally, at paragraphs 38 to 45 of his reasons, my colleague finds the taxpayer’s lack of intention to carry on business in common with one of the American parties to the transaction (“BDI”) as a basis for holding that no partnership existed. That matter will be dealt with below. With respect, I find no merit in this argument which, in my respectful opinion, is based on a fundamental misunderstanding of the facts.

Since this appeal raises the question of the applicability of the reasonable expectation of profit doctrine, established by the Supreme Court in Mo Ido wan v. /?. [42] , and because of the disparate views held by my colleague and myself, I feel compelled to retrace the facts of this case and to review Continental Bank.

Facts and Decision Below

In 1978, a partnership was formed pursuant to the laws of California for the purpose of developing a 423-unit condominium on California’s Santa Catalina Island. In order to obtain the requisite government approvals, the partnership had to undertake to construct an apartment building, the rent to which would be government subsidized. Both projects were completed, and title to the apartment building was held by a corporation wholly owned by the partnership.

By the end of 1986, the cost of the condominium development had exceeded its value by approximately $10 million (U.S.). At that time, the partnership was comprised of “BDI” and “Peninsula”, which were interested in selling their 50% interests in the partnership if BDI could retain title to the development. That stipulation did not affect Peninsula, since it was a wholly owned subsidiary of BDI. The sale of the condominium to BDI would generate a non-capital loss and, on this understanding, the appellant taxpayer, together with other Canadian residents, agreed to purchase the partnership. Prior to the execution of the formal documents, the parties were advised that, in order for the scheme to survive legal scrutiny, it would be necessary for the partnership to carry on business following the sale of the condominium development. Thus, it was agreed that the partnership would acquire direct ownership of the apartment building and continue to operate it as such. Under the agreement, the taxpayers were guaranteed a minimum tax loss of $7 million (U.S.) for a maximum investment of $1.4 million (U.S.). The agreement also stipulated that once the Canadian taxpayers were admitted to the partnership, they would sell the condominium development to BDI and title to that property would be transferred immediately to BDI.

On November 30, 1987, a series of “step” transactions were executed, resulting in the following events. BDI and Peninsula amended their partnership agreement to provide that the partnership would continue regardless of the withdrawal of a partner or the admission of a new one. The apartment building was then sold to the partnership for $2.9 million (U.S.), payable in cash ($696,000 U.S.) and the assumption of existing liabilities. The partnership borrowed the cash from BDI. The partnership then sold the shares of the corporation to BDI for $696,000 (U.S.). That amount was paid by way of a set-off against the loan from BDI to the partnership. At this stage of the transaction, the partnership was comprised of two partners, BDI and Peninsula, which held title to both the condominium development and the apartment building.

The next “step” involved Peninsula selling its 50% interest in the partnership to the taxpayer. In turn, BDI disposed of its 50% interest by selling a 25% interest to the taxpayer and the other 25% to a Canadian corporation (Spire Investors Group Ltd.) which acted for itself and as nominee for several persons.

The aggregate purchase price for all of the partnership interests was $34.5 million (U.S.), of which $1.2 million (U.S.) was paid by certified cheque and the remaining $33.3 million (U.S.) by demand promissory notes. The partnership then sold the condominium project to BDI for the amount secured by the promissory notes. The partnership’s net loss for the 1987 taxation year on the sale of the condominium project was $10 million (U.S.) plus $400,000 (U.S.) on the sale of the shares. The Minister does not dispute the amounts in issue, which I have rounded off for ease of reference.

In addition to paying down the mortgage on the apartment building, the partnership realized profits of $457,000 (U.S.). An excess cash flow of $756,000 (U.S.) was withdrawn from the partnership between 1989 and 1995, inclusive. The following table, represents the partnership’s net profits, amounts withdrawn by the partners, and partnership income for Canadian tax purposes during those years:

The Tax Court Judge accepted that when BDI and Peninsula formed their partnership, a bona fide partnership existed under the laws of California. That determination was based on a finding that the two original partners “had a reasonable expectation of profit from the investments and carried on a business with a view to profit.” The Tax Court Judge then turned his attention to the validity of the partnership, in light of the admission of the Canadian partners and the withdrawal of BDI and Peninsula.

The Tax Court Judge acknowledged that the creation and dissolution of the partnership had to be determined by reference to California law. However, he noted that the taxpayer’s expert witness addressed only the question of whether the partnership had been dissolved by virtue of the admission of new partners on November 30, 1987. Accepting the expert’s testimony that the partnership remained intact, the Tax Court Judge asked whether the alleged partnership met the other requirements of California law. He ruled that since neither party led evidence on this issue, it had to be assumed that the law of California with respect to partnerships was the same as that in the Canadian provinces. On this basis, he held that in order for a partnership to exist, there had to be a relationship between persons “carrying on business in common with a view to profit.” [43]

The Tax Court Judge found that this requirement was not satisfied. It is somewhat unclear whether he held that the taxpayer’s sole purpose was to obtain a tax loss or whether that was simply the overriding consideration. More importantly, in reaching his conclusion, the Tax Court Judge invoked this Court’s decision in Continental Bank, in addition to a case which he authored. [44] The latter decision involves a tax plan similar to the one under appeal. The taxpayer’s appeal in that case was also unsuccessful.

The Tax Court Judge went on to find that there was no intention to carry on business with a view to profit and that there was no reasonable expectation of profit. As noted earlier, this finding was arrived at by comparing the anticipated loss of $10 million (U.S.) with the anticipated profits to be realized from the apartment building. At paragraph 72 of his reasons, the Tax Court Judge stated:

[i]n the appeals at bar as well [as in Continental Bank], none of the appellants intended anything other than to obtain a tax loss. The retention of the Tremont Apartments was an afterthought the appellants were advised was necessary. The quantum of the initial loss anticipated by the appellants compared with any anticipated, or real, profits from the Tremont Apartments cannot, in my view, lead to the conclusion that the relationship subsisting between the appellants was to carry on a business in common with a view to profit or with a reasonable expectation of profit. Any profits from the Tremont Apartments compared to the initial loss requires an exaggerated imagination to conclude that the transactions were undertaken with a view to profit. Again, the relationship subsisting between the appellants was not that of carrying on a business in common with a view to profit; they did not associate themselves to carry on a business for profit. [emphasis added; footnote omitted]

The Tax Court Judge did rule in favour of the appellant taxpayer with respect to three issues. First, he held that the transaction in question was not a “sham”. Second, he rejected the argument that the tax loss could be disallowed under section 67 of the /ncome Tax Act, which limits the amount of an outlay or expense to that which is reasonable in the circumstances. The Tax Court Judge held that neither a non-capital loss arising from the disposition of property nor a capital loss from the disposition of shares constitutes a disbursement or an expense within the meaning of section 67. Third, the Tax Court Judge rejected the argument that section 245 of the Act, which prohibits a deduction in respect of a disbursement or an expense that unduly or artificially reduces a taxpayer’s income, was applicable for the same reasons offered in regard to section 67.

At paragraphs 8, 9 and 40 to 42 of his reasons, my colleague draws attention to the manner in which the transactions were reported by BDI to the American tax authorities and the fact that BDI never lost effective control of the condominium development. In my view, those facts are irrelevant to the disposition of the present appeal. I say this because they formed no part of the Tax Court Judge’s reasons for disposing of the appeals. At paragraph 45, the Tax Court Judge observed: “I always have reservations about accepting evidence as to how a transaction is treated for tax purposes in a foreign jurisdiction”, and “[h]ow a transaction is treated in a foreign juris- diction is of no import as to how it ought to be treated for Canadian tax purposes”.

I turn now to the decision in Continental Bank.

