Tax Court of Canada Judgments

Date: 20010608

Docket: 1999-4006-IT-I

BETWEEN:

R. CRAIG LABBETT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Sarchuk J.T.C.C.

[1]            These are appeals by R. Craig Labbett from assessments of the 1993, 1994 and 1995 taxation years in which the Minister of National Revenue disallowed partnership losses in the amounts of $12,166, $12,526 and $19,897, respectively.

Facts

[2]            At some point of time in 1992, the Appellant and Phil Noble became aware of a limited partnership, Pinecrest Golf Club of London, Ontario (Pinecrest), which had been formed to build and operate a golf club, Forest City National Golfers' Club of London (the golf club). Both had previously been involved in the construction and operation of golf courses and based on their experiences, they were satisfied that the financial prospects for the golf club were excellent. The project was considered by the Appellant and Noble and by four other individuals, one of whom was employed in the investment consulting industry (as was the Appellant) while two others had experience in real estate investing, and a decision was taken to form a partnership to purchase units in Pinecrest. On September 20, 1992, they entered into an agreement for that purpose.[1] The partners retained the services of a solicitor to prepare the partnership agreement and mandated Noble to register the partnership and to conduct the necessary bookkeeping. The partnership was registered and carried on business under the name and style of Fairway Investments (Fairway). According to the Appellant, it was at all times understood by the partners that Fairway's investment in Pinecrest would require frequent attendance at the meetings of Pinecrest. For that purpose, he and Noble were authorized to attend the Pinecrest meetings at which they always held themselves out as representatives of Fairway.

[3]            The capital contributed by each of the partners was used to purchase two units in Pinecrest at $156,000 per unit. The Appellant observed that the amounts of capital contributed by the partners were not equal in amount and that although the issue was not dealt with in the agreement, it was clearly understood by the partners that any revenues generated or losses incurred would be split based upon the percentage of capital contributed. The Appellant for his part contributed $56,000 in capital to Fairway, $50,000 of which represented the proceeds of a loan granted to him by Golf and Recreation Management Inc. (GRM), a company which was controlled by the Appellant's father. GRM was the general partner of Pinecrest until July 18, 1995.

[4]            According to the Appellant, although the partnership did not expect the golf club would be profitable in the first three years of its operation, it was the partnership's intention that once expected profits were generated "we wouldn't take out the profits that were generated by Fairway, but that we would reinvest them and build it into a business - that invested in - other real estate properties." The Appellant does not dispute that Fairway never received any income from Pinecrest and that no tax returns had been filed by Fairway but says that was because it was not aware of any requirement to do so until income was generated.

[5]            The golf club's first year of operation was 1993. The initial public reaction was favourable and it was described by Golf Digest as the second best new course in Canada. During its first three years of operation, it hosted the Ontario Open and the CPGA tournament and its future looked promising. However, in 1995 several of the other limited partners in Pinecrest expressed dissatisfaction with the performance of GRM and suggested that it be replaced. The Fairway partnership disagreed and expressed its dissatisfaction regarding the proposed new general partner. Two other candidates for consideration were submitted, neither was accepted and GRM was replaced as general partner of Pinecrest. The Appellant testified that by the end of 1996, as a result at least in part of mismanagement by the new general partner, Pinecrest was insolvent and the investment of Fairway in Pinecrest became worthless. In good measure as a result of this turn of events, Fairway did not undertake any other business or investment activities.

Respondent's Position

[6]            The Respondent's position is that Fairway was not a partnership but rather was a consortium or an investment vehicle. Counsel for the Respondent relied, inter alia, on the following propositions in support of that position:

(a)            the partnership agreement did not outline any specific business activity other than the purchase of two units in Pinecrest;

(b)            the agreement did not set out how profits or losses were to be distributed and did not provide for the manner in which management or control was to be exercised over the partnership;

(c)            the only distribution of any profit or losses in Fairway was from Pinecrest and not any other source; furthermore, Fairway had no other assets than the two units in Pinecrest at all relevant times; Fairway did not have any bank accounts, had never sent in partnership tax returns to Revenue Canada, had never prepared any financial statements, had no letterhead, and had, on the fact of it, no dealings with banks, suppliers, brokerage firms or clients.

Furthermore, counsel argued that Fairway did not hold itself out to be a partnership. Accordingly, the Respondent contends that Fairway is not the partnership specified in paragraph 96(2.2)(c) of the Income Tax Act. Thus, according to counsel, in view of the fact that Fairway was not a true partnership it follows that "it is logical that Pinecrest would be the partnership that the language of s. 96(2.2)(c) intends to capture". It further follows that the Appellant is not entitled to deduct his partnership losses in the 1993 and 1994 taxation years in the amounts of $12,166 and $12,526, respectively, pursuant to paragraph 96(2.2)(c) of the Act because the Appellant borrowed his investment funds of $50,000 from GRM, a non-arm's length third party, therefore resulting in a $50,000 reduction of the Appellant's at-risk amount in respect of Pinecrest.[2] Subsection 96(2.1) of the Act in conjunction with paragraph 111(1)(e) allows for deduction of limited partnership losses from taxable income as long as they do not exceed 'at-risk' amount.[3] Counsel's calculation indicated that the 'at-risk' amount was $27,125. Since this at-risk amount is the maximum that can be deducted, subtracting the $50,000 from the remaining at-risk amount, disentitles the Appellant from making any claim.

