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Docket: 98-793(IT)G |
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BETWEEN: |
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THOMAS WHEALY, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence with the appeals of Robert Siskind (98-794(IT)G) on June 2 and 3, 2003, at Edmonton, Alberta,
By: The Honourable Justice M.A. Mogan |
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Appearances: |
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Counsel for the Appellant: |
Cheryl Gibson |
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Counsel for the Respondent: |
Dan Misutka |
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1987, 1988, 1989, 1993, 1995 and 1996 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 8th of June, 2004.
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"M.A. Mogan" |
Mogan J.
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Docket: 98-794(IT)G |
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BETWEEN: |
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ROBERT SISKIND, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeals heard on common evidence with the appeals of Thomas Whealy (98-793(IT)G) on June 2 and 3, 2003, at Edmonton, Alberta,
By: The Honourable Justice M.A. Mogan |
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Appearances: |
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Counsel for the Appellant: |
Cheryl Gibson |
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Counsel for the Respondent: |
Dan Misutka |
____________________________________________________________________
JUDGMENT
The appeals from assessments of tax made under the Income Tax Act for the 1987, 1988, 1989, 1990, 1991 and 1994 taxation years are dismissed, with costs.
Signed at Ottawa, Canada, this 8th of June, 2004.
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"M.A. Mogan" |
Mogan J.
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Citation: 2004TCC377 |
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Date: 20040608 |
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Docket: 98-793(IT)G 98-794(IT)G |
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BETWEEN: |
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THOMAS WHEALY and ROBERT SISKIND, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Mogan J.
[1] The appeals of Thomas Whealy v. The Queen (Court file 98-793) and Robert Siskind v. The Queen (Court file 98-794) were heard together on common evidence. For convenience, I will refer to the individual Appellants by their family names as "Whealy" and "Siskind", respectively. For Whealy, the taxation years under appeal are 1987, 1988, 1989, 1993, 1995 and 1996. For Siskind, the taxation years under appeal are 1987, 1988, 1989, 1990, 1991 and 1994. The Appellants claim that, in 1988, they acquired certain interests in a partnership and that, in all relevant years after 1988, they have carried on a business in that partnership. In each year under appeal, one or both of the Appellants deducted in computing income (or taxable income as the case may be) an amount described as his allocated share of a loss incurred by the partnership.
[2] By Notices of Reassessment, the Minister of National Revenue disallowed the deduction of all amounts claimed by the Appellants to be allocated portions of losses incurred by the partnership. Whealy and Siskind have come to this Court appealing from those reassessments. There are a number of issues but the principal issue appears to be whether the organization which purported to allocate losses pro rata to the Appellants was a partnership. Most of the relevant transactions occurred in 1988 and they are complicated.
The Facts
[3] The parties entered as Exhibit A-1 a binder of documents (35 tabs but tab 8 is blank) on the understanding that the authenticity of the documents is admitted. None of the documents in the binder requires proof but either party may dispute the accuracy of any statement or amount in a document, or may dispute the admissibility of a particular document.
[4] Siskind and Whealy both live in London, Ontario. Siskind was born in 1942 and Whealy in 1941. They met at the University of Western Ontario around 1960. At the hearing, each one described himself as a real estate developer. Siskind became a lawyer and practised in London for about 15 years from 1967 to 1982. Much of his practice was concerned with commercial law and real property and so he started to do some real estate development when he was practising law. In 1982, he gave up the practise of law to do full-time development. Whealy obtained two degrees from the University of Western Ontario (B.A. and M.A.) and then went to Chicago where he was engaged in some real estate development. In 1972, Whealy returned to London and joined with Siskind in land development. They started with townhouses but later moved to the design, construction and management of commercial buildings, office buildings, condominiums, and a couple of hotels.
