Joseph Lohe v. Minister of National Revenue, [1979] CTC 3107

Guy Tremblay [TRANSLATION]:—This case was heard on May 17 and September 19, 1979, at Montreal, Quebec.

1. Point at Issue

The question is whether the appellant is correct in maintaining that he was in partnership with his wife in the truck farming business which he operated on his farm, and that accordingly he is entitled in 1976 to declare as income only half the profits of the said truck farming business.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R \N S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 Before coming to settle in Canada in 1952 appellant lived in France with his wife, Louise Legal Hot. Both were then working as labourers in the truck farming industry.

3.02 The couple was married in France under the regime of community of property. For them this regime meant working together, starting a family, improving what they had undertaken, and so on.

3.03 In 1952 the couple worked from June till October with a farmer in St- Hubert. Their work consisted in assisting the owners with work in the garden (weeding and so on) and housework. They were each paid $100 a month, and given board and lodging.

3.04 In the summer of 1953, appellant and his wife worked for Engineering Products in Montreal at a salary of $25 a week.

3.05 The couple deposited their respective wages in a joint account on which each had signing privileges.

3.06 In September 1953, as the result of a joint decision, appellant and his wife decided to buy a farm and use it for truck farming. This land was purchased with the money in their joint account.

3.07 The farm, which was located at Sherrington in the county of Napier- ville, was purchased for $3,100, including $1,200 borrowed from Farm Credit. The purchase of this four-arpent piece of land was followed in subsequent years by the purchase of four other lots adjoining the first piece. Increased mechanization of the farm made it possible to work more productively over a large area.

3.08 Over the years, the Lohés had employees whose number varied from three to five. The latter, who for the most part were immigrants, received board and lodging from their employer.

3.09 The Lohés now have four children, varying in age from 22 to 26, the oldest having been born in March 1953.

3.10 Although purchases (such as land and farming implements) were made in appellant’s name, they were all preceded by a joint decision. In the minds of the husband and wife, they were jointly owned.

3.11 On one occasion, when an arpent was sold, Mrs Louise Lohé had to sign a contract in accordance with Art 1292 of the Civil Code (Exhibit A-7).

3.12 The couple’s testimony left no doubt that Mrs Louise Lohé’s duties were not limited to housework. She was also involved with the gardening, drove the tractor, supervised the employees in her husband’s absence, and so on. As for several years the employees were also given board and lodging by the appellant, Mrs Lohé played a large part in the family business.

3.13 Over the years the money received continued to be deposited in the joint account, and all expenses were paid from this account.

3.14 Over the years, Mrs Louise Lohé received no salary. According to her testimony, she did not even think of doing so, as she considered that what each owned belonged to them both. She used the joint account for her personal needs.

3.15 Except for 1976, appellant always reported an income in his tax returns for earlier years the entire earnings of the business. In 1976, as the result of advice given by a planner, he treated the income from the family business as income from the business of the partnership consisting of himself and his wife. Accordingly, he reported only half the earnings. The distribution of net profit, according to the financial statement in question, was as follows: net profit, $53,881.08; Joseph Lohé, $26,940.54; Marie- Louise Lohé, $26,940.54.

3.16 This planning not only had the advantage of reducing taxes, it also allowed Mrs Lohé to consider herself an independent worker and to contribute to the Quebec Pension Plan, with all the future benefits resulting therefrom.

3.17 However, the appellant and his wife never concluded a written partnership contract. In their view, the agreement in question resulted from the regime of community of property, and also from the situation under which, in their submission, since 1954 both had carried on a truck farming business for profit in partnership, with joint funds and joint activities.

4. Act— Case Law—Comments

4.1 Act

The principal sections of the Income Tax Act involved in the case at bar are the general sections 3 and 9, which need not be cited at length.

4.2 Case Law and Legal Theory

The parties referred to the following case law and articles on legal theory:

1. Lloyd William Thomas Rathwell v Helen Marie Rathwell, [1978] 2 SCR 436;

2. Frank Sura v MNR, [1962] CTC 1; 62 DTC 1005;

3. Robert Porter and Sons Ltd v J H Armstrong, [1926] SCR 328;

4. Bourboin v Savard, [1926] 40 CBRQ 68;

5. Jerry Huzevka v MNR, 35 Tax ABC 254; 64 DTC 330;

6. Du fort v Dufresne, [1923] SCR 126;

7. Silpit Apparel Industries Ltd v MNR, 5 Tax ABC 118; 51 DTC 384;

8. No 138 v MNR, 9 Tax ABC 419; 54 DTC 42;

9. Marius Ste-Marie v MNR, 15 Tax ABC 46; 56 DTC 211;

10. Pearl Zabitsky v MNR, 31 Tax ABC 170; 63 DTC 200;

11. The Commissioners of Inland Revenue v Williamson, (November 28, 1928), Case 706;

12. MNR v Samuel L Shields, [1962] CTC 548; 62 DTC 1343;

13. Traité de droit civil du Québec, vol 13, “De la Société”, pp 335 to 347, “Des obligations des associés”, pp 401 to 403;

14. Mignault, vol 8, “De la Société”, pp 181 to 192, “Des obligations des associés”, pp 193 to 217.

4.3 Comments

4.3.1 Community of Property and Partnership

Without entering into any lengthy discussion of the subject, the Board believes that it is first of all necessary to make certain distinctions between the association resulting from community of property and that resulting from a partnership as provided for in the Civil Code.

