Estate of John Sedelnick v. Minister of National Revenue, [1986] 2 CTC 2102, 86 DTC 1563

Christie, A.C.J.T.C.:—The issue is whether during his 1976 taxation year the late John Sedelnick who died on February 2, 1977, was, as alleged by the executor of his estate in a return of income, in partnership with his wife Eva in relation to a farming operation in Saskatchewan and regarding interest derived from a joint bank account in their names and Canada Savings Bonds in the name of John Sedelnick alone. In reassessing the respondent denied the existence of the partnership.

What is generally regarded as relevant in determining the existence of a partnership is discussed in a recent decision of this Court: Woodlin Developments Ltd. v. M.N.R., [1986] 1 C.T.C. 2188 at 2192-95; 86 D.T.C. 1116 at 1120-21. All that is said there need not be repeated, but emphasis is placed on this extract from Lindley on Partnership 15th (1984) edition:

. . . 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, (1860) 8 H.C.L. 268, is that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case.

Unlike Woodlin the case at hand has this feature. It is alleged by the appellant and denied by the respondent that a business partnership existed between a husband and his wife. At common law a wife did not have the Capacity to contract because marriage created a condition whereby, in the eyes of that law, they were one person and for contractual purposes that person was the husband. Consequently, except regarding contracts for necessaries, a wife could not enter into a legal relationship binding either on her husband or herself. This has been swept aside by legislation such as section 9 of the Married Persons’ Property Act, R.S.S. 1978, c. M-6 which reads:

9. Every married woman shall be capable of entering into and rendering herself liable on contract as if she were a feme sole.

While the sine qua non of a partnership is the existence of a contract, it need not be in writing but can be established by parol. 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. I think these authorities can be usefully mentioned: Cornforth v. The Queen, [1982] C.T.C. 45; 82 D.T.C. 6058; Be- dard v. M.N.R., [1984] C.T.C. 2239; 84 D.T.C. 1204; Law of Partnership, 3rd (1983) ed. by Charles D. Drake and The Law of Partnership, 4th (1981) ed. by P.F.P. Higgins and K.L. Fletcher.

In Cornforth, Mr. Justice Cattanach said at 55 (D.T.C 6065-66):

If a contract of partnership existed, it is such a contract that is not required to be entered into with any particular formalities, without any official act such as registration or without any written agreement whatsoever no matter that wisdom directs to the contrary.

In Lindley on Partnership, 14th Ed. (Scamell and Banks) it is stated at 64:

There is no reason why a married woman should not enter into partnership with her husband although as in the case of other potentially contractual obligations, the court will be less ready to infer a partnership where the parties are husband and wife.

In Bédard, St-Onge, T.C.J. said at 2241 (D.T.C. 1206):

Because of the special status that exists between a husband and wife, it is very difficult to prove for past years that a partnership existed between them for the operation of a particular business, unless there is a document to that effect. There is no document to prove the existence of a partnership in the present case. The appellant simply paid money into a joint (bank) account.

Drake said at 76:

Clearly, husband and wife may enter into a valid partnership agreement, but in view of the reluctance of the Courts to presume that spouses living together in amity intend their discussions concerning money matters to have legal effect, it is doubly important that their wishes should be unequivocally set forth in a partnership deed.

Higgins and Fletcher said at 34:

In spite of the present contractual freedom of married women, the courts are adverse to drawing an implication of partnership from the course of mutual dealings between husband and wife, where there is no express agreement between them to enter into a partnership. Certainly, in cases where the sole evidence of partnership is of mutual dealing with each other’s property, and a common sharing of the profits derived from that property, the courts incline to treat the matter, not as a partnership, but as a normal incident flowing from the ordinary family relationship of husband and wife.

I also refer to subsection 3(1) and section 4 of the Partnership Act, R.S.S. 1965, c. 387, which was the legislation in force at the time relevant to this appeal. As is deducible from Woodlin Developments Ltd. the source of these provisions is the Partnership Act 1890, 53 and 54 Vict., c. 5, (United Kingdom). Subsection 3(1) of the Saskatchewan legislation defines partnership in these words: “Partnership is the relation that subsists between per- sons carrying on a business in common with a view of profit/' Section 4 contains a number of rules for determining a partnership:

1. 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;

2. 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 the property from which or from the use of which the returns are derived;

3. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but the receipt of such 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 and in particular:

(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him a partner in the business or liable as such;

(b) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such;

(c) a person, being the widow or child of a deceased partner and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such;

(d) the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing, and signed by or on behalf of all the parties thereto;

(e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him of the goodwill of the business is not by reason only of such receipt a partner in the business or liable as such.

Mr. Dempsey Sedelnick, the 52 year old son of John Sedelnick testified on behalf of the appellant in its endeavour to establish the existence of the alleged business partnership between the late John Sedelnick and his widow Eva ("the Sedelnick partnership"). He did not create a favourable impression. For example, it took an inordinate length of time and prompting by both counsels for the respondent and the Court to elicit an answer to this simple question: “Do you know, Mr. Sedelnick, if your parents ever reported their income on a partnership basis prior to 19762” The answer finally given was: “No, I don't know." Nothing more elucidating was forthcoming on this important point. Nor was there any evidence regarding income tax returns filed by Mrs. Sedelnick.