[5] Marvin Weisler is a urinary surgeon living in Edmonton, Alberta. Siskind is married to Dr. Weisler's sister and so Siskind and Weisler are brothers-in-law. Dr. Weisler's father owned some real estate investments and, when the father became ill in the mid-late 1970s, Dr. Weisler had to step in and become involved in the management of the real estate. At that time, he also became involved with Siskind and Whealy in other real estate projects. By 1982, Siskind and Whealy and Weisler were working together as an informal partnership or joint venture in the development of various real estate projects. Siskind described their respective areas as follows. Siskind would find the property and arrange for its purchase and zoning. Whealy would be responsible for construction. Weisler would be responsible for financial matters and work with their outside accountants. They (Siskind, Whealy and Weisler) would frequently have other partners participating in one or more development projects.
[6] In the summer of 1988, their accountants (Coopers & Lybrand) brought to Weisler's attention a proposal which involved a loss to be realized on the disposition of certain land and building in Texas, and the allocation of that loss among the partners of the partnership which owned the land and building. The general concept of the proposal is set out in a letter to Weisler dated August 19, 1988. See Exhibit A-1, Tab 4. Weisler described the proposal to Siskind and Whealy; and the three decided to participate in equal portions. Weisler also described the proposal to two individuals in Edmonton (Jean Pare and her son Grant Lovig) who decided to participate. See Exhibit A-1, Tabs 5 and 6.
[7] Because the five individuals from Canada (Siskind, Whealy, Weisler, Lovig and Pare) decided to participate in the proposal with respect to the land and building in Texas, a series of transactions occurred in Texas on September 12, 1988 to give effect to the proposal. Those transactions are described in Exhibit A-1, Tab 7(1) with a closing agenda listing 15 documents to be signed in order from 10:56 p.m. to 11:39 p.m. The documents are all reproduced under Tab 7 but can be summarized in a number of facts to which the parties have agreed. The facts set out in paragraphs 8 to 10 below are admitted in the pleadings or in the Appellant's Request to Admit or are taken from the documents in Exhibit A-1.
[8] On or about January 30, 1986, Preston Court Venture ("PCV"), Preston Court Associates ("PCA") and Preston Partners ("Preston-P") entered into an agreement of limited partnership named Preston/Lovers, Ltd. (the "Old Partnership"). The Old Partnership was formed by Texas entities pursuant to the Texas Limited Partnership Act. See Exhibit A-1, Tab 1. Shortly after its creation, the Old Partnership acquired certain lands and improvements located in Dallas County, Texas ("the Real Estate Assets"). Following the purchase of the Real Estate Assets and prior to September 12, 1988, the real estate market in Dallas declined and the value of the Real Estate Assets declined.
[9] The following transactions occurred in the following sequence on September 12, 1988:
(a) PCV, PCA and Preston-P agreed to amend their original partnership agreement to convert certain limited partnership interests in the Old Partnership, acquired by PCV from PCA and Preston-P, to general partnership interest;
(b) PCV granted a promissory note in the amount of $6,500,000(USD) to the Old Partnership;
(c) The Old Partnership entered into an option agreement with Preston/Lovers-I, Ltd. (the "New Partnership") whereby the New Partnership was granted an option to purchase certain property from the Old Partnership;
(d) The Old Partnership and the New Partnership entered into a second option agreement whereby, if the New Partnership exercised its option to purchase certain property from the Old Partnership, then the Old Partnership had a separate option to purchase certain land and improvements from the New Partnership on or before September 30, 1990 for $25,000,000(USD).
Note: The facts in subparagraphs (e) to (l) inclusive are admitted by the Respondent subject to the following condition: The Respondent admits that the transactions described in subparagraphs (e) to (l) inclusive occurred but the Respondent denies that Siskind and Whealy and the other assignees became partners in the Old Partnership because the Respondent claims that Siskind and Whealy and the other assignees did not carry on any business in partnership on September 12, 1988 or at any time thereafter.
