Clifford E McCall v. Minister of National Revenue, [1980] CTC 2572, [1980] DTC 1503

D E Taylor:—This is an appeal heard in the City of Calgary, Alberta, on May 13, 1980, against an income tax assessment for the year 1975 in which the Minister of National Revenue assessed certain income against this ap- pellant as an individual, not as one of two partners. In assessing, the respondent relied, inter alia, upon sections 38, 39, 40 and subsection 74(3) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

History

The appellant was married to Helen M McCall. During the year in question, his income came from several sources, two of which were separate parcels of farm property (“A” and “B”). A portion of farm “B” has been sold during the year in question, resulting in a capital gain.

Contentions

For the appellant:

—The appellant and his wife were in partnership in the two farm properties, both as to the investment itself, and as to the operation of the business of farming.

—The efforts of each party in the ventures were at least equal. Possibly those of Helen M McCall was even greater than those of her husband.

—The income tax return of the appellant for 1975 had been filed crediting all the income in question to the appellant, but charging a salary for his wife against other separate real estate commission he had earned. The Minister had disallowed the salary charge.

For the respondent:

—While the appellant had not filed amended income tax returns to reflect his present “partnership” proposal, the Minister was prepared to have the Board deal with that question.

—The Minister recognized that Helen McCall had a 20% interest in investmentin farm“B” (leavingthe appellant with 80%) and had reassessed the appellant accordingly. The Minister did not agree that a partnership existed for the operation of farm “B”, and the Minister’s position regarding farm “A” was that there was no partnership, either with regard to the investment or the operation.

Evidence

Both the appellant and Mrs McCall detailed the history of the farms. “A” was purchased from the appellant’s father in 1953 for $9,000, of which $2,000 had been put down, and the balance of $7,000 under a mortgage. According to the appellant, $2,000 had been provided by himself and his wife, each paying $1,000. “B” was purchased several years after farm “A”. Both farm properties were in the name of the appellant. While both the appellant and his wife originally farmed property “A” and continued to do so on both farms, this was less frequent in the later years. Arrangements such as “share cropping” etc, has recently been the pattern of operation for both farms.

Argument

The following comments by the agent for the appellant would indicate that farming had always been considered on a joint basis, but the sale of the portion of farm “B” in 1975 had made the problem relevant and immediate:

. . . maybe a year or two years actually generated a taxable profit of a few thousand dollars, but most years it’s very close to border-line. Because of the way the Act reads, so many things can be written off on a cash basis in a farm operation, so the income reported is actually insignificant. Now, today, we are looking at a fair amount of farm land and there is substantial equity in it. Today it is starting to matter whether or not this thing is split fifty-fifty or 80-20 or 100-zero. Whereas (before) we are talking about $500 worth of earned income and it didn't really matter one way or the other.

The best I can do on the partnership, there is an Interpretation Bulletin No 90 and it is rather vague as to what constitutes or doesn’t constitute a partnership. It starts off by saying that the Income Tax Act does not define a partnership. Then it goes down and says:

“2. Generally speaking, a partnership is the relation that subsists between persons carrying on business in common with a view to profit.

3. A characteristic of a partnership is a sharing of profits of a business as opposed to a sharing of gross returns.

6. Since a partnership is a relationship between persons carrying on business for profit, the type and extent of a person’s involvement in the business is relevant in determining whether he is in reality a partner.”

. . . both parties have originally put monies into this on a more or less equal basis, in the original capital investments. Both of them have gone out and have driven tractors, driven trucks, planted crops and hired people. Both of them have exposed themselves to liability in that Mrs McCall had gone out and ordered things and could be held responsible if they were not paid for. So both of them were intricately involved.

Up until 1975 it was never reported as a partnership. Since 1975 it has been in fact reported as a partnership, and the income has been split. Again, in most instances, it didn’t matter an awful lot, and probably won’t matter an awful lot, until they sell another quarter section, from the point of view of the taxable income.

The position of the Minister was summarized:

With regard to the farm income, I believe Mr Kergan’s comments on partnership are relevant, but with regard to the ownership of the property, I have some trouble. I don’t believe the fact of carrying on a partnership, which we don’t accept, but at the moment I will use the hypothetical, would automatically make the farm owned by both people. I think that those are different issues.

The evidence which was called . . . sounds very much like the community of property cases.

... the fact of working hard and contributing by virtue of physical labour and assistance in other ways, does not by itself entitle a wife to own an interest in the property.

. . . Mr McCall was the legal beneficiary of the property. The property was registered in his name and in the absence of any community of property (legislation) of the type which does not exist in Canada anywhere even at this time, or in the absence of an agreement, a partnership agreement, which I will deal with next, or in the absence of Mrs McCall being registered on the title of the property, the income from the property cannot be her income.

