Northern Sales (1963) Ltd. v. MNR, 73 DTC 5200, [1973] CTC 239 (FCTD)

Collier, J:—This is an appeal by the taxpayer from a decision of the Tax Appeal Board. There is also a cross-appeal by the respondent Minister relating to one aspect of the judgment of the Tax Appeal Board.

In 1960 the appellant and two other companies entered into an agreement for the marketing of rapeseed for the crop year 1960-1961. The appellant was entitled to a share of any profits. The agreement was extended by the parties for the succeeding crop year as well.

The appellant’s fiscal year was May 31. The parties to the agreement used July 31 as the date for the final accounting for the rapeseed marketing activities. In 1961 the appellant included in its income for the period ending May 31, 1961 $120,628.82 as its share of profits from the marketing of rapeseed although as of that date the final net figures for the crop year could not be ascertained until some time after July 31, 1961. The appellant’s actual income from the rapeseed venture calculated to July 31, 1961 was $167,227.64.

The Minister deleted the income included in the 1961 return and brought the whole amount of the rapeseed profits into the appellant’s 1962 income. The respondent’s position is that the rapeseed marketing arrangement was a partnership, and by subsection 15(1) of the Income Tax Act the appellant could bring its partnership profits into its 1962 taxation year only.* [1] It was further contended by the respondent that even if the rapeseed operation was not a partnership the appellant was not entitled, in the circumstances, to apportion the profits received in the manner it did. I use the word “apportion” in the loose sense; the appellant adduced evidence endeavouring to show the apportionment was made in accordance with generally acceptable accounting principles.

The Tax Appeal Board held there was no partnership but affirmed the Minister’s assessments on the following grounds (p 899):

I have therefore concluded that the appellant was in no position to know what profits would accrue to it under the agreement at the close of its own fiscal year on May 31, 1961, this information not having been established until July 31 of that year, and that the said profits or losses, if any, therefore fell into the appellant’s 1962 fiscal period for accounting and income tax purposes.

In the circumstances, the Minister of National Revenue proceeded correctly in deleting from the taxpayer’s return of income for its 1961 taxation year the appellant’s estimate of its income arising from the aforesaid rapeseed marketing arrangement and in including it as part of the appellant’s income for its 1962 taxation year.

For the appellant’s 1962 taxation year the respondent had disallowed two deductions claimed for foreign exchange losses in the amounts of $7,842.94 and $1,149.69. The Tax Appeal Board affirmed the disallowance of the first amount but found for the appellant with respect to the second amount. The respondent by his cross-appeal challenges the correctness of the latter finding.

The issues before me were as follows:

(1) Was the business carried on for the marketing of rapeseed a partnership of which the appellant was a member? The parties have agreed that if the answer to that question is “yes”, then the income from the business could be brought only into the taxpayer’s 1962 taxation year.

(2) If there was not a partnership, was the method of distributing the income between the two years correct and permissible?

(3) Were the foreign exchange losses on account of capital or income?

I turn now to the evidence. The appellant, McCabe Grain Company Limited and Pacific Vegetable Oils Corporation signed what is entitled “Rapeseed Agreement”. I quote what I think to be the key portions of this agreement:

It has been agreed between McCabe Grain Company Limited, Northern Sales Limited, both resident at Winnipeg, Manitoba, Canada, and Pacific Vegetable Oils Corporation of San Francisco, California, that they agree to contract, purchase, handle, transport, merchandise and sell on a joint basis, all Rapeseed which they may handle from the production of the Western Canadian crop during the crop year 1960-61, doing so exclusively with each other on the following agreed basis, subject to all parties agreement that certain purchases and sales from the crop year 1959-60 are to be included.

1. In this joint agreement, the 9,000 tons of Rapeseed sold to SIOFA in March-April 1960, is subject to a separate division percentagewise than other Rapeseed handled for the joint account, as set out hereunder.