(e) For $112,342(USD), PCV sold and assigned 49.98% of its general partnership interest in the Old Partnership to Siskind, Whealy and other assignees in the following ratio:
Marvin Weisler - 8.00%
Robert Siskind - 8.00%
Thomas Whealy 8.00%
Grant Lovig 6.50%
Jean Pare 19.48%
TOTAL 49.98%
(f) The partnership agreement respecting the Old Partnership was amended to recognize the sale and assignment of a portion of PCV's general partnership interest to Marvin Weisler, Siskind, Whealy, Grant Lovig and Jean Pare;
(g) For $112,274(USD), PCV sold and assigned 49.95% of its general partnership interest in the Old Partnership to Siskind, Whealy and other assignees in the following ratio:
Marvin Weisler - 7.99%
Robert Siskind - 7.99%
Thomas Whealy 7.99%
Grant Lovig 6.49%
Jean Pare 19.49%
TOTAL 49.95%
(h) The partnership agreement respecting the Old Partnership was amended to recognize the sale and assignment of a portion of PCV's general partnership interest to Marvin Weisler, Siskind, Whealy, Grant Lovig and Jean Pare;
(i) PCV sold and assigned its .05% general partnership interest in the Old Partnership to the assignees; PCA sold and assigned its .01% limited partnership interest in the Old Partnership to the assignees; and Preston-P sold and assigned its .01% limited partnership interest in the Old Partnership to the assignees, as follows:
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Assignee |
General Partnership Interest |
Limited Partnership Interest
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Marvin Weisley |
.01% |
.00% |
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Robert Siskind |
.01% |
.00% |
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Thomas Whealy |
.01% |
.00% |
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Grant Lovig |
.01% |
.00% |
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Jean Pare |
.01% |
.00% |
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386853 Alberta Ltd. |
.00% |
.02% |
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TOTAL |
.05% |
.02% |
(j) The partnership agreement respecting the Old Partnership was amended to recognize the sale and assignment of partnership interests noted in subparagraph (i) above;
(k) The Old Partnership purchased from PRI Producing Inc., PRI Gas Transmission Inc. and Hiawatha Oil Company, Inc. the following oil and gas interests for $25,000(USD): an interest in the Ellis #1-35 well in Oklahoma and an interest in the Campbell #A-2-41 and #A-1-41 wells in Texas; and
(l) The New Partnership exercised its option to purchase certain assets from the Old Partnership including the Real Estate Assets.
[10] In September 1988, the value of Park City Towers was $6,050,000(USD) in total ($1,550,000 land and $4,500,000 building). Exhibit A-1, Tabs 9 and 29 are copies of the 1988 income tax returns of Siskind and Whealy, respectively. Included in each tax return is a copy of the Old Partnership financial statements for the fiscal period January 1 to September 30, 1988. The balance sheet shows comparable amounts at December 31, 1987. According to the balance sheet, the Old Partnership had fixed assets (land and building) with a book value of $19,478,358 at December 31, 1987 but no fixed assets at all on September 30, 1988. The Old Partnership's only asset at September 30, 1988 was "oil and gas properties" with a book value of $32,463(USD). According to other parts of the financial statements, the Old Partnership had a terminal loss of $9,287,504 on the disposition of its building, and a loss of $3,760,042 on the disposition of its land.
[11] If the Old Partnership's only asset at September 30, 1988 was oil and gas properties with a book value of $32,463(USD), I conclude that those oil and gas properties were the Ellis well in Oklahoma and the Campbell wells in Texas (referred to in subparagraph 9(k) above) although there does not appear to be any direct evidence on this point. Siskind stated that he had done other tax shelters (like movies) but had never felt comfortable with them because there were no hard assets. He felt comfortable with the Old Partnership because producing gas wells were hard assets. If the gas wells were the source of Siskind's comfort, he paid little attention to them and knew little about them from 1988 to 2000. The same could be said of Whealy. Because Dr. Weisler was the person who introduced to Siskind and Whealy the concept of acquiring real property losses in Texas, Weisler was the contact person for the gas wells.
