8 September 1994 Internal T.I. 9420937 - HUSBAND & WIFE PARTNERSHIP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a partnership existed between husband and wife where wife was solely responsible for setting up and operating a business solely owned by her husband.

Position TAKEN:

No partnership.

Reasons FOR POSITION TAKEN:

The substantial time and effort contributed by the wife to the conduct of the business is not sufficient, in light of the other circumstances, to establish the existence of a partnership.

		September 8, 1994

	XXXXXXXXXX District Office	Head Office
   	Audit Adjustments & Enquiry	Rulings Directorate
C. Chouinard
XXXXXXXXXX Sr. Technical Advisor	957-8953
		7-942093

XXXXXXXXXX

This is in response to your memorandum of August 16, 1994 wherein you requested our opinion regarding a tax dispute involving the above-mentioned taxpayers.

Our understanding of the facts is as follows:

XXXXXXXXXX

Our comments

The XXXXXXXXXX claim that they were operating the business as a partnership of which they were both partners. The question whether a particular arrangement constitutes a partnership is a question of fact, the determination of which can only be ascertained by an examination of all the relevant facts. A properly constituted husband and wife partnership is acceptable under the Income Tax Act (the "Act"). In general, an acceptable partnership requires an investment by each partner, a written partnership agreement and proper notices to creditors and financial institutions concerning the existence of a partnership.

The question whether a partnership existed was considered in Boles v. M.N.R., 82 D.T.C. 1643 (T.R.B.), where the taxpayer sold farmland and the capital gain derived therefrom was reported equally by the taxpayer and his wife on the basis that the wife was in partnership with her husband. As an alternative, the taxpayer argued that a resulting or constructive trust should be inferred. According to the facts, the wife had made a small financial contribution to the acquisition of the farmland, although her main contribution consisted of the work she had performed in acquiring, managing, maintaining, operating and improving the farmland. There was no written partnership agreement in existence and the financial statements disclosed that the income had always been reported by the husband. Based on the facts, the Court held that the evidence did not support a conclusion that the Boles were partners. The resulting trust argument was dismissed summarily by the Court.

In Cullen et al. v. M.N.R., 85 D.T.C. 409 (T.C.C.), the taxpayer and his wife had always shared the work on their farm and all income was deposited into a single joint bank account. When they sold their herd, they purchased a gasoline station agency, title to which was in the taxpayer's name. The taxpayer's wife became responsible for the day to day management of the agency. She did all the bookkeeping and banking and generally worked in the business on a full time basis, but she never received a salary. All dealings with third parties, however, were conducted in the taxpayer's name alone. A half section of the farm property was leased out and the taxpayer and his wife were also involved in the breeding and racing of horses. Funds from the agency account and rentals from the farm lease were placed in the joint family bank account. Receipts and costs of the horse breeding business also flowed through the joint bank account. The taxpayer always reported all income until 1979 when he and his wife each reported half of the agency and rental income and claimed half of the horse losses, on the basis that they formed a partnership. The Minister included all of the income and losses in the taxpayer's income and the taxpayer appealed. The Court found that the evidence failed to establish the existence of a partnership. Although there was a pooling of assets, the Court held this was incidental to the formation of the family unit and that the Cullen's dealings with third parties and their failure to treat their income as partnership income in prior years indicated the absence of a partnership.

The Cullen case was relied upon in the Kopp v. M.N.R., 86 D.T.C. 1150 (T.C.C.) case to reject the taxpayer's argument that him and his wife were partners in a farming business. In this case, the wife had provided some of the original capital needed to buy the farm property, equipment, animals and buildings. In addition, she had made and continued to make a substantial contribution to the physical labour and management of the farm. There had always been a joint bank account and the taxpayer's wife participated in the decision-making process. The Court nevertheless refused to recognize the existence of a partnership on the basis that the evidence did not support such a conclusion. In another similar farming business case, Sedelnick Estate v. M.N.R., 86 D.T.C. 1563 (T.C.C.), the Court held that the evidence regarding the joint efforts and interest of the taxpayer and his wife were just as consistent with their marital status as with the implied existence of a partnership. In this respect, the Court expressed itself as follows:

"Nevertheless, when the basic assumption relied on in reassessing under the Income Tax Act is that an alleged partnership did not exist between spouses thereby placing the onus on the appellant to establish on the preponderance of the evidence that it did exist one should, in my opinion, be guided by these considerations. Where there is no evidence of the existence of an express partnership agreement between husband and wife then in the absence of some special reason, which I cannot at the moment foresee, the existence of such a partnership should not be inferred from the conduct of the parties if that conduct is equally consistent with conduct arising out of the community of interests created by the marriage. This can embrace many activities which are purely commercial in nature."