Conclusion

[7]            The single question in these appeals is whether the Appellant is entitled to claim his proportionate share of certain partnership losses for the 1993 and 1994 taxation years. The answer to this question depends upon whether Fairway constituted a partnership for the purposes of the Act. To establish the existence of a partnership regard must be had for the governing provincial legislation, in this case the Ontario Partnerships Act.[4] In particular, section 2 defines partnership as:

2.              Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

There are three major aspects to this definition: (i) a business; (ii) carried on in common; and (iii) with a view to profit. In Continental Bank Leasing Corp. v. Canada,[5] the Supreme Court of Canada conducted an in-depth analysis of these three requirements. Bastarache J. writing for a unanimous Court on the point stated that the existence of a partnership was dependent on the particular facts and circumstances of each case and proceeded to enumerate the following criteria for coming to a conclusion on the matter:

The Partnerships Act does not set out the criteria for determining when a partnership exists. But since most of the case law dealing with partnerships results from disputes where one of the parties claims that a partnership does not exist, a number of criteria that indicate the existence of a partnership have been judicially recognized. The indicia of a partnership include the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts.

[8]            In Schultz v. The Queen, [6] Stone J. speaking for the Court observed:

For a partnership to exist, according to the language of section 2 of the Partnerships Act of Ontario, two or more persons must be "carrying on a business in common with a view to profit". By subsection 1(1) of that statute, the word "business" is defined to include "every trade, occupation and profession". Lindley & Banks on Partnership, 17th ed., (London, Smith & Maxwell, 1995), concludes at page 8, that "virtually any activity or venture of a commercial nature ... will be regarded as a business for this purpose. ...

On the evidence, I am satisfied that the relationship which existed between the Appellant and the other five members of Fairway was a partnership and that they carried on business in common with a view to profit. There was a written partnership agreement, there was registration under provincial law as a partnership, there was representation to third parties of the existence of the partnership, and there was clear evidence that the partners in Fairway had a mutual right of control or management of the enterprise, a joint property interest in the subject matter of the venture and the sharing of profits and losses. Furthermore, given the particular nature of this partnership, the failure to open a bank account in the name of the partnership or to have stationery with the partnership's name on the letterhead and even the failure to file tax returns as a partnership are not matters of sufficient import to permit me to conclude that a partnership did not exist. In this context, the testimony of the Appellant, which I accept, establishes that there was a contribution by the six individual members of Fairway of money, effort, knowledge and skill to a common undertaking. While it is a fact that there was no explicit provision in the partnership agreement for the sharing of management or control or for the sharing of profit or losses, I accept without equivocation his testimony that "there was an understanding as to how each partner was going to contribute time and contribute their expertise ... " as well as an understanding with respect to the allocation of partnership profits and losses. In this context, I reject the submission of counsel for the Respondent to disregard the Appellant's testimony that after September 20, 1992, meetings among the six partners continued in order to discuss the business of Fairway investments because no minutes of such alleged meetings were produced and no other witness was called to support the testimony of the Appellant. Having listened to and observed the Appellant I find no basis whatsoever to question his credibility nor, I might add, was anything established by counsel in the course of cross-examination which would lead to that conclusion.

[9]            In my view, there is substantial evidence of the existence of a partnership in the present appeals in that there is both an expressed declaration of partnership coupled with a clear inference of an intention to do so gathered from all of the surrounding circumstances. I am satisfied that Fairway was a partnership for the purposes of the Act and it follows that it was at arm's length to the lender of the loan to the Appellant and accordingly, the loan was not properly captured by paragraph 96(2.2)(c) as assumed by the Minister. The appeals are allowed, with costs to be taxed.

Signed at Ottawa, Canada, this 8th day of June, 2001.

"A.A. Sarchuk"

J.T.C.C.

COURT FILE NO.:                                                 1999-4006(IT)I

STYLE OF CAUSE:                                               R. Craig Labbett and

                                                                                                Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           December 7, 2000

REASONS FOR JUDGMENT BY:      The Honourable Judge A.A. Sarchuk

DATE OF JUDGMENT:                                       June 8, 2001

APPEARANCES:

Agent for the Appellant:                     Marcel Theroux

Counsel for the Respondent:              Scott Simser

COUNSEL OF RECORD:

For the Appellant:                

Name:                      N/A

Firm:                       

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-4006(IT)I

BETWEEN:

R. CRAIG LABBETT,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeals heard on December 7, 2000, at Toronto, Ontario, by

the Honourable Judge A.A. Sarchuk

Appearances

Agent for the Appellant:                       Marcel Theroux

Counsel for the Respondent:                Scott Simser

JUDGMENT

          The appeals from assessments of tax made under the Income Tax Act for the 1993, 1994 and 1995 taxation years are allowed, with costs, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is entitled to deduct his share of partnership losses from Pinecrest Golf Partners Limited Partnership in the taxation years 1993, 1994 and 1995 in the amounts of $12,166, $12,526 and $19,897, respectively.

Signed at Ottawa, Canada, this 8th day of June, 2001.

"A.A. Sarchuk"

J.T.C.C.

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