[12] Any revenue coming from the wells was sent to Dr. Weisler in Edmonton. Around 1997, Dr. Weisler transferred responsibility for the wells to Grant Lovig who, in turn, transferred the responsibility to Siskind around 2000. Exhibit A-1, Tabs 17 to 22 inclusive are monthly statements from CIBC to the Old Partnership (c/o Grant Lovig, Edmonton) for random months from July 2001 to October 2002 showing various amounts deposited as revenue from the wells, and one payment out (Tab 20) for legal fees. There is little evidence concerning the Campbell wells and, in particular, whether they produced any revenue. Siskind said that the Campbell wells "had some problems and was sold off when Mr. Lovig was still looking after the interest". Transcript page 68. Exhibit A-1, Tab 25 is a letter from Grant Lovig (on behalf of the Old Partnership) dated September 19, 2002 conveying its interest in a Campbell well for $1,000(USD).
[13] The parties did not agree on the actual percentage interest which the Old Partnership acquired in the Ellis well and in the Campbell wells but Exhibit A-4 is a copy of the "Gas Balancing Historic Report" issued by a person identified only as "Samson" for the month of December 2002 but prepared on March 27, 2003. Exhibit A-4 reports on an Ellis well and, in the two left-hand columns, shows an "owner number" and a "unit working interest". From Exhibit A-4, I have extracted the following information to indicate the size of the Old Partnership's working interest in relation to the two persons who appear to have the two largest working interests:
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Owner No. |
Unit Working Interest |
Current Entitlement
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- |
Samson .68710680 |
1,229
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643508 |
Keystone Company .10000000 |
179
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010609 |
Preston/Lovers, Ltd. .05405270 |
97 |
I conclude that, in approximate portions, Samson has a 68.71% interest, Keystone Company a 10% interest, and the Old Partnership a 5.4% interest in the Ellis well. My conclusion is supported by the "current entitlement" column because Samson's entitlement (1,229) is about seven times Keystone's (179) and the Old Partnership's (97) is a little more than half of Keystone's. According to Exhibit A-4, there are 35 persons with what are called "unit working interests" in the Ellis well. If Samson (68.71%) and Keystone (10%) are excluded, there is only 21.29% to be divided among the other 33 participants. Therefore, it is not surprising that the Old Partnership's interest is only 5.4%.
[14] Exhibit A-2 is a schedule prepared for the hearing by PriceWaterhouseCoopers showing the Partnership's Net Earnings from Oil & Gas Operations from 1989 to 2002, omitting any amounts for 1994 for which no records were available. It shows net earnings of $17,124(Can) from September 30, 1989 to September 30, 2002 (with no amounts for 1994). Five of the reporting years show negative amounts while the remaining eight years show positive amounts. In nine of the reporting years, the net amounts (positive or negative) are under $1,400(Can); in three of those years the net amounts (positive or negative) are between $1,400 and $2,700(Can); and in 2001 the net earnings are $11,211(Can). From Exhibit A-2, I conclude that 65% of the net earnings of $17,124 was received in the one year 2001.
[15] The supporting schedules in Exhibit A-2 show both revenue and expenses from oil and gas operations. In some years, the expenses exceed revenues but there is no evidence that the Old Partnership was ever required to make a cash contribution toward the operation of the Ellis well or the Campbell wells after the original cost of $25,000(USD) was paid in September 1988. I infer that any contribution toward expenses payable by the holder of a small minority working interest in those wells was deferred and set off against future revenues. Siskind stated that the net revenues were accumulated in a bank account in Edmonton and he recalled a distribution around 1997/1998 among himself, Whealy, Weisler, Lovig and Pare.