Continental Bank

When Continental Bank (the “Bank”) decided to wind up its affairs, it invited offers for the purchase of the shares or assets of one of its wholly owned subsidiaries which carried on a leasing business. A prospective purchaser was found for the subsidiary’s business, but it was concerned about the credit-worthiness of certain lessees. Accordingly, at the purchaser’s request, the Bank entered into an arrangement whereby the subsidiary formed a partnership with several of the purchaser’s subsidiaries to carry on the same leasing business. The assets of the subsidiary, other than the questionable leases, were transferred to the partnership. To avoid a recapture of capital cost allowance that would have otherwise flowed from an outright sale of the assets, the subsidiary effected a rollover under subsection 97(2) of the Income Tax Act by making the requisite election. The partnership continued to carry on the leasing business of the subsidiary. Three days later, the subsidiary transferred its interest in the partnership to the Bank pursuant to section 88 of the Act as part of its winding up. The Bank then sold its interest to the purchaser’s subsidiaries.

The Bank’s subsidiary filed an income tax return on the basis of the above transaction, including $130,726 in income with respect to its net earnings during the three days in which it held an interest in the partnership. The Minister reassessed the subsidiary on the basis that the partnership transaction was invalid, giving rise to a recapture of capital cost allowance. In addition, the Minister relied on the fact that the tax planning strategy involved a breach of subsection 174(2) of the Bank Act, which provides that a bank may not directly or indirectly participate in a partnership. Section 34 of Ontario’s Partnerships Act provides for the dissolution of a partnership upon the happening of any event that makes it unlawful to carry on business. The Tax Court allowed the subsidiary’s appeal from the Minister’s reassessment, but this Court reversed that decision and allowed the Minister’s appeal.

Writing for the Federal Court, Justice Linden found that no valid partnership had been created. Although the evidence failed to establish that the transaction was a sham, he held that a bona fide partnership had not been created, as the parties had failed to demonstrate their intention to carry on business in common with a view to profit. Rather, he found that the parties intended to effect a sale of assets through a device called a “partnership”. At paragraphs 21 and 22 of his decision, Justice Linden stated:

[c]ounsel for the taxpayer, however, suggests that a partnership existed and that the elements of the partnership definition were present. There is, says counsel, a written agreement, and this agreement is said to contain terms one normally finds in a partnership agreement. There is a business operated as a revenue producing enterprise. There is, too, the evidence that the parties held themselves out as partners to third parties, and that separate bank accounts and books and records were maintained solely on account of the “partnership”.

Yet despite this array of facts, I am of the view that this was not a business carried on in common with a view to profit. The scheme lacked the necessary glue to hold it all together, which is intention. The parties must not only do in form what the statute prescribes, they must also intend it in substance, and this intention must be demonstrated on the facts. In other words, what occurred in the present circumstances as mere incidents of adopting a form of partnership cannot be seen as substantive evidence of an intention to create a partnership in fact. Hence, even if a business was transferred into the vehicle the parties called a partnership, and even if this business was claimed to be carried on in common, which I doubt it actually was, it was not run with the intention of earning profit. The parties, rather, intended to conduct a sale of assets through a device they chose to call a partnership, even though, in reality, it was not one.

Justice Linden went on to conclude that tax considerations so dominated the parties’ intentions that he was forced to conclude that the parties did not intend to create a “genuine partnership”. The idea of sharing profits was described as “an afterthought when the parties originally put the deal together” [45] . As for the fact that the partnership generated profits during its three day existence, which were reported as income by the subsidiary, Justice Linden reasoned that such evidence was not conclusive that a partnership had been established.

Although not relevant to the present appeal, Justice Linden also went on to find that a partnership did not exist because subsection 174(2) of the Bank Act and section 34 of the Partnerships Act of Ontario had been breached.

The Supreme Court allowed the appeal (L’Heureux-Dubé and Bas- tarache JJ. dissenting), finding that a valid partnership had been created and that the transaction did not contravene the Bank Act. Of particular relevance to the present appeal is the fact that the Supreme Court unanimously found that the transaction created a valid partnership.

Justice Bastarache, speaking for the entire Court on the partnership issue, began his analysis of a valid partnership with some general propositions. They are found at paragraph 25 of his reasons:

[i]n cases such as this, where the parties have entered into a formal written agreement to govern their relationship and hold themselves out as partners, the courts should determine whether the agreement contains the type of provisions typically found in a partnership agreement, whether the agreement was acted upon and whether it actually governed the affairs of the parties. (Mahon v. Minister of National Revenue, 91 D.T.C. 878 (T.C.C.)).

