Franklin v. R., [1997] 3 C.T.C. 2914, 97 D.T.C. 1485

McArthur T.C.J.:

1 In assessments for the 1990 and 1991 taxation years of Anita Franklin, the Appellant, was disallowed deductions for losses in the amounts of $41,379.00 and $66,855.00, respectively, which assessments she is appealing.

2 The 1990 loss arises from the purchase and sale of a commercial building at 290 Shuter Street (Shuter Street) in Toronto. The 1991 loss is from aborted syndications known as London Town Square Limited Partnership in Calgary (Towne Square) and Lawrence Park Towers Limited Partnership (Lawrence Park) in Toronto. The Minister assessed the Appellant on the basis that the losses were not hers. Ultimately, the issue is whether she owned an interest in Shuter Street and the investment syndications.

General Background

3 Mr. and Mrs. Franklin have been married for over 26 years. Anita Franklin has a Bachelor of Arts degree and taught school during the early years of her marriage. Over the years, she has acquired extensive experience investing in real estate. David Franklin practiced law in Toronto for many years in the real estate and commercial areas. In 1985, he gave up practice for a career in the private business world. He has been involved in a number of successful syndications of various types of investments, including real estate transactions. The recession and downturn in the real estate market that commenced in 1990 dealt a severe blow to his business.

4 While Mr. and Mrs. Franklin purportedly acted as a team, Mr. Franklin was, without doubt, the directing mind. Mrs. Franklin's contribution to the business known as The Franklin Group, was of a supportive and subtle nature. She had little input in the day-to-day operations. Also, she had her separate funds and appears to have blended at least some of these funds with those of her husband. She also participated in investments on her own, completely separate from her husband's endeavours.

5 Since 1987, she was jointly and severally liable with Mr. Franklin to pay a $250,000.00 line of credit to the Royal Bank of Canada. In 1990, after the sale of Shuter Street, she granted a $300,000.00 mortgage on the family home at Beaverhall Drive, Toronto, which she had owned in her name alone since 1979. She was familiar with her husband's projects and she stated that he spoke business to her at home “all the time”. She participated in the marketing of his investments through social contacts. She visited buildings under construction and acquired an expertise in assessing the condition of a structure, its location and ultimately whether money could be made by its acquisition and syndication.

Facts

6 With respect to the 1990 taxation year, the Respondent contends that the Appellant never held an interest in Shuter Street. Nowhere does her name appear with respect to ownership other than in her income tax return for 1990, filed in 1991 and a replacement Declaration of Trust completed on January 10, 1997.

7 Shuter Street was acquired in September 1988 and sold in December 1989, giving rise to a loss in the 1990 taxation year. The Appellant claimed that loss in the amount of $41,378.00. The question is did the Appellant own a 25% interest in Shuter Street? Title to the property was acquired by Shuter Property Incorporated, in trust for Martin Grinstein, in trust, and David Franklin, in trust, each to an undivided 50% interest. An original Declaration of Trust was filed in evidence to that effect. Furthermore, Martin Grinstein, in Trust, executed a Declaration of Trust indicating that he held the Agreement of Purchase and Sale, in trust for David Franklin and himself, each as to a 50% interest. This Declaration of Trust was dated September 14, 1988.

8 On January 10, 1997, David Franklin executed a replacement Declaration of Trust wherein he declared that he held an undivided 50% interest in Shuter Street for Anita Franklin as to 25% and for J.A. McFarlane Engineering Company Limited as to 25%. He testified that he could not find the original Declaration of Trust but that he had signed same on September 30, 1988. In the same manner, he signed another replacement Declaration of Trust on January 10, 1997, which replaced a lost original Declaration of Trust dated December 28, 1989. In this Declaration he stated that he held his proportionate share of a vendor takeback mortgage upon the sale of Shuter Street for Anita Franklin as to an undivided 25% interest.