To begin with, community of property gives the wife co-ownership of the property, but only on dissolution of the community, that is, at the time of death, as indicated by a judgment. It does not give the wife a right to income from the property. On the other hand, the wife is not liable to third parties from her personal property for community debts. The aspect of profit is not a characteristic of the community regime.

The community of property the effects of which are described above is that contained in the Civil Code of Quebec. The appellant and his wife, however, were married under the community of property regime as contained in the French Civil Code. No evidence was presented on the legal provisions of this regime as they might differ from that of the Quebec regime.

secondly, partnership also has the effect of making the partners owners of the property, but immediately at the time of purchase, not when the partnership is dissolved. Additionally, a partnership entitles the partners to share in the profits. This is the essence of a partnership, and it results from the fact that the spirit of speculation is one of the key characteristics of a partnership. The codifiers of the Civil Code explained that the concept of a partnership does not involve “associations by mutual agreement resulting from community between spouses and undivided community of property”: Droit civil canadien, P B Mignault, vol 8, p 181. The appellant cited the case of Rathwell. The couple had carried on a joint farming business in Saskatchewan. After their separation the Supreme Court held that the wife had a right of ownership over half the property. This was the same effect as at the time of dissolution of the community of property. However, a joint business does not necessarily constitute a partnership.

4.3.2 In the case at bar, if the association between Mr and Mrs Lohé results solely from the regime of community of property, as they themselves appeared to indicate, it cannot lead to sharing of benefits and an annual division of tax purposes.

4.3.3 In fact, however, quite apart from the statements made by Mr and Mrs Lohé and even by their counsel, on the legal aspect of the problem, does their association not also comply with the provisions of the Civil Code of Quebec regarding partnership?

4.3.4 First, it is clear that according to legal theory until 1969 (that is, until the repeal of Art 1301 of the Civil Code), a husband and wife could not make a partnership contract between them. Thus, under Art 1301 a wife could not contract with or for her husband (Traité de droit civil du Québec, vol 13, p 335). When the appellant arrived in Quebec in 1952, he was subject to this article until it was repealed. If he was not subject to it because of being a French national, he had the burden of showing this, and he did not do so.

From the time of the repeal of Art 1301, were the appellant and his wife, who were completely unaware of the said article, able to form a partnership without concluding a contract, simply by continuing their activities as before? To answer this question, one has to know what a partnership is and the principal conditions required for forming one.

4.3.5 The Civil Code does not define partnership. It is however defined in legal theory as:

A contract by which two or more persons agree with each other to share a means of acquisition in order to exploit it for a common benefit. Accordingly, one of the principal characteristics of partnership is necessarily a plurality of parties. It is a consensual, synallagmatic and onerous contract. It is consensual in that the consent of the parties suffices; it is synallagmatic in that the contracting parties are mutually bound to each other; it is onerous in that each partner seeks to obtain a common benefit at the cost of making a contribution.

(Traité de droit civil du Québec, vol 13, H Roch: R Paré, p 335.)

4.3.6 The contribution of each partner to the partnership, under Art 1830 CC, may consist of property, credit, skill or industry. In this regard, the Traité de droit civil du Québec, cited above, says the following at p 336:

There must first be a pooling of resources by each partner, that is, each of them must contribute something to the common fund. This may be property, whether movable or immovable, real or intangible, owned or merely enjoyed. Under the article credit may also be the subject of a contribution, but the prevailing opinion is that this must be commercial credit, not political credit. Finally, a partner may make a contribution to the partnership by his effort, skill and industry. In a word, the contribution of a partner may consist of anything which may produce and enhance the value of the jointly held property.

In the opinion of the Board, according to the evidence the appellant and his wife met the legal conditions for contribution contained in 1831 CC.

4.3.7 A crucial aspect of the formation of a partnership is the intent to form it. According to Mignault, it may not be presumed. The Traité de droit civil du Quebéc is to the same effect, and there is a long line of decided cases to this effect: Reid v McFarlane, 2 QB 130; Rin fret v May, MLR, 6 CS 137; Christie v Charest, 7 RJ 151, and so on. On the evidence presented, was there an intent by the appellant and his wife to form a partnership?

The evidence is clear that their only intent was to live under their regime of community property. It does not appear that this is sufficient to support a retroactive finding that a partnership existed. The intent was never at any given point expressed in a verbal or written agreement. A decision at the end of 1976 or in early 1977 that they had been a partnership in 1976 is not valid to create a partnership for 1976.

However, that does not mean that the appellant and his wife may not form a partnership in future. To do so, they would have to meet the necessary requirements.

For 1976, however, the Board cannot view the joint truck farming operation as a partnership and the appeal must therefore be dismissed.

5. Conclusion

The appeal is dismissed in accordance with the foregoing reasons for judgment.

Appeal dismissed.