His Lordship then went on to outline the classic prerequisites to establishing a valid partnership: (1) there must be a business; (2) the business must be carried on in common; and (3) the business must be carried on with a view to profit.

Of particular significance to the present appeal is Justice Bastarache’s holding that simply because there was an overriding intention to create a partnership for tax purposes, that does not negate the fact that profit-making and profit-sharing were ancillary purposes. At paragraphs 43 and 44, Justice Bastarache adopted the view expressed in Lindley & Banks on Partnership that even though a partnership is formed for a predominant motive other than profit (for example, tax avoidance), it still constitutes a valid partnership:

[s]imply because the parties had the overriding intention of creating a partnership for one purpose does not, however, negate the fact that profit-making and profit-sharing was an ancillary purpose. This is sufficient to satisfy the definition in s. 2 of the Partnerships Act in the circumstances of this case. At pp. 10- 11, Lindley & Banks on Partnership makes the following observation:

...if a partnership is formed with some other predominant motive [other than the acquisition of profit], e.g., tax avoidance, but there is also a real, albeit ancillary, profit element, it may be permissible to infer that the business is being carried on “with a view of profit.” If, however, it could be shown that the sole reason for the creation of a partnership was to give a particular partner the “benefit” of, say, a tax loss, when there was no contemplation in the parties’ minds that a profit ... would be derived from carrying on the relevant business, the partnership could not in any real sense be said to have been formed “ with a view of profit.”

This is not a case where the disentitlement of one partner to a share of the profits was agreed to by the parties; nor is it a case where no profits were anticipated during the term of a partner’s involvement. During the period in which Leasing and the Bank were partners in the business, the Partnership earned a profit from its leasing operations and that profit was distributed at year end.

At paragraph 45 of his reasons, Justice Bastarache emphasizes that it is insufficient to examine the parties’ subjective intentions in order to determine whether they had an intention to carry on business in common with a view to profit:

[t]he respondent argues that intending to constitute a valid partnership is not the same thing as intending to carry on business in common with a view to profit. I agree. The parties in the present case, however, set up a valid partnership within the meaning of s. 2 of the Partnerships Act. They had the intention to and did carry on business with a view to profit. This conclusion is not based simply on the parties' subjective statements as to intention. It is based on the objective evidence derived from the Partnership Agreement entered into by the parties. ^ [46] [emphasis added]

As to the fact that the transaction in question was structured for tax purposes, Justice Bastarache rejected this Court’s assumption that such a transaction is invalid. At paragraph 50, he held:

[t]he Court of Appeal held, in effect, that because the ultimate objective of the Bank in proceeding with the partnership transaction was to effect a sale of its leasing business to Central, neither Leasing nor the Bank could have had the requisite intent to form a valid partnership. The result of this reasoning is that unless the only motive underlying the formation of a partnership is to carry on business in common with a view to profit, a valid partnership cannot be formed. The underlying premise of this reasoning is also that a transaction that is motivated by the securing of tax benefits is not a valid transaction. This reasoning cannot be supported. [emphasis added]

Justice Bastarache held that profit-making and profit-sharing were real, albeit ancillary, motives of the partnership. This was held to be sufficient to satisfy the “view to profit” requirement for partnership. [47] Justice Bastarache also noted that it was irrelevant that the Bank’s subsidiary was only a member of the partnership for three days. All that was required was that the business be carried on in common with a view to profit during that period. Finally, Justice Bastarache criticizes this Court for assuming that simply because a transaction is motivated principally by tax considerations, the parties lacked the requisite intention to form a valid partnership. At paragraphs 52 and 53, Justice Bastarache writes:

[h]aving found that the transaction was not a sham, the Court of Appeal should not have found that the parties lacked the requisite intention to form a valid partnership simply because the transaction was motivated by a resulting tax benefit. The Court of Appeal proceeded on the basis that the predominance of fiscal motives or the absence of a concurrent business purpose justifies or compels the court to disregard the legal form of the transaction which the parties intended.