A partnership is a legal contract. There are many indicia of partnerships, and those indicia are quoted by Mr Justice Collier in the case of Northern Sales (1963) Limited v MNR, 73 DTC 5200, (1973) CTC 239 (at the bottom of DTC 5204 and 5205, and at CTC 244). However, he also said that the indicia, the contribution of capital, common management, common assets, common facilities, common bank accounts and common firm name, are not conclusive whether they are present or absent. He also says that:

“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”

The best statement of a Common Law that I could locate is in the case of Boychuk et al v Boychuk et al (55 DLR (3d) at page 751), in the Alberta Supreme Court, where Mr Justice Kirby quotes on the recognized authorities on the definition of a partnership, which is from an old English case of Cox v Hickman (1860), 8 HL Cas 268, 11 ER 431, 30 LJCP 125, if I may quote from that 55 DLR (3d) page 754:

. . . the relation which subsists between parties carrying on business in common with a view to profit. It is a relationship resulting from contract, and the fundamental rule to be observed in determining the existence of a partnership is, that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case.

Now, the evidence is, and it is uncontradicted, that there was no partnership agreement between Mr and Mrs McCall. As to the intention of the parties, Mr Kergan has said that they intended to share the income from their joint labours. That, we would submit, is not enough. . . . it is important to note that the intention to form a partnership . . . cannot be construed by the Board to form a partnership in the legal sense, with all the legal ramifications flowing therefrom. A partnership depends on a contract. There was no contract between Mr and Mrs McCall. They worked together well and hard, but that is not sufficient in terms of the law.

As far as the statutory definition of a “partnership” goes, I would refer to Section 4(c) of The Partnership Act (RSA 1955, c 230, s 1), which has also been provided, and in which it is stated that:

the receipt by a person of a share of the profits of a business is prima facie proof that that person is a partner in the business, . . .

This, ... we would emphasize, is a very important point in this case as well. There is no receipt by Mrs McCall of a share of the profits as indicated by the fact that she did not report an income, a share of the profits. If she had, it goes without saying, I think, if she had received a share of the profits that that would have been income to her, and would have been reported as income.

No matter what Mr and Mrs McCall’s intentions were, that wasn’t done.

In essence . . . we would state that, as far as the partnership argument goes, it is the Respondent’s strong submission that there was no partnership—there was no contract and there was no sharing of income.

Findings

No information was provided to the Board for the basis upon which the Minister allowed (on reassessment) a 20% interest in farm “B” to Mrs McCall. I can only conclude that the Minister’s position is that a partnership in the investment necessary to purchase farm “B” did exist. That is a conclusion which I might not reach, based upon the testimony of the witnesses, but it is not an issue before the Board. The Board recognizes the dichotomy raised by the Minister agreeing to an 80-20 partnership arrangement in the investment for farm “B”, but not agreeing to any partnership arrangement in the operation, but the Board makes no comment thereon.

With regard to farm “A”, while the appellant’s claim that the original investment was equal, no documentation was presented to support that position. It might be unreasonable to expect such supporting evidence so many years later, but the Board is faced with the facts that the property was held in the appellant’s name only, there was no “partnership” contract of any description drawn up, and all the income has been reported by the appellant. Against the background, the Board can not agree that a partnership in the investment existed for farm “A”.

With regard to the alleged partnership in the operation of the farms, the Board faces the same factors noted earlier, and they negate the appellant’s proposal. The appellant’s proposal itself is unusual and contradictory. It amounts to—“forget about the ‘partnership’ when it does not affect him adversely for income tax purposes, but establish it retroactively when there is (or may be) a tax impact.” Contractual business arrangements are not to be determined, interpreted or varied, based upon calculated or perceived income tax liability. It is the reverse which must be the rule—income tax liability is to be based upon the contractual business arrangements which existed at the time the relevant events or transactions occurred. Accounting entries and financial statements for income tax purposes are only a convenient and acceptable format for recording such commercial events and transactions—they do not give official character to the events and transactions, nor do they become such events and transactions in themselves. Such accounting entries and financial reports are not immutable, but they do take on a very substantive and dependable character when it is the taxpayer himself who alleges that they are not consistent with the business arrangements that existed and that, therefore, they should be rejected, ignored or altered.

Summary

The Board has seen no evidence to support a conclusion that any contractual partnership arrangement existed regarding the investment in farm “A”, or the operation of farms “A” or “B”. In addition, there is no evidence that the 80-20 partnership split for the investment in farm “B” made by the Minister should be altered to show a greater proportion for Mrs McCall.

Decision

The appeal is dismissed.

Appeal dismissed.