(a) The ratio of division of any profits or losses resulting from this sale to be divided as follows:

Northern Sales Limited	—	45%
McCabe Grain Co Ltd	— 271/2%
Pacific Vegetable Oils Corporation	— 27 /2%

2. On all other Rapeseed other than the above in Clause 1, to be divided equally to the three parties, one third (1/3) each. Determination of the respective amounts of net profit and loss to each of the separate portions as above, to be as follows:

It is agreed that the percentage ratio of division of profits and/or losses as set out in Paragraph 1(a) applies to all sales made to SIOFA during the term of this agreement and, further, that portion of the profits and/or losses to be distributed under Paragraph 1(a) is the first distribution; and further, this distribution of the profit or loss Is to be on same ratio that the total sales made to SIOFA bears to the total sales of Rapeseed tonnage sold during the term of the agreement.

3. Net profit or loss will be the balance remaining after determination of gross profit or loss less agreed handling charges as follows:

(c) Other Purchases

In the event that Rapeseed purchased by any party to this joint agreement on an FOB seaport basis, and/or CA F/C IF basis, it has been agreed that no handling charges would be allowed, except as the partners may jointly agree on a handling fee commensurate with the incidental expenses that may be involved.

4. Each party to this joint agreement will contract acreage, purchase, handle and ship to export terminal positions, such quantities of Rapeseed as they may jointly agree, and to this end will consult with and advise each other in all phases of their operations.

Clause 5 of the agreement provided that each party would keep its own records.

6. (a) The interior elevators owned by McCabe Grain Company Limited at Edmonton, Alberta, and Fort Whyte, Manitoba, and the cleaning plant owned by Northern Sales Limited at Red Deer, Alberta, will be made available for the use of the joint account, and such cleaning as done by these plants is subject to a tolerance allowance at each of these plants, for invisible loss of one (1) percent.

Such other plants in the country as may be required and deemed necessary are included in the above arrangement.

All resultant screenings from the cleaning operations are for the joint account, subject to any separate agreements made by any of the partners on outside cleaning facilities owned by others.

(b) McCabe Grain Company Limited and Northern Sales Limited will utilize their plants in Edmonton, and Red Deer, Alberta, as interior terminals for the proper storage, cleaning and reshipment of Rapeseed directed to them from country elevator points. This will be in addition to their utilization of these specific plants as normal country handling elevators. The proper use of these plants in order to effect any savings by way of charges or extra expenses, will be jointly agreed and consulted upon during the full season.

9. Seed stocks accumulated and purchased prior to the planting season, by one or all of the respective parties, and the resultant profit and/or loss therefrom, are for the joint account and the purchase/sale of such stocks is to be accounted separately.

10. All decisions pertaining to country prices, purchases and sales, and any or all matters pertaining to this agreement, are to be made by joint decision of all parties.

In the event where such decisions may require immediate settlement without the benefit of time or consultation with any or all of the respective parties, it is agreed that one individual, Mr M Nusgart, shall be appointed and given the responsibility to do so. This delineation of authority is given solely on the basis that, where possible, when time and conditions permit, proper consultation and agreement with all parties on all matters is the first consideration.

11. Such other agreements as may have been made now or subsequently made by any of the joint partners with others, are deemed to be incorporated as part and parcel of this joint account, subject to the mutual agreement of all parties, such other agreements will become addendums to this agreement.

Prior to and at the time the rapeseed agreement was signed, rapeseed was a relatively unknown crop. According to the evidence the parties to the agreement felt there would be advantages in cooperating in the marketing of the crop. These companies, particularly the Manitoba companies, were in all phases of the grain business and were competitors. Mr Samuel Lezack was the chief accountant for the appellant. On examination for discovery he explained the agreement as follows:

Q. Mr Lezack, you are familiar with this rapeseed agreement? A. Yes.

Q. Could you give me the background of how that agreement was entered into? A. Well, I think the purpose to begin with of entering into that particular agreement was to trade in rape to the greatest possible advantage between these three partners who had—

Q. Who are those three partners? A. McCabe Grain of Winnipeg and Pacific Vegetable Oils of Winnipeg, these particular people had access to rape—potential rape customers and it was felt that by working together they could eliminate competition and for the benefit of the three people, it was felt that was the best way to go about it. Each of them bought and sold their own particular parcels of rape. They each had their own customers. It was felt in some instances that one party could possibly gain a better advantage with a certain customer than another one could.

Q. What do you mean by that? A. Well, they knew the other people better and therefore they were more likely to make a sale to them than anyone of the other companies.