The legal and commercial reality in the present case is that Leasing intended to and did enter into a partnership with Central within the meaning of s. 2 of the Partnerships Act. The Court of Appeal erred by ignoring the substance of a legally effective transaction.

It is against this backdrop that the present case must be evaluated.

Analysis

The legal requirements to form a partnership outlined by Justice Bas- tarache set out the analytical framework to be applied in this case. To reiterate, a partnership is formed if the parties (1) carry on a business (2) in common (3) with a view to profit.

There is no question that the California partnership (of which the taxpayers became members) was carrying on the business of real estate development and, later, rental property. Unlike the factual circumstances in Continental Bank, where the partnership lasted three days, the present partnership has continued for over ten years. These facts support the proposition that a business was being carried on in common. Justice Linden disagrees, and at paragraphs 38 to 45 of his reasons, he posits that all of the parties must have a mutual intention to form a partnership and that this requirement was lacking because the American partner, BDI, never entered into a continuing partnership with the Canadian taxpayers.

As far as I am aware, the “mutual intention” argument was never advanced before the Tax Court Judge. Nor was it pursued before this Court in oral argument. Only at paragraph 32 of the Minister’s Factum and at paragraph 9 of his Reply Factum is there a reference to the mutual intention argument. In any event, it is my understanding that the Canadian taxpayers did not enter into a continuing partnership with BDI and Peninsula, since the latter two entities sold their respective partnership interests to the Canadian taxpayers. In the circumstances, it is difficult to imagine why it would be necessary for the Tax Court Judge or this Court to determine whether the American parties intended to become partners with the Canadians. The taxpayers called expert evidence as to whether the partnership would terminate on the admission of new partners and the withdrawal of old ones. The Tax Court Judge concluded that the partnership had not terminated under California law. Thus, it is the Canadian taxpayers who have been carrying on business in common over the last decade.

In my view, the evidence and the findings of the Tax Court Judge make it clear that the taxpayers held themselves out to be partners and conducted themselves in a manner consistent with the partnership agreement. The agreement is typical of partnership agreements concluded in the commercial world. There has been a sharing of profits and a business is being carried on in common. Given these circumstances, how can it be said that there was no intention to carry on business with a view to profit? This question brings us back to the issue of the weight to be assigned to the subjective and objective evidence of intention for the purpose of determining whether a valid partnership was formed.

In my respectful view, and with the advantage of hindsight, the Tax Court Judge erred in relying on this Court’s decision in Continental Bank to hold that, since the taxpayers’ predominant motive was to gain access to the tax losses, they were not entitled to their respective shares of those losses. No one can seriously question that the taxpayers’ primary motive or intention was to acquire a substantial non-capital loss. But it is equally obvious that their secondary intention was to acquire and retain an income-producing asset by which they could continue to carry on business in common. As noted earlier, in evaluating a taxpayer’s intention, consideration must be given to its conduct undertaken in response to advice given by legal and tax advisors. In the present case, the parties did what they said they were going to do.

This leads me to the Tax Court’s finding that the partnership was not carried on “with a view to profit or with a reasonable expectation of profit”. As noted earlier, that finding was based on the understanding that the realizable profits from the apartment building could never exceed the non-capital loss incurred on the disposition of the condominium development. It is not clear from the Tax Court Judge’s reasons whether the “profitability factor” is invoked as a basis for holding that no valid partnership was formed because there was no secondary intention to carry on business with a view to profit, or as evidence that there was no source of income giving rise to a loss because of the failure to satisfy the “reasonable expectation of profit” test articulated in Moldowan . . Irrespective of what the Tax Court Judge may have intended, it is clear that the Minister is now invoking the reasonable expectation doctrine as a ground for upholding the decision below. This raises yet another issue. Is there a substantive difference between the reasonable expectation of profit doctrine and the requirement that a business be carried on “with a view to profit” under partnership law? Fortunately, that is not a question I need to address directly. In the reasons that follow, I con- elude that neither the reasonable expectation of profit doctrine nor partnership principles provide a basis on which to deny the taxpayers the relief being sought. I begin with the profit requirement imposed under partnership law.