9 Cindy Varcoe, a competent and experienced secretary, testified that she had prepared and had executed by Mr. Franklin the original Declarations in September 1988 and December 1989. She stated that duly executed original copies had been lost or mislaid, thus requiring the execution of replacement Declarations in January 1997. Mrs. Varcoe had worked many years as a legal secretary in the area of real estate before becoming a key employee of the Franklin Group in 1985.

10 Upon the purchase of Shuter Street, the balance due on closing was paid out of an account in David Franklin's name alone, of which he was the sole signing officer. Accounting for Shuter Street, prepared by Mrs. Varcoe, indicates a debit on March 1, 1990 of $58,187.00. Mrs. Varcoe stated that the sum of $45,000.00 and $4,312.00 were received from Blondie's Tavern and paid to reduce the balance owing. Blondie's Tavern had been owned in part by the Appellant and sold at a profit in excess of $100,000.00 prior to March 1, 1990. Mr. Franklin had no interest in Blondie's Tavern. Other than a hand-written notation indicating that the money came from Blondie's Tavern, there was no canceled cheque or other document to corroborate that the Appellant had made a financial contribution.

11 A $600,000.00 first mortgage was registered against the Shuter Street Property at the time it was purchased. No evidence was offered indicating that the Appellant was a guarantor or a signatory in any way on the mortgage document.

• 1) the replacement Declarations of Trust;

• 2) the notation by Mrs. Varcoe's accounting reflecting that the Appellant used her own separate funds from Blondie's Tavern in excess of $45,000.00 to pay Shuter Street expenses;

• 3) she co-signed for a $250,000.00 bank loan;

• 4) she introduced $300,000.00 into the business from her home after the sale of Shuter Street;

• 5) the testimonies of Mrs. Varcoe and Mr. Franklin.

• 1) Letter from Mr. Franklin to his accountant dated April 1990, stating he was a 25% owner of Shuter Street. Mr. Franklin stated that this letter was an error.

• 2) The substitute Declarations of Trust cannot be relied upon particularly in light of the fact that other Declarations of Trust are available that protect David Franklin's interest from third parties.

• 3) Nowhere in the hundreds of pages of the Appellant's documentation, is there mention of the Appellant as beneficial owner.

• 4) There was no independent evidence to corroborate that she, rather than Mr. Franklin, participated with the two individuals who were the directing minds of the remaining 75% interest in the property.

• 5) The replacement Declarations of Trust are not credible.

• 6) The oral evidence of Mrs. Varcoe and Mr. Franklin cannot be relied upon.

14 Turning to the 1991 taxation year, the Appellant claimed losses in the amount of $66,855.00 which she stated arose from her investment in two failed real estate ventures which were syndicated by David Franklin. The Appellant's evidence was that she agreed to be responsible for the professional fees of the solicitors and accountants for the syndicate. David Franklin stated that he agreed to convey a 50% share of his interest in the investment known as Lawrence Park and London Town in consideration of the Appellant paying these expenses. As was the case with Shuter Street, it is alleged that original Declarations of Trust were executed on June 8, 1990, and the replacement Declarations were executed on January 10, 1997 by David Franklin in favour of the Appellant. Both projects failed.

15 The Appellant submitted that the source of monies for payment of her expenses were the following:

- Income from investments (as demonstrated in her 1990 Income Tax Return);

- Line of Credit with the Royal Bank of Canada wherein the Appellant was jointly and severally liable with her spouse, David Franklin;

Revolving Demand Loan Agreement between Royal Bank of Canada and David Franklin and Anita Franklin dated August 28, 1987;

Revolving Demand Loan Agreement between Royal Bank of Canada and David Franklin and Anita Franklin dated December 14, 1989;

Copy of Charge/Mortgage to Royal Bank of Canada dated December 15, 1989;

Operation of Account Agreement between Royal Bank of Canada, David Franklin and Anita Franklin dated February 1, 1990;

Loan Agreement Summary of Royal Bank of Canada dated December 31, 1993.

