Victor Tarasow v. Minister of National Revenue, [1981] CTC 2466, 81 DTC 462

M J Bonner:—This is an appeal from an assessment of income tax for the appellant’s 1974 taxation year. On assessment the Minister included in the computation of the appellant’s income the entire profit from the operation of the Central Hotel in Lindsay, Ontario. This action was based on a finding or assumption that the business in question was being carried on by the appellant as sole proprietor. The appellant’s contention on appeal was that only one-half of the profit was his income because the business was carried on by himself and his wife in equal partnership.

The appellant and his wife were married in 1959. Following the marriage both were employed, the appellant by a rubber company and the appellant’s wife by a distiller. As a result of Mrs Tasarow’s employment she developed skill in bookkeeping and accounting. Her income substantially contributed to the financial well-being of the family. Her contribution was, in a sense, magnified because the nature of the appellant’s work was such that he was laid off fairly frequently.

In 1968 the appellant and his wife, together with another couple, decided to go into the hotel business. They bought the Woodfield Motor Hotel near Parry Sound. The two couples raised the capital necessary to purchase the hotel by selling their homes.

In the second year after the purchase some friction developed between the two couples. The appellant and his wife therefore decided to sell their interest in the Woodfield Motor Hotel. The Central Hotel was purchased at the end of that year. Although at the beginning of the form of the agreement of purchase and sale the appellant alone was named as purchaser, the agreement was signed not only by the appellant, but also by Mrs Tarasow. Title to the hotel was taken in the name of the appellant alone. Apparently this was done on the bais of advice given by a real estate salesman who suggested that approval of the transfer from the vendor of the liquor licence could be more readily obtained if the property were shown as owned by the appellant alone.

The cash downpayment made on the purchase of the Central Hotel was raised in part by bank borrowings and in part by borrowings from family and other non-institutional sources. Mrs Tarasow said that she and her husband “signed for the loans together”. It was unclear, however, whether Mrs Tarasow signed as a person primarily liable or as a guarantor. Substantial renovations to the Central Hotel were made during the period between the fall of 1973 and the spring of 1974. Those renovations were financed by a small business improvement loan. Again, the evidence was unclear whether Mrs Tarasow joined with her husband as a borrower in this loan. In any event, contributions to capital are not, by any means, conclusive as indicators of the existence of a partnership.

Once renovations were completed the appellant and his wife personally took over the entire management of the hotel. Mrs Tarasow managed all the food operations and did much of the vooking. She kept all the books and financial records of the hotel. In addition she did the banking and tended bar on a regular basis. The appellant managed the operations of the bar and supervised the staff. The bank accounts of the business were kept in the names of both the appellant and his wife.

There can, on the evidence, be no doubt whatever that the successful operation of the hotel resulted from the industry and intelligence not only of the appellant, but also of his wife. Equally, there can be no doubt that the marriage was successful, that each trusted the other and that, as a result, neither paid any attention to the legal niceties of partnership and ownership of the business.

It was apparent from the evidence that both spouses regarded any property owned by the other as being the property of both. Each said, with total sincerity, that from the beginning the other was his partner. “The beginning” was identified by Mrs Tarasow as being the beinning of the marriage. However, income tax returns reporting the results of the Central Hotel business were made by the appellant as proprietor. The appellant explained that while the business was not making much money, the question “Who carried it on?” was of little importance. Financial statements showing the operations of the Woodfield Motor Hotel showed Mr Tarasow and the other husband as the only two partners although, again, the appellant said, “by rights there were four partners”. This evidence, while far from conclusive, at least faintly indicates that the Central Hotel business, like the Woodfield business before it, was not operated by Mrs Tarasow.

No attempt was made to divide profits between the appellant and Mrs Tarasow. As often happens with married couples, the money which the appellant had left after payment of taxes was deposited in a bank account upon which both the appellant and his spouse could draw. I am unable to conclude that the power of a wife to draw cheques on a bank account maintained by her husband and herself into which account the husband deposits business profits is a circumstance which points to the existence of a partnership between the spouses.

The situation as to licences points toward the absence of a partnership. In cross-examination Mr Tarasow was asked who held the licence to operate the Central Hotel. He answered that it was in his name. I assume reference was there made to some sort of a municipal licence. I have referred earlier to the evidence as to the title to the Central Hotel. From that evidence I infer that the liquor licence was issued to the appellant alone. It is a little difficult to reach a conclusion that the business was operated by a partnership when licences necessary to its lawful operation were held by the appellant alone.

The only conclusion which I am able to reach on the evidence is that at no time did a contract of partnership exist between the appellant and his spouse in relation to the operation of the Central Hotel. The appeal is therefore dismissed.

Appeal dismissed.