Joseph Mazur v. Minister of National Revenue, [1987] 2 CTC 2060, 87 DTC 403

Tremblay, T.C.J.:—This appeal was heard on November 28, 1986 at the City of Vancouver, British Columbia.

1. The Point at Issue

Pursuant to the notice of appeal and the reply to notice of appeal, the points at issue are whether the appellant is correct

(a) first in the computation of his net income, to deduct business losses of $2,698.99 and $2,342.74 with respect to 1980 and 1981 taxation years as active partner with his wife in a bookkeeping business, and

(b) second, in the computation of his taxable income to claim his spouse as married exemption because she was his dependant in 1980 and 1981.

The respondent first disallowed the said losses on the basis that the appellant worked full-time as a locomotive engineer and that his spouse operated the business as a proprietorship. Thence, the income of the appellant's spouse was $10,000 (in 1980) and $11,000 (in 1981). The claim for married exemption was disallowed.

2. The Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's reassessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment, the Court decided that the assumed facts, on which the respondent based his reassessment, are also deemed to be correct. In the present case, the assumed facts are described in paragraphs 5(a) to (d) of the reply to notice of appeal.

5. In so reassessing the Appellant, the Respondent relied upon the following assumptions of fact, inter alia:

(a) the Appellant's spouse operated Lor-Mae Office Staff as proprietorship and not in partnership with the Appellant in 1980 and 1981;

(b) in 1980 and 1981 the Appellant worked full time as a locomotive engineer for the British Columbia Railway;

(c) the Appellant's spouse had a net income of $10,000.00 in 1980 and $11,000.00 in 1981;

(d) the Appellant had no interest in and took no part in the operation of Lor- Mae Office Staff.

3. Admission Concerning Married Exemption

3.01 At the beginning of the trial, counsel for the respondent informed the Court that his client was prepared to concede that the appellant was entitled to the married exemption for the 1980 and 1981 taxation years.

4. The Facts

4.01 The appellant's spouse, Mrs. Lorna Faye Mazur, testified as follows:

(a) in April of 1980, in partnership with her husband she started a bookkeeping business doing also tax returns, especially for small businesses. The name of the business was Lor-Mae Office Staff.

(b) The business was not registered.

(c) She did not have a written agreement of partnership with her husband.

(d) However, they opened a bank account in joint partnership. To this effect, two documents were filed as Exhibit A-1. The first one (Form 86-61) was an agreement with the Canadian Imperial Bank of Commerce dated February 2, 1981. It was agreed in sum, that Joseph Mazur and Lorna Mazur be jointly and severally responsible for the open bank account. However, the second document says that Lorna Mazur would only sign and verify the bank account No. 57-01-813. Mrs. Mazur said her husband did not want to have signing authority. This document was not signed.

(e) Until January of 1981, her business bank account was with the Bank of Montreal.

(f) By February of 1982, she became very ill and had to close the business.

(g) She never had an employee because she was not busy enough.

(h) Her husband gave her $1,000 when she opened the business and each month thereafter he gave her $340 to pay the vehicle leased in the business name from Lake City Ford Lease. He also bought a desk and a typewriter.

(i) She worked out of the basement of their home.

(j) Her husband was learning the bookkeeping and also helped her by doing posting and banking.

4.02 In cross-examination, Mrs. Mazur substantially confirmed what she said in direct examination. However, she also said that:

(a) in 1980 she did not have employment, that is why she started the business; she had been in bookkeeping for years;

(b) she did most of the work of the business and her husband gave the money;

"That's the arrangement? asked counsel for the respondent.

“It wasn't an arrangement, it is just how it was, he said if I had to have a vehicle for picking up what work I did therefore we purchased a vehicle on lease. And I said well if I don't make enough money I can't afford this, and he said I will contribute this money to make sure that you are able to keep the car. Therefore he was contributing. Is there a law against being a silent partner in business?”

(c) her husband never went out and met clients;

(d) profit and loss statements for 1980 and 1981 were filed as Exhibit R-1.