The person who signed the appellant’s 1976 income tax return certifying that the information contained therein “is true, correct and complete in every respect" is the sole executor of the estate, Mr. Steve Sedelnick. He is also a son of John Sedelnick. He did not testify, nor did anyone else who may have been involved in the preparation of the 1976 return referred to a moment ago or any returns prior to that date reporting the income of John Sedelnick. The witness Dempsey Sedelnick said Steve was a farmer who had "some things to finish off." This was the extent of the justification, if it can even be regarded as such, for the failure on the part of the executor to testify. It brings to mind this passage from Evidence in Civil Cases by So- pinka and Lederman at pages 535-6:

In Blatch v. Archer ((1774), 1 Cowp. 63 at p. 65) Lord Mansfield stated:

“It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted?’

The application of this maxim has led to a well-recognized rule that the failure of a party or a witness to give evidence, which it was in the power of the party or witness to give and by which the facts might have been elucidated, justifies the court in drawing the inference that the evidence of the party or witness would have been unfavourable to the party to whom the failure was attributed. In the case of a plaintiff who has the evidentiary burden of establishing an issue, the effect of such an inference may be that the evidence led will be insufficient to discharge the burden.

I draw the inference from the failure of the executor to testify that his evidence would have been unfavourable to the appellant. I do not however say that, in the context of this appeal, this failure by itself leads to the conclusion that the other evidence led by the appellant is insufficient to discharge the onus on the appellant to establish the existence of the Sedelnick partnership.

Also John Sedelnick's alleged former partner was not called upon to give evidence. At the outset of the hearing Mr. Hawrish informed the Court that she is 89 years old and declared that: “She would not be capable of being a witness in this matter”, although in cross-examination Dempsey Sedelnick said: “She is still very active.” In determining this appeal I choose not to draw an inference adverse to the appellant from this omission.

On the basis of the evidence before me I conclude that, if the appellant is to succeed, the existence of the Sedelnick partnership must be inferred from the conduct of the parties.

The only witness called at the hearing was Dempsey Sedelnick. His evidence is that his father came to Saskatchewan from the Ukraine in 1926. Two years later he was joined by his wife and two children. Four additional children were born of the union. At first he worked for the C.P.R. or C.N.R., the witness did not know which. He then rented land from the C.P.R. until 1944 when he purchased a half-section in the municipality of Eagle Creek. In 1950 additional farmland was purchased and, in 1956, a dwelling house was purchased in Saskatoon which is about 60 miles from the farming operation. All of these properties are said to have been jointly owned by John Sedelnick and his wife. It was also said that since 1944 proceeds from their farming were credited to joint bank accounts.

Mrs. Sedelnick worked hand in glove with her late husband on the farm in tasks ranging from preparing the land for cultivation to assisting with the harvesting and feeding the farm animals. Assistance in this regard was also given by the children as they grew up. Mrs. Sedelnick did the cooking and other work identified with a farmer’s wife. The witness said he overheard his parents from time to time referring to the farm as “our land”. He understood from overheard conversations that profits were to be shared on a 50-50 basis. Reference was made to the couple “pooling their energies and resources”, although the witness later said that his mother was never possessed of independent means from which she could make a financial contribution to the farming enterprise. Whether it was a stove, farm machinery, real estate, etc. which was being purchased, Mrs. Sedelnick was interested and wanted details about what was being bought.

The Canada Savings Bonds referred to at the commencement of these reasons were purchased with funds to the credit of the joint bank account of John and Eva Sedelnick at a branch of the Royal Bank in Saskatoon.

The foregoing is the substance of Dempsey Sedelnick's evidence.

The only documents produced in evidence to bolster the viva voce evidence are these. First is a copy of a transfer under the Land Titles Act of Saskatchewan dated March 11, 1975, of a quarter-section of land minus two acres from John and Eva Sedelnick to Dempsey Sedelnick. Second is copy of a similar transfer of a quarter-section minus 3.60 acres. This is dated February 1, 1977, the day prior to John Sedelnick’s death. The land involved in these transfers was the land or part thereof purchased in 1950. Third is a passbook issued by the Royal Bank of Canada, 20th Street and Avenue “H”, Saskatoon. Entries run from May 1, 1967 until April 30, 1977.

The passbook simply bears an account number and is not identified with any person or persons. Nevertheless I am prepared to accept the passbook as related to the joint account of John and Eva Sedelnick. The two T-5's issued in relation to the 1976 taxation year by that branch of the Royal Bank are addressed to both. I am also prepared to assume that they had a joint bank account to which proceeds from the farming operation were credited since 1944. I consider this of itself to be of minimal if any assistance to the appellant. In the world of matrimony joint husband-wife bank accounts unaccompanied by a business partnership are commonplace. The same can be said of the joint ownership of farms and urban dwelling houses. Paragraph 1 of section 4 of the Partnership Act of Saskatchewan has been cited. It deals with joint tenancy, tenancy in common, joint property and common property.

I am also prepared to assume that the Canada Savings Bonds were purchased with funds drawn from the joint account at the Royal Bank. These acquisitions cannot be regarded as positive indicators of the existence of the Sedelnick partnership. Indeed to my mind they cut the other way because in the absence of some explanation — of which there is none in this case — one would expect that, in the ordinary course, bonds would be registered in the name of both partners if acquired with funds the source of which is a joint account pertaining to a business partnership.

The testimony about the relationship existing between John and Eva Sedelnick regarding their joint efforts and interest in the farming enterprise was just as consistent with their marital status as with the implied existence of a partnership agreement. When the indicia which it is said establish the existence of the Sedelnick partnership are considered together and regarded in light of the adverse inference to be drawn from the fact that the executor did not testify, they fall far short of discharging the onus on the appellant to establish that the respondent erred in denying the existence of that supposed partnership.

The appeal is dismissed.

Appeal dismissed.