Does the fact that a partnership has realized a substantial non-capital loss on the disposition of real estate bring that partnership to an end simply because the profits to be generated from other income-producing assets cannot reasonably surpass the amount of the loss? In short, does the fact that a partnership disposes of a losing business while retaining a profitable one mean that the partnership ceases to exist at law? In my view, the answer is obvious: the partners continue to carry on business in common with a view to profit with respect to the income-producing assets, regardless of the quantum of the loss. This is true even when a third party buys into the partnership and a non-capital loss is subsequently realized. The following hypothetical derived from the facts of the present case illustrates my point.

Assume that a partnership consisting of two partners has two incomeproducing assets: a condominium and an apartment building. Assume further that a sale of the former would give rise to a $10,000 non-capital loss, since it cost $30,000 to construct the condominium but its fair market value has fallen to $20,000. The apartment building is fully mortgaged and it is agreed that, in the event there are any excess rents (potential profits), such sums will be applied against the principal amount of the mortgage loan. One of the partners decides to leave the partnership and finds a third party who is willing to pay $10,000 for its half interest. A year later, the newly constituted partnership decides to dispose of the condominium and suffers a non-capital loss of $10,000 ($5,000 per partner). If I understand the Tax Court Judge’s reasoning correctly, this loss is not deductible by the new partner since that amount cannot be realistically off-set by the profits from the apartment building. Clearly, this legal result is unacceptable, even if the facts are altered to provide that the new partner buys into the partnership for a nominal sum, such as $1000, and sells the condominium the next day. The price paid to enter the partnership (the adequacy of the consideration, so to speak) is of no concern to the Minister, nor is the Minister in a position to dictate how long the condominium should be held. That would require a fundamental rewriting of the Income Tax Act and lead to intolerable uncertainty in tax law.

Accepting that there was an ancillary or secondary intention on the part of the Canadian taxpayers to continue carrying on business in common with a view to profit following the disposition of the condominium development, the only remaining question is whether the reasonable expectation of profit doctrine is a sufficient basis for dismissing the appeals. The Minister invokes the doctrine in a bifurcated fashion. First, the Minister adopts the Tax Court Judge’s “netting-out” of the loss arising from the sale of the condominium development with the profits from the apartment building in order to establish that the taxpayers had no reasonable expectation of profit. In short, the taxpayers’ “reasonable expectation” is measured in terms of the net gain or loss arising from both income-producing assets. Second, the Minister argues that the condominium development did not constitute a source of income to the taxpayers. With respect to this asset, it is argued that there was no reasonable expectation of profit when the taxpayers became partners. Their only expectation was to receive a predetermined and preordained non-capital loss of $10 million (U.S.). In my respectful view, the reasonable expectation of profit doctrine does not sustain either argument for the simple reasons that it has no application to cases such as this.

I do not propose to write a dissertation on the Supreme Court’s decision in Moldowan. It has always been a controversial decision, if only because it is one of the few instances in which the Supreme Court has been prepared to adopt a common law anti-avoidance rule aimed at limiting a taxpayer’s ability to engage in dubious business pursuits with a view to deducting inevitable losses from other income sources, typically employment income. Contrary to tax mythology, that portion of Moldowan is not obiter, but what is often forgotten is that seven years after Moldowan was decided, the Supreme Court held in Stubart Investments Ltd. v. Æ. [48] that, absent any statutory ambiguity, it was no business of the courts to parlay doctrines of statutory interpretation into disguised anti-avoidance techniques. According to Justice Estey, [49]

where the substance of the Act, when the clause in question is contextually construed, is clear and unambiguous and there is no prohibition in the Act which embraces the taxpayer, the taxpayer shall be free to avail himself of the beneficial provisions in question.