Q. So how was that an advantage to the other two? A. Pardon?

Q. How was that an advantage to the other two? A. Well, they felt that they could possibly eliminate competition between themselves.

Q. So it was an advantage to them? A. Yes. We felt it was an advantage or we wouldn’t have done it.

Q. Because it eliminated the competition from the other two? A. That's right.

Q. Was there any other advantages? A. Oh, it might have served to an extent to spread any particular risk that may have been involved.

Q. What do you mean by that? A. Well, supposing you were to run into some trouble and you would lose a chunk of money.

Q. You mean on a deal? A. Yes.

Q. So the others would have to share in it? A. Although that wasn't a principal purpose. The principal purpose of this thing was the gain the best possible advantage of the markets.

Q. Of the markets? A. Yes.

Q. Well, when one particular party had a customer that he thought he could best deal with, would he contact the other two parties? A. On occasion, yes, not always.

Q. Well alright. What was discussed? A. Now I! can’t be too sure on that. Now, I’ll tell you—

Q. Whatever information you have you can give here. You don’t have to have personal knowledge? A. I presume that they were discussed with one another the best possible acreage that any of the three could possibly contract for. For instance if Northern Sales Company could contract on a more favourable basis with some of the suppliers than others, well, we would do that. We would possibly work with those customers much more favourably.

Q. When you say customers you are not talking about suppliers? When you are talking about customers were you not talking about purchasers rather than suppliers or did I misunderstand you? MR. KROFT: I think he used both words. THE WITNESS: Both suppliers and purchasers.

Even under the rapeseed agreement they could still compete with each other in the purchasing and selling of that crop, although the overall profits were ultimately to be shared in the portion agreed upon. There was no capital contribution by any of the parties nor were any facilities for handling the crop owned jointly. As can be seen from the agreement, the parties could use their own facilities.

There was no common set of books and records nor any central accounting system. There was no common bank account. All purchases and sales were made by the individual companies, and the only expenses incurred in common were the shipping rates. There was no common management, although the parties communicated with each other as to the state of the market. Each company used its own office facilities and their overhead costs, which might be attributable to the rapeseed marketing, were absorbed by the individual companies.

While the agreement does not set out a settlement date, July 31 was the date in fact used, and the actual calculations as to profits or losses were made two or three months after that date when all the figures were known.

On the issue as to whether or not there was a partnership within the meaning of the Income Tax Act, I am of the opinion there was. Partnership is not defined in the Income Tax Act, but the general principles as to whether or not a partnership exists in a given situation have been laid down in the common law and by statute. Most of the Partnership Acts of the provinces have been modelled on the English Partnership Act of 1890. It is pointed out in Lindley on Partnership (13th ed, 1971) that prior to the Act of 1890 the law of partnership was the result of judge-made law (page 3) and the Act of 1890 introduced no great change in the law, with one exception, which is not relevant to this case (page 4). Partnership is the relation which subsists between persons carrying on a business in common with a view of profit. That definition is in most of the provincial partnership Acts and merely states the former common law.

Counsel for the appellant contends that under this agreement there was no Carrying on of a business in common, nor were the “net profits” shared in the usual sense. The appellant relies on the fact there was no contribution of capital, no common management, no common assets, no common facilities, no common bank account and no common firm name.

In my view, it is not necessary to have the above features for there to be a partnership, and conversely the absence of the features outlined, or any of them, does not necessarily lead to the conclusion there was no partnership. I quote from Lindley at page 65:

. . . As will appear more clearly hereafter, the main rule to be observed in determining the existence of a partnership, a rule which has been recognised ever since the case of Cox v Hickman, is that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. Although this principle is not expressed in the Act it is still law.

I cite as illustrations where partnerships have been found to exist in somewhat analogous situations the cases of Gardner et al v CIR (1930), 15 TC 602, and Hall and Son v Platt (1954), 35 TC 440.