16 Mr. Tomlin, the Appellant's accountant, who prepared her 1991 return, testified on her behalf. He filed an Adjustment Request dated November 19, 1996 respecting the 1991 tax return, which Request details actual losses to the Appellant as of June 30, 1991 in the sum of $156,956.00, a loss significantly greater than what was claimed in the 1991 tax return. He stated that the Appellant had massive losses from an interest in a Bloor Street apartment building for the years commencing in 1992 and did not see the significance of defending the 1990 and 1991 losses when the Bloor Street losses could be carried back to 1990 and 1991.

17 The Respondent takes the position that the replacement Declarations of Trust cannot be relied upon. There is no evidence of the Appellant paying the losses and a total of $28,000.00 for expenses was paid out of Mr. Franklin's account. Also, there was no evidence that the Appellant participated in the syndication activities and the Appellant did not have an interest in Lawrence Street and London Towers.

18 The Respondent's Reply to the Notice of Appeal submits that as the Appellant did not have a reasonable expectation of profit from her purported real estate trading business in the 1990 and 1991 taxation years, they were not businesses within the meaning of section 9 and subsection 248(1) of the Act, and accordingly no loss therefrom was deductible in computing income in those years. The Reply adds that the expenses were not deductible as they were not expenses incurred for the purpose of gaining income from a business within the meaning of paragraph 18(1)(a) of the Act but were personal or living expenses within the meaning of paragraph 18(1)(h) of the Act. The Appellant is not entitled to any business losses for her 1990 and 1991 taxation years as she provided no information regarding such losses for her 1990 taxation year and incomplete information regarding such losses for her 1991 taxation year.

19 In summary the position of both parties on whether a partnership between the Appellant and her husband existed is as follows. Firstly, the Appellant submitted that there was a working partnership between herself and her husband in the sense that they discussed the businesses, she visited the investment properties, and she entertained prospective investors and generally aided in promotion. Although the internal documents of the Franklin Group relating to the investments informally referred to “David”, it was submitted that they impliedly referred to both the Appellant and her husband, particularly since husbands and wives should not need written agreements to co-operate on investments. On these points, the Respondent argued that there is no evidence that the Appellant paid for her interest in the real estate investments, contributed money towards the purchases, or paid for expenses after the properties were sold, while the documents of purchase and sale referred only to David Franklin.

20 Secondly, the Appellant submitted that she provided funding for the purchase of Shuter Street through her covenant as a guarantor, from her own separate funds, as well as through obtaining a mortgage loan of $300,000 secured on her home, which was previously unencumbered. The mortgage loan was deposited into a general account under David Franklin's name. The Respondent submitted that, although the Appellant and her husband might have had joint banking authority, no bank statements were provided to demonstrate that she drew upon those funds in order to contribute to the capital of the businesses.

21 Thirdly, the Respondent relied upon a letter sent by David Franklin to his accountant in April 1990, after the Shuter Street Property was sold, stating that he held the 25% interest in that property personally; on this basis, it was argued that the Appellant held no ownership stake in the Shuter Street Property. The Appellant submitted in response that the letter was in error and that, in fact, the Appellant held an interest in the Shuter Street Property.

22 Fourthly, the Respondent stated that the Appellant was claiming 1991 expenses of $85,000 yet only $28,000 was in fact paid.

23 Finally, the Appellant submitted that she had valid interests in the investments in question, as the necessary Declarations of Trust were prepared at the time of the transactions, but replacement Declarations were executed since the originals had been misplaced. The Respondent submitted that while the only documents tying the Appellant to the investments in question were the replacement Declarations, which had been created in 1997, replacement Declarations can be of no help if it cannot be demonstrated that the necessary Declarations had been executed at the relevant time.

Analysis

24 I have struggled to find favour in the Appellant's argument but I cannot. She has failed to satisfy the burden of proof incumbent upon her. The Appellant's involvement in the investment business of her husband does not constitute active involvement. The Appellant had a peripheral and indirect involvement in the business of the Franklin Group. This does not constitute a legal partnership. She was supportive of her husband's ventures and this does not, in itself, constitute a partnership.