In the present case, the losses being claimed by the taxpayers fall squarely within section 96 of the Income Tax Act. That provision admits of no ambiguity and, therefore, no interpretative analysis is required. According to Stubart, the onus is on the Minister to thwart unacceptable tax-moti- vated transactions by adopting specific anti-avoidance provisions. This is true unless, of course, the reasonable expectation of profit doctrine is applicable. As much as I am an admirer of Chief Justice Dickson’s decision in Moldowan, it is my view that the Minister is not entitled to rely on that doctrine as a wholesale means of circumventing the need to amend the Income Tax Act in order to thwart aggressive tax planning schemes. I note that with respect to the present case, the Act was amended in 1994 to eliminate that particular tax shelter. [50] I also note that the legislation was not made retroactive.

Generally speaking, the reasonable expectation of profit doctrine is intended to deny tax benefits where profit-seeking becomes the pursuit of an “impossible dream” [51] or there is an overriding personal element attached to an undertaking. That personal element usually manifests itself as a blatant indifference to the profitability of what might otherwise be considered a genuine business undertaking. The classic example is the hobby farmer who makes his money in the city as a lawyer or physician, and then loses it in the country. [52] In addition, there are those who are intent upon deducting half of the interest accruing on their home mortgage from their employment income on the ground that they incurred a rental loss with respect to a basement apartment which, according to the taxpayer’s calculations, is as valuable as the upstairs premises. [53]

There are several factors set out in the jurisprudence which must be examined when assessing whether a reasonable expectation of profit is present, including: the personal element; the profit and loss experience in past years; the formulation of a proper business plan; the taxpayer’s qualifications, training and experience; and the amount of time devoted to the enterprise. Yet this Court has not been asked to examine any of those factors in this case. Rather, the Minister has taken the unprecedented step of arguing that the condominium development did not constitute a source of income because there was no expectation of profit at the time the taxpayers bought into the partnership due to the unrealized non-capital loss. In other words, the Minister invites this Court to adopt a rule of tax law that effectively prohibits anyone who buys into a business with a substantial unrealized non-capital loss from treating that business as a source of income, unless it can be demonstrated that future profits will exceed that loss. I decline the invitation to adopt such a rule. The reasonable expectation of profit doctrine is intended only to determine whether a business exists. If the owners of a business are able to satisfy that requirement, the determination that a business exists should not change simply because the business is transferred to a new owner, or the new partners decide to dispose of an unprofitable asset.

The dangers of adopting the Minister’s argument are self-evident. As far as I am aware, the reasonable expectation of profit doctrine has never been invoked to support the proposition that if one source of income gives rise to a loss which cannot be offset by another income source, then there is no source of income for tax purposes. I pause here to note that if the Minister’s view of the law were to be accepted, then the profits generated by the apartment building would be immune from taxation. I rather doubt that the Minister has reassessed the taxpayers on that basis.

A recurring theme throughout the Minister’s arguments is that the taxpayers did not turn their minds to the issue of profitability when deciding whether to commit themselves to the transaction at issue; rather, they were preoccupied with the huge tax losses that they expected to obtain as a result of the transactions. It is argued, for example, that the taxpayers did not obtain any appraisals or reports with respect to the apartment building. Nor could witnesses recall any discussion with the American vendors concerning estimates of the apartment’s potential profitability. There is a simple response to this argument: the apartment building proved to be profitable. The Minister’s position results in the absurd proposition that, even though a profit was realized, the fact that the taxpayers had no reasonable expectation of profit at the outset is sufficient to hold that no business was being carried on.

Interestingly, the Minister considers that the non-capital loss in issue is merely an arithmetic calculation, and not a “real loss”. In fact, the California partnership spent $10 million (U.S.) more than the fair market value of the condominium development, resulting in a genuine unrealized loss which it was willing to sell to the Canadian taxpayers. I fail to see what is “unreal” about the loss. Finally, there is no merit to the Minister’s arguments involving the sham doctrine and sections 67 and 245 of the Income Tax Act. In this regard, I adopt the reasoning of the Tax Court Judge.

Disposition

I would allow the appeal with costs here and in the Tax Court, set aside the judgment below and substitute it with an order allowing the appeal from the Minister’s reassessment and referring the matter back to him for disposition on the basis that the taxpayers are entitled to the partnership losses claimed.

Appeal dismissed.