In the Travica v. M.N.R., 88 D.T.C. 1260 (T.C.C.) case, the taxpayer's position was that his wife was a partner in his fishing business as she had contributed towards the purchase of the boat and she had worked on the boat. However, cheques received from the sale of fish were always made payable to the taxpayer, the income from the business had always been reported on a personal basis and the profits from the business were never divided between the taxpayer and his wife. Accordingly, the Court held that the evidence fell short of establishing the existence of a partnership. In Rosenfeld et al. v. M.N.R., 82 D.T.C. 1214 (T.R.B.), the taxpayers, who were husband and wife, carried on the business of farming in partnership. Prior to the taxation year in issue, the wife had entered into an agreement of purchase and sale for a particular parcel of land which she had purchased in her name alone. Although the husband had advised and guided his wife in relation to the purchase and sale of the parcel of land and had assisted her in financing the purchase by joining with her in borrowing from the bank, the Board nevertheless rejected the Minister's argument that the parcel of land constituted partnership property.

In Cornforth v. The Queen, 82 D.T.C. 6058 (F.C.T.D.), the taxpayer was a physiotherapist who carried on business in his home and his wife, also a physiotherapist, assisted in the practice. As such, she treated patients, did most of the administrative and office work, handled the finances, as well as managed the home and raised a family of four children. The taxpayer claimed that a partnership existed between himself and his wife and, therefore, that one half of the income was assessable in her hands. The Minister assessed the total income from the physiotherapy business to be that of the taxpayer alone. On appeal, the Court found that the prerequisites to a partnership had not been met, that no intention or agreement to enter into a partnership existed and that despite the cumulative efforts of the husband and wife in the business, the wife's contribution flowed from the marriage relationship and not from a partnership relationship. Therefore, the taxpayer and his wife were not in partnership. This case was distinguished by the Tax Review Board in Berg v. M.N.R., 82 D.T.C. 1571, where the taxpayer successfully argued that a partnership existed between himself and his wife in respect of a farming business. The evidence disclosed that his wife was substantially active in the farm chores and management. The Board found that, while no formal partnership agreement existed between the taxpayer and his wife, the wife assisted and was involved in the farming operation in a way that went beyond the ordinary requirements of a family unit.

A similar conclusion was reached by the Board in the Feder v. M.N.R., 81 D.T.C. 307 case. In that case, the taxpayer and his wife had, from the time of their arrival in Canada, worked and pooled all of their resources, assets and income. When the Minister assessed the profit on the sale of a parcel of land as income to the husband alone, the husband appealed, contending that he and his wife shared the profit equally. The Court held that, based on Mr. and Mrs. Feder's long history of pooling their resources and sharing property equally, the profit on the land belonged equally to each of them. In coming to this conclusion, the Court found that there was a constructive trust in all assets held in the name of the husband for the benefit of himself and his wife. It is not clear what facts lead the Court to this conclusion, however, it would appear that some reliance was placed upon the fact that the income tax returns of the Feders showed a division of income throughout the years and that, in the words of the Court, the Feders "shared in all common losses and worked together as one".

Although XXXXXXXXXX did not invest her own money into the business, since she performed work in respect of the business, we could consider that she acquired her interest in the partnership by performing work for the partnership. However, in our opinion, the substantial time and effort contributed by XXXXXXXXXX to the conduct of the business is not sufficient, in light of the other circumstances, to establish the existence of a partnership. The other circumstances do not substantiate the intention to operate the business as a partnership since XXXXXXXXXX had no visible regard for the partnership interest, if any, of XXXXXXXXXX On the one hand, it does not appear that the income from the business (rental income, interest income and capital gains) was ever shared by the XXXXXXXXXX as is evidenced by their income tax returns for the 1987 to 1989 taxation years. As XXXXXXXXXX was a businessman and likely knowledgeable in business matters, his failure to deal with the business income as partnership income is difficult to understand. As far as the land and building are concerned, although they are said to have been held in trust for XXXXXXXXXX the agreement executed on XXXXXXXXXX does not, in our opinion, reflect the arrangement made by XXXXXXXXXX when the land was transferred from the corporation to XXXXXXXXXX The wording of the trust agreement implies that an express trust existed as of XXXXXXXXXX and that the trust agreement was merely a written confirmation of the trust arrangement. However, there is no other evidence that, at the time the land was transferred from the corporation to XXXXXXXXXX, there was an oral or written agreement between XXXXXXXXXX that the land would be held in trust for both of them. In fact, the land was originally acquired by the corporation, in trust for XXXXXXXXXX, and then transferred by the corporation to XXXXXXXXXX. There was no indication, either at the time the land was acquired by the corporation or when it was transferred to XXXXXXXXXX, that the land was held in trust for both XXXXXXXXXX The trust agreement might, in fact, simply be an attempt to retroactively change the ownership of the land to secure a tax advantage as the land became more valuable. Accordingly, in our view and in the absence of corroborating evidence, the trust agreement submitted by the XXXXXXXXXX does not constitute an express trust.

Based on the facts, we agree with your assessment of this case. In our view, the conduct of XXXXXXXXXX does not establish the relationship of partnership to the exclusion of any other relationship consistent with the same conduct. Furthermore, all of the surrounding circumstances cast doubts on the taxpayers' assertions that they intended to form a partnership and suggest that the business was deliberately structured in such a manner as to give the result intended by the XXXXXXXXXX Accordingly, it is our opinion, based on the facts, that the rental income and the capital gains and interest income from the sale of the land and building were properly reported and included in XXXXXXXXXX income.

XXXXXXXXXX

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch