Peter David Kopp v. Minister of National Revenue, [1986] 1 CTC 2227, 86 DTC 1150

Taylor, T.C.J.:—This is an appeal heard in Edmonton, Alberta on November 28, 1985, against an income tax assessment for the year 1981, by which the Minister of National Revenue treated all the farm income as that of Peter Kopp rather than assessing it on the basis it was reported as divided between Peter Kopp and his wife Sue Kopp as partners in the operation. A separate appeal had been lodged by Sue Kopp but the result of the reassessment for Sue Kopp was to reduce not increase her originally reported taxable income and it was quashed on agreement by the parties. The issue however remained the same for Peter Kopp — were the two taxpayers operating the farm in 1981 as partners, or was it the operation of Peter Kopp as now assessed?

The essential elements of the reply to notice of appeal were:

The Respondent in reassessing the Appellant as he did made, inter alia, the following assumptions of fact with respect to the points at issue:

— The Appellant has farmed in the area of Leduc in the Province of Alberta since 1968:

— Prior to 1968 the Appellant had been farming in the Lethbridge area of the Province of Alberta;

— For the first time with respect to taxation year 1981 the Appellant claimed that the farming operation which had been carried out by him as a sole proprietorship up to then, had been operated by him and his spouse, Sue Kopp, on a partnership basis in the proportion of 60% and 40% respectively for each spouse;

— The spouse of the Appellant did not contribute any substantial amount of capital to the farming enterprise during the taxation year 1981 nor before the taxation year 1981;

— The contribution of the Appellant’s spouse in time and effort had not materially changed from the year 1980 to the year 1981;

— Before and during the taxation year 1981 the spouse of the Appellant devoted most of her time and energy to homemaking, child rearing, trampoline sales and substitute teaching;

— Any work done by the spouse of the Appellant with respect to the farming operation such as bookkeeping and casual help was rewarded by way of wages paid to her in the amount of $3,200.00, which has been reported as an expense of the farming operation in the 1981 Income Tax Return of the Appellant;

— The Appellant did not publicly display or declare his farming operation as that of a partnership before or during his taxation year 1981;

— The apportionment of the income of the farming operation in the proportion of 60% — 40% as stated in subparagraph (c) above was not reasonable in the circumstances.

— No partnership in law or in fact existed between the Appellant and his spouse with respect to his farming operation.

— The Respondent relies, inter alia, on Section 3 and Subsection 103(1.1) of the Income Tax Act, R.S.C. 1952, c. 148 as amended by S.C. 1970-71-72, c. 63, s. 1 applicable to the 1981 taxation year of the Appellant.

— The Respondent submits that no partnership existed between the Appellant and his wife and that the whole of the income derived from the exploitation of the Appellant’s farm should be included in the Appellant’s income.

Both Peter and Sue Kopp testified, and that evidence indicated that in 1968 Sue Kopp had provided some of the original capital (probably several thousand dollars) which had gone to purchase of the farm property, machinery, animals and buildings which still remained the source of the income at issue. In addition it was clear that she had made and continued to make a substantial physical contribution to the labour and the management of the farm. The couple's four daughters also helped on the farm. With regard to the $3,200 "wages" noted above for Sue Kopp the appellant and his agent requested that it would be treated by the Minister according to other provisions of the Act, but that it did not materially alter the question before the Court. There had always been a joint bank account, and Sue Kopp at least sat in on discussions related to acquisition of machinery, and the determination of matters directly affecting the farm. The 60/40 division of profits suggested by the appellant was based on a commonly held view that Peter Kopp had the major role in the operation, and should share accordingly. There was no other reason for it. À partnership agreement, registered on March 1, 1982, indicating that it took effect as of January 1, 1981 was filed with the Court. It was also noted that the 1981 income tax return for Peter Kopp was dated March 6, 1982.

In cross examination, counsel for the Minister raised a very interesting question — since the general description of the duties performed by the appellant's four daughters was similar to the duties that his wife performed, in what way did he differentiate the relationship so that his wife was a partner and his children (and in later years his hired man) were not? In essence his answer (a) was that his wife had contributed to the capital base (at acquisition of the farm in 1968), and (b) that he regarded her as his partner during those years.