In the first case, Gardner was a coal merchant selling to customers. The other appellant was a coal importer and exporter. Prior to a coal strike which commenced in April 1926, neither appellant had any business dealings with the other. After the strike, an oral arrangement was made whereby coal was to be invoiced by the other appellant to Gardner at cost and Gardner was to pay to the other appellant half of the net excess, if any, obtained by him from his customers. The other appellant bought and sold a good deal of coal which was not included in the arrangement and with which Gardner had no concern. The arrangement continued for a few months only and was brought to an end by an accounting and division of profits. As I read that case, the features of partnership, which the appellant says were lacking in the case before me, were equally lacking in the Gardner case. The Commissioners of Inland Revenue held there was a partnership, and their decision was upheld by the Court of Session. I quote from the Lord President (Clyde) at page 610:

. . . that whereas these cargoes of coal generally had been formerly the simple transaction of purchase and sale between the parties, they immediately became the subject of a transaction in which both parties were interested, and in which, when one of them carried out the purpose and intention of the scheme which had been pre-arranged and sold the coal, the sale was not on his own behoof but for behoof. of the two together, and the net profit so obtained was equally divisible between them.

In the second case, Hall carried on business as a farmer. Another group, who were also farmers but merchants of agricultural produce as well, entered into an agreement with Hall for the growing and marketing of carrots. Hall was to find land and horse labour for the crop, and that expense was to be paid out of the proceeds of sale of the crop. The other group was to find the seed, manure and hand labour necessary for cleaning and harvesting the crop and was to harvest and sell it. The expenses incurred were to be paid out of the proceeds of the sale of the crop. After payment of all the expenses described above, any balance remaining was to be divided equally. There was no joint employment of labour; each party employed and paid its own workers. The sale of the crop was conducted solely by the second group. There was no joint bank account, nor any joint ownership of assets. At page 442 of the report, the contention on behalf of the appellant Hall that there was no partnership appears to be very similar to the contention advanced in the case before me. Upjohn, J described the situation as a borderline case but viewing it broadly he went on to hold the arrangement was a joint venture and a partnership. In my view the facts in this appeal are much stronger in favour of partnership.

On looking at the agreement signed by the parties and the manner in which they carried on this particular marketing arrangement, I conclude a partnership was created. The expression “partners” is used several times in the agreement. That is not conclusive, nor does it raise a presumption, as the agreement must be construed as a whole, but it is some evidence there was in fact a partnership.

Under the Partnership Acts, the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner. Again that factor is not conclusive and the presumption can be rebutted. All the surrounding circumstances must be examined. In this case the agreement provides for the sharing of losses as well as profits. That, in my view, is characteristic of a partnership contract. The agreement also provides for consultation among the parties, and while there is evidence they did not always consult each other with regard to sales, there was nevertheless some consultation. I do not accept the argument there were no “net profits” in the usual sense in which that expression is used because the expenses of the marketing were not shared in their totality nor on the same basis as the profit sharing. In my opinion, the parties to a partnership agreement can make their own particular rules as to how the “net profits” are to be arrived at.

I therefore decide the first issue against the appellant and the assessments by the respondent are consequently confirmed, with one reservation. It was agreed subsequent to the hearing that the Department had made an error in calculating its reassessments. The amount of income assessed for 1962 by the Department should be reduced by $26,416.90.

In view of the conclusion I have reached on the first issue, it is not necessary to express any opinion on the second issue.

I now turn to the third question as to the deductibility of the foreign exchange losses. The evidence is that in 1956 the appellant borrowed $139,000 from an American company with which it was associated. The shareholders of each company were the same. The appellant’s witnesses testified that this loan in American funds was for inventory or trading purposes and not for the provision of working capital in the business. Generally speaking, those in the grain and crop marketing business have heavy constant borrowings in order to finance their current trading operations. A large part of the loan in question here was repaid in 1962, and because of the exchange rate of the Canadian dollar vis-à-vis the American dollar at that time, the exchange losses in question were incurred. In my opinion the two amounts involved cannot be segregated one from the other. I find the appellant has met the onus of proving that these amounts were on account of income and not on account of capital. The decision of the Tax Appeal Board in regard to the amount of $7,842.94 is therefore set aside and the assessment of the respondent for the 1962 taxation year will be varied accordingly.

In my view, the main points in issue on this appeal were the first two which I have earlier set out. The appellant has not succeeded on them. The issue of the foreign exchange losses was a lesser one, and in the circumstances I think the appropriate and fair order as to costs will be that the respondent recover 70% of his taxable costs.