The revenue, the main expense and the losses were as follows:

(e) the appellant was never paid back for the money he spent for the rented car and the $1,000 he gave in April 1980 (TS p. 16);

(f) the verbal agreement with the appellant was to help her get started (TS p. 16);

(g) in 1980, when she put the bank account into Lor-Mae Office Staff's name, the Bank of Montreal did not require to have a second party to sign the document; the Bank of Montreal could not find the document signed in 1980;

(h) the business had a phone listing; it was a separate phone line (TS p. 22); the phone bill was in her name;

(i) she had a business card, but her husband's name was not on it.

4.03 The appellant testified that:

(a) he is a locomotive engineer for the British Columbia Railway; he is on call 24 hours a day;

(b) he contributed the funds to help his wife to start up the business; he was a silent partner;

(c) he does not recall the Bank of Montreal account that Lor-Mae Office Staff had before 1981.

5. Law - Cases at Law - Analysis

5.01 Law

The main provisions of the Income Tax Act involved in this appeal are sections 3 and 9. The main provisions of the Partnership Act of British Columbia (R.S.B.C. 1979, c. 312) are subsection 2(1) and paragraphs 3(a), (b), and (c).

All those provisions shall be quoted in the analysis, if it is necessary.

5.02 Cases at Law

The Court referred to many cases concerning the definition and different constitutive elements of a partnership:

(1) Cullen & al. v. M.N.R., [1985] 2 C.T.C. 2059; 85 D.T.C. 409 (T.C.C.);

(2) Wessell v. M.N.R., [1985] 1 C.T.C. 2192; 85 D.T.C. 206 (T.C.C.);

(3) Tarasow v. M.N.R., [1981] C.T.C. 2466; 81 D.T.C. 462 (T.R.B.);

(4) Venne v. The Queen, [1984] C.T.C. 223; 84 D.T.C. 6247 (F.C.T.D.);

(5) 5) Cornforth v. The Queen, [1982] C.T.C. 45; 82 D.T.C. 6058 (F.C.T.D.).

5.03 Analysis

5.03.1 Pursuant to subsection 2(1) of the Partnership Act of British Columbia, partnership is "the relation which subsists between persons carrying on business in common with a view of profit".

The appellant has the burden of proof. It is particularly heavy to show the existence of a partnership when there is no written agreement between the parties and when the partnership is not officially registered at the Registrar Office. Then the proof of the intention to enter into a partnership must remain on other facts which are not all significant.

In the Cullen case (par. 5.02(1)), Sarchuk, J. said:

A partnership has been held to be the result of an express or implied agreement. As Duff, J. stated in Porter v. Armstrong, [1926] S.C.R. 328 at 329:

Partnership, it is needless to say, does not arise from ownership in common, or from joint ownership. Partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing. It is not sufficient there should be community of interest; there must be contract.

Section 3 of the Partnership Act of B.C. gives the rules for determining the partnership:

3. In determining whether a partnership does or does not exist, regard shall be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in property from which or from the use of which the returns are derived; and

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he is a partner in the business, but the receipt of a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business;

5.03.2 The evidence given by the witnesses is that there was a bank account in the name of the business. On the form 86-61 of the bank, signed by the appellant and his wife, it was agreed with the bank that Mr. and Mrs. Mazur be both responsible for the open bank account. However, the appellant could not sign cheques and verify the bank account — these documents were issued in 1981 by the Canadian Imperial Bank of Commerce (par. 4.01(d)).

However, in April 1980, when a similar account had been opened at the Bank of Montreal the appellant's signature was not required on the document to open the account (par. 4.02(g)).

Is this evidence significant enough to lead to the conclusion of the existence of the partnership? I must say no.

5.03.3 Moreover, the evidence is to the effect that the appellant, despite the fact that he considered himself as a silent partner, invested over $1,400 at the beginning of the business in April 1980 — plus the payment of the rent to lease the car in the name of the business. He then paid over $8,000 during 1980 and 1981 (pars. 4.01(h) and 4.02(e)).

Is that investment significant enough to determine the existence of a partnership? I have a great doubt — the two persons involved are husband and wife. Both said that the appellant invested money to help his wife to start the business (pars. 4.02(f) and 4.03(b)).

In my opinion, the preponderance of evidence is to the effect that the pooling of the assets was incidental to the formation of the family unit and I cannot arrive at the conclusion that there was an actual partnership.

Conclusion

The appeal is allowed in part and the matter referred back to the respondent for reconsideration and reassessment in accordance with the reasons given above.

Appeal allowed in part.