The series of questions from counsel for the Minister served to focus the issue quite clearly — there had been no real change in that regarded as the "partnership" by the appellant, from the year 1968 on — Possibly even from the year 1964. The registration of a document in 1982 attesting to a "partnership" from January 1, 1981 was specifically for the purpose of taking advantage of the fact that the Income Tax Act permitted such "income splitting" after 1979. The Court pointed out that even that as a reason (income tax reduction) did not of itself exclude the appellant from the benefit he sought (see Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305). But the issue remained the same — was there in fact a partnership?

The agent for the appellant, in summary, put forward several points which he believed supported his claim —

— Sue Kopp had indeed put money into the farm at least during the period 1964 to 1968 when she was employed outside the farm, as a teacher.

— since then the two had worked as partners building up the farm.

— the land and buildings were registered in the joint names.

— there was a joint bank account.

— they had made out the "partnership registration" (March 1, 1982) as soon as it was "permitted" by the Income Tax Act.

Counsel for the respondent noted that two recent cases of this Court, Ingram Wessell v. M.N.R., [1985] 1 C.T.C. 2192; 85 D.T.C. 206 and Morley Cullen and Caroline Cullen v. M.N.R., [1985] 2 C.T.C. 2059; 85 D.T.C. 409, fairly well covered the subject and the issue, and counsel dutifully detailed both the similarities and the differences. In the Minister's view there was no legal basis upon which the Court should hold that there was a partnership

— and that nothing had changed for the year 1981, merely by the filing of the registration certificate in 1982. There had not been adequate evidence or independent confirmation of the existence of even a “‘tacit” partnership during the years from 1968 on, and the situation had not been shown to have changed at all in the year 1981.

In my view the matter can indeed be resolved by reference to Wessell (supra) and Cullen (supra). I would note, that in my opinion, Cullen (supra) is a comprehensive and comprehensible analysis of the circumstances this Court must look for in deciding this kind of question. The critical and applicable paragraph therefrom is to be found at 2064 (D.T.C. 413):

In addition it is necessary to consider the parties’ conduct in a general sense. The fact that the appellant and his wife describe themselves as partners is not conclusive, nor is the fact that the farm was owned by them as joint tenants. In cases such as the case at bar where no written partnership agreement exists the intention of the parties may be ascertained from their conduct, the mode in which they have dealt with each other, and the mode in which each has, with the knowledge of the other, dealt with other people. This can be shown by books of account, by the testimony of clerks, agents, and other persons, by letters and admissions, and, in short, by any of the modes by which facts can be established. It seems appropriate in this context to note that no independent evidence was adduced to corroborate the statements of the appellant and his wife.

In the Wessell (supra) matter, there were financial and accounting records — including capital contribution statements — which supported the appellant's contentions for all the businesses; thee was one independent situation (the "partnership” assignment) which reflected the relationship as asserted by the appellant; there was consistent and substantial independent action by both parties binding and obligating the partnership; and finally and most importantly there was independent confirmation by two parties

— the bank manager and the hired man, who attested to the operating arrangements between the two people. On that kind of foundation, the agent for Mr. Wessell felt quite assured (and correctly so) in advising that the tax returns could be filed for each individual as a partner. The Wessell (supra) case does stand for the proposition that circumstances can be seen when the conduct of the parties, the public perception of their business organization, and the independent confirmation of their assertions provides a persuasive argument in favour of a “partnership.” The Wessells did not claim they had been in "partnership” before the 1978 taxation year — but certainly filed that way for that year, and subsequently. It was the repeal of subsection 74(5) of the Income Tax Act which prompted the action by this taxpayer, Mr. Kopp, and that permitted such husband and wife partnerships for taxpayers subsequent to December 11,1979. In Wessell the claim to partnership was made under the general "partnership” provision of section 96 of the Act — and such claim had been made for the 1978 income tax year of the Wessells — while the subsection 74(5) of the Act prohibition still remained in effect. The conduct of the parties, and the evidence and confirmation brought forward at the hearing led to the favourable decision in Wessell — but that set of circumstances was not repeated in the instant case.

The appeal is dismissed.

Appeal dismissed.