Date: 20010608
Docket: 1999-4006-IT-I
BETWEEN:
R. CRAIG LABBETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk J.T.C.C.
[1]
These are appeals by R. Craig Labbett from assessments of the
1993, 1994 and 1995 taxation years in which the Minister of
National Revenue disallowed partnership losses in the amounts of
$12,166, $12,526 and $19,897, respectively.
Facts
[2]
At some point of time in 1992, the Appellant and Phil Noble
became aware of a limited partnership, Pinecrest Golf Club of
London, Ontario (Pinecrest), which had been formed to build and
operate a golf club, Forest City National Golfers' Club of
London (the golf club). Both had previously been involved in the
construction and operation of golf courses and based on their
experiences, they were satisfied that the financial prospects for
the golf club were excellent. The project was considered by the
Appellant and Noble and by four other individuals, one of whom
was employed in the investment consulting industry (as was the
Appellant) while two others had experience in real estate
investing, and a decision was taken to form a partnership to
purchase units in Pinecrest. On September 20, 1992, they entered
into an agreement for that purpose.[1] The partners retained the services of
a solicitor to prepare the partnership agreement and mandated
Noble to register the partnership and to conduct the necessary
bookkeeping. The partnership was registered and carried on
business under the name and style of Fairway Investments
(Fairway). According to the Appellant, it was at all times
understood by the partners that Fairway's investment in
Pinecrest would require frequent attendance at the meetings of
Pinecrest. For that purpose, he and Noble were authorized to
attend the Pinecrest meetings at which they always held
themselves out as representatives of Fairway.
[3]
The capital contributed by each of the partners was used to
purchase two units in Pinecrest at $156,000 per unit. The
Appellant observed that the amounts of capital contributed by the
partners were not equal in amount and that although the issue was
not dealt with in the agreement, it was clearly understood by the
partners that any revenues generated or losses incurred would be
split based upon the percentage of capital contributed. The
Appellant for his part contributed $56,000 in capital to Fairway,
$50,000 of which represented the proceeds of a loan granted to
him by Golf and Recreation Management Inc. (GRM), a company which
was controlled by the Appellant's father. GRM was the general
partner of Pinecrest until July 18, 1995.
[4]
According to the Appellant, although the partnership did not
expect the golf club would be profitable in the first three years
of its operation, it was the partnership's intention that
once expected profits were generated "we wouldn't take
out the profits that were generated by Fairway, but that we would
reinvest them and build it into a business - that invested in -
other real estate properties." The Appellant does not
dispute that Fairway never received any income from Pinecrest and
that no tax returns had been filed by Fairway but says that was
because it was not aware of any requirement to do so until income
was generated.
[5]
The golf club's first year of operation was 1993. The initial
public reaction was favourable and it was described by Golf
Digest as the second best new course in Canada. During its first
three years of operation, it hosted the Ontario Open and the CPGA
tournament and its future looked promising. However, in 1995
several of the other limited partners in Pinecrest expressed
dissatisfaction with the performance of GRM and suggested that it
be replaced. The Fairway partnership disagreed and expressed its
dissatisfaction regarding the proposed new general partner. Two
other candidates for consideration were submitted, neither was
accepted and GRM was replaced as general partner of Pinecrest.
The Appellant testified that by the end of 1996, as a result at
least in part of mismanagement by the new general partner,
Pinecrest was insolvent and the investment of Fairway in
Pinecrest became worthless. In good measure as a result of this
turn of events, Fairway did not undertake any other business or
investment activities.
Respondent's Position
[6]
The Respondent's position is that Fairway was not a
partnership but rather was a consortium or an investment vehicle.
Counsel for the Respondent relied, inter alia, on the
following propositions in support of that position:
(a)
the partnership agreement did not outline any specific business
activity other than the purchase of two units in Pinecrest;
(b)
the agreement did not set out how profits or losses were to be
distributed and did not provide for the manner in which
management or control was to be exercised over the
partnership;
(c)
the only distribution of any profit or losses in Fairway was from
Pinecrest and not any other source; furthermore, Fairway had no
other assets than the two units in Pinecrest at all relevant
times; Fairway did not have any bank accounts, had never sent in
partnership tax returns to Revenue Canada, had never prepared any
financial statements, had no letterhead, and had, on the fact of
it, no dealings with banks, suppliers, brokerage firms or
clients.
Furthermore, counsel argued that Fairway did not hold itself
out to be a partnership. Accordingly, the Respondent contends
that Fairway is not the partnership specified in paragraph
96(2.2)(c) of the Income Tax Act. Thus, according
to counsel, in view of the fact that Fairway was not a true
partnership it follows that "it is logical that Pinecrest
would be the partnership that the language of s.
96(2.2)(c) intends to capture". It further follows
that the Appellant is not entitled to deduct his partnership
losses in the 1993 and 1994 taxation years in the amounts of
$12,166 and $12,526, respectively, pursuant to
paragraph 96(2.2)(c) of the Act because the
Appellant borrowed his investment funds of $50,000 from GRM, a
non-arm's length third party, therefore resulting in a
$50,000 reduction of the Appellant's at-risk amount in
respect of Pinecrest.[2] Subsection 96(2.1) of the Act in conjunction
with paragraph 111(1)(e) allows for deduction of limited
partnership losses from taxable income as long as they do not
exceed 'at-risk' amount.[3] Counsel's calculation indicated that the
'at-risk' amount was $27,125. Since this at-risk amount
is the maximum that can be deducted, subtracting the $50,000 from
the remaining at-risk amount, disentitles the Appellant from
making any claim.