25 No material evidence was adduced in support of the Appellant's position. Other than the replacement Declarations of Trust, there were no documents to support the Appellant's contention. A similar matter was dealt with in Kuchirka v. R. (1991), 91 D.T.C. 5156 (Fed. T.D.). Strayer J., addressing the issue of whether the evidence supported the conclusion that a business partnership existed between the taxpayer and his wife, stated at page 5157:

From a survey of a number of similar cases it becomes obvious that each must turn on its own facts. While the fact that the alleged partners are also married should not automatically exclude the existence of a business partnership between them, one must take care to see if the conduct allegedly establishing the partnership is not simply attributable to the fact of the marriage relationship.

The most telling factor, I believe, against the existence of a partnership was the lack of evidence that they operated, vis-à-vis third persons, as partners entitled to bind the partnership rather than themselves. As noted the truck was registered in the plaintiff's name, equipment was bought and financed in his name, insurance with respect to the truck and farm buildings was all in his name, and cheques for farm income were typically in his name alone. Similarly, after Mrs. Kuchirka inherited the houses in North Battleford, they were insured in her name alone and she principally dealt with their rental. There was no evidence from third parties as to any kind of holding-out by either the plaintiff or his wife that they were acting on behalf of a partnership.

Viewed as a whole, such sharing as there was of money or property as contributions to their common welfare, or of earnings for purpose of personal support and family savings, is equally consistent with normal family relationships. There is nothing in their conduct or their relations with third persons to confirm their intention to have a business partnership where each could act for the partnership and where they would legally share both the profits and the debts of the partnership.

26 Strayer J's remarks apply to the present facts. There was no evidence that Mr. and Mrs. Franklin operated vis-à-vis third persons, as partners entitled to bind the partnership rather than themselves. Mr. Franklin dealt extensively with third parties and other partners. There was no evidence that he was acting on behalf of his wife.

27 Notwithstanding the potential blending of funds belonging to the Appellant and her husband, the bank account was in David Franklin's name alone. Although that in itself is not conclusive, there is no evidence that the Appellant personally contributed money towards the business, such as bank statements which demonstrate that she drew upon those funds in order to contribute to the businesses. Also, although at least some of the Appellant's funds were blended with those of her husband, other funds were maintained separately and were put towards retirement funds, the family home, the children, and investments unrelated to the investments at issue.

28 The Appellant submitted that Mrs. Varcoe's testimony is sufficient to establish that the necessary Declarations of Trust were executed at the proper time. As stated by Linden J.A. in Friedberg v. R. (1991), 92 D.T.C. 6031 (Fed. C.A.), at page 6032, a mere indication of subjective intention is insufficient in itself to alter the characterization of a transaction for tax purposes. The lack of the original Declarations of Trust makes it more difficult for the Appellant to satisfy her onus. Given the lack of material evidence, the credibility of the testimonies took on added importance. The Appellant had to rely on the memories of Mr. Franklin and Mrs. Varcoe as to what they believed took place seven years previously. Unfortunately, the Appellant failed to satisfy her burden in this regard as well.

29 The Appellant's counsel suggested in several instances that Mrs. Varcoe offered “clear and unchallenged” evidence which cannot be ignored. On the contrary, her testimony was anything but “clear and unchallenged”. The facts do not support her position. Contrary to the submissions of the Appellant's counsel, Mrs. Varcoe was not an impartial witness, given her years of employment with the Franklin Group. A decision made at the time of filing the returns to indicate the Appellant as owner of the investments is equally consistent as the position taken by the Appellant.

30 I cannot simply ignore the signed letter of April 1990 wherein David Franklin advised his accountant that he held the 25% interest in Shuter Street personally. The statement is clear and unequivocal and given as a direction to his accountant to be acted upon in the preparation of Mr. Franklin's income tax return. There was no conflicting correspondence. The accountant to whom the letter was directed was not presented as a witness.

31 I conclude that the Appellant is not entitled to claim the losses in question for the 1990 and 1991 taxation years and the appeals are dismissed, with costs, to the Respondent.