Conclusion
[7]
The single question in these appeals is whether the Appellant is
entitled to claim his proportionate share of certain partnership
losses for the 1993 and 1994 taxation years. The answer to this
question depends upon whether Fairway constituted a partnership
for the purposes of the Act. To establish the existence of
a partnership regard must be had for the governing provincial
legislation, in this case the Ontario Partnerships Act.[4] In particular,
section 2 defines partnership as:
2.
Partnership is the relation that subsists between persons
carrying on a business in common with a view to profit, but the
relation between members of a company or association that is
incorporated by or under the authority of any special or general
Act in force in Ontario or elsewhere, or registered as a
corporation under any such Act, is not a partnership
within the meaning of this Act.
There are three major aspects to this definition: (i) a
business; (ii) carried on in common; and (iii) with a view to
profit. In Continental Bank Leasing Corp. v. Canada,[5] the Supreme Court
of Canada conducted an in-depth analysis of these three
requirements. Bastarache J. writing for a unanimous Court on the
point stated that the existence of a partnership was dependent on
the particular facts and circumstances of each case and proceeded
to enumerate the following criteria for coming to a conclusion on
the matter:
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.
[8]
In Schultz v. The Queen, [6] Stone J. speaking for the Court observed:
For a partnership to exist, according to the language of
section 2 of the Partnerships Act of Ontario, two or more
persons must be "carrying on a business in common with a
view to profit". By subsection 1(1) of that statute, the
word "business" is defined to include "every
trade, occupation and profession". Lindley & Banks on
Partnership, 17th ed., (London, Smith & Maxwell, 1995),
concludes at page 8, that "virtually any activity or venture
of a commercial nature ... will be regarded as a business
for this purpose. ...
On the evidence, I am satisfied that the relationship which
existed between the Appellant and the other five members of
Fairway was a partnership and that they carried on business in
common with a view to profit. There was a written partnership
agreement, there was registration under provincial law as a
partnership, there was representation to third parties of the
existence of the partnership, and there was clear evidence that
the partners in Fairway had a mutual right of control or
management of the enterprise, a joint property interest in the
subject matter of the venture and the sharing of profits and
losses. Furthermore, given the particular nature of this
partnership, the failure to open a bank account in the name of
the partnership or to have stationery with the partnership's
name on the letterhead and even the failure to file tax returns
as a partnership are not matters of sufficient import to permit
me to conclude that a partnership did not exist. In this context,
the testimony of the Appellant, which I accept, establishes that
there was a contribution by the six individual members of Fairway
of money, effort, knowledge and skill to a common undertaking.
While it is a fact that there was no explicit provision in the
partnership agreement for the sharing of management or control or
for the sharing of profit or losses, I accept without
equivocation his testimony that "there was an understanding
as to how each partner was going to contribute time and
contribute their expertise ... " as well as an
understanding with respect to the allocation of partnership
profits and losses. In this context, I reject the submission of
counsel for the Respondent to disregard the Appellant's
testimony that after September 20, 1992, meetings among the six
partners continued in order to discuss the business of Fairway
investments because no minutes of such alleged meetings were
produced and no other witness was called to support the testimony
of the Appellant. Having listened to and observed the Appellant I
find no basis whatsoever to question his credibility nor, I might
add, was anything established by counsel in the course of
cross-examination which would lead to that conclusion.
[9]
In my view, there is substantial evidence of the existence of a
partnership in the present appeals in that there is both an
expressed declaration of partnership coupled with a clear
inference of an intention to do so gathered from all of the
surrounding circumstances. I am satisfied that Fairway was a
partnership for the purposes of the Act and it follows
that it was at arm's length to the lender of the loan to the
Appellant and accordingly, the loan was not properly captured by
paragraph 96(2.2)(c) as assumed by the Minister. The
appeals are allowed, with costs to be taxed.
Signed at Ottawa, Canada, this 8th day of June, 2001.
"A.A. Sarchuk"
J.T.C.C.
COURT FILE
NO.:
1999-4006(IT)I
STYLE OF
CAUSE:
R. Craig Labbett and
Her Majesty the Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
December 7, 2000
REASONS FOR JUDGMENT BY: The
Honourable Judge A.A. Sarchuk
DATE OF
JUDGMENT:
June 8, 2001
APPEARANCES:
Agent for the
Appellant:
Marcel Theroux
Counsel for the
Respondent:
Scott Simser
COUNSEL OF RECORD:
For the
Appellant:
Name:
N/A
Firm:
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
1999-4006(IT)I
BETWEEN:
R. CRAIG LABBETT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeals heard on December 7, 2000, at Toronto,
Ontario, by
the Honourable Judge A.A. Sarchuk
Appearances
Agent for the
Appellant:
Marcel Theroux
Counsel for the
Respondent:
Scott Simser
JUDGMENT
The
appeals from assessments of tax made under the Income Tax
Act for the 1993, 1994 and 1995 taxation years are allowed,
with costs, and the assessments are referred back to the Minister
of National Revenue for reconsideration and reassessment on the
basis that the Appellant is entitled to deduct his share of
partnership losses from Pinecrest Golf Partners Limited
Partnership in the taxation years 1993, 1994 and 1995 in the
amounts of $12,166, $12,526 and $19,897, respectively.
Signed at Ottawa, Canada, this 8th day of June, 2001.
J.T.C.C.
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