[16] Siskind, Whealy and Weisler each incurred a cost of $106,561 in order to acquire interests in the Old Partnership. The cost was determined as follows (Exhibit A-1, Tab 28):
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Weisler |
Siskind |
Whealy |
Total
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U.S. Funds
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Partnership Purchase (433,846 x 48.01%) |
$69,429.82 |
$69,429.82 |
$69,429.82 |
$208,289.46 |
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Johnson Bromberg (27,760.12 x 48.01%) |
4,442.47 |
4,442.48 |
4,442.48 |
13,327.43 |
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Don A. Tipton, Inc. |
1,738.48 |
1,738.47 |
1,738.47 |
5,215.42
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|
Total |
75,610.77 |
75,610.77 |
75,610.77 |
226,832.31
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|
Converted @ 1.2168
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92,003.18 |
92,003.18 |
92,003.18 |
276,009.54
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|
Canadian Funds
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|
|
|
|
|
Thorsteinsson, Mitchell (31,347.39 x 48.01%) |
5,016.63 |
5,016.63 |
5,016.62 |
15,049.88 |
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Thorsteinsson, Mitchell |
2,874.71 |
2,874.71 |
2,874.71 |
8,624.13 |
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Coopers & Lybrand |
6,000.00 |
6,000.00 |
6,000.00 |
18,000.00 |
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Cruikshank (estimate) |
500.00 |
500.00 |
500.00 |
1,500.00 |
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Cash Reserve |
166.67 |
166.66 |
166.67 |
500.00
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|
Total |
14,558.01 |
14,558.00 |
14,558.00 |
43,674.01
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|
Total Canadian Funds |
$106,561.19 |
$106,561.18 |
$106,561.18 |
$319,683.55 |
[17] Exhibit A-1, Tab 13 is a letter dated September 29, 1988 from John Gregory of the Thorsteinsson law firm to Dr. Weisler. Because the letter is short, I will set it out in full:
Re: Preston/Lovers, Ltd.
I enclose copies of the cash flow analysis in respect of the resource properties acquired by Preston/Lovers, Ltd. The resource properties consist of interests in two proved, producing gas wells, one located in Texas and one located in Oklahoma. The projections indicate a payout over about 4½ years.
I have written to Plains Resources and asked them to forward your share of the net operating revenues to your office. A copy of my letter to Plains Resources is enclosed.
Yours truly,
Messrs. Siskind, Whealy and Weisler were in agreement that the reference in the letter to "a payout over about 4½ years" was a reference to the cost of the wells ($25,000) and not a reference to their cost ($106,561 each) of acquiring interests in the Old Partnership. Exhibit A-2 shows net earnings of $17,124(Can) from the wells over a 14-year period from 1989 to 2002. The projected payout over 4½ years was certainly optimistic. Siskind explained that the net earnings would have been higher if Dr. Weisler or Grant Lovig had signed a marketing agreement which apparently was overlooked either at the beginning (1988/1989) or sometime in the 1990s. Evidence with respect to the marketing agreement is vague and I cannot determine the extent (if any) to which it may have increased the net earnings from the wells.
[18] Exhibit A-1, Tab 7 is a list of the documents (closing agenda plus 18 documents) which were tabled at the closing in Texas on September 12, 1988. The closing agenda was tightly scripted from 10:56 p.m. to 11:39 p.m. for the execution and delivery of the 15 documents listed in the closing agenda. Document number 15 is a "Purchase and Sale Agreement" with respect to the purchase by the Old Partnership of certain interests in gas wells in Oklahoma and Texas at a cost of $25,000. I assume that the cost is expressed in U.S. dollars because the entire transaction took place in Texas with three American vendors and one American purchaser. In Exhibit A-1, Tab 28 (cost of Old Partnership interests), U.S. dollars are converted to Canadian dollars at the rate of 1.2168. Applying the same rate to the cost of the wells ($25,000) results in a cost of $30,420 Canadian dollars. The net earnings of $17,124(Can) in Exhibit A-2 for the period 1989 to 2002 show that, after 14 years, the Appellants had recovered less than 60% of the cost of the wells.
[19] I will attempt to summarize the results of the transactions which took place in Texas on September 12, 1988 using the abbreviated names of the parties from paragraphs 8 and 9 above:;
(a) the original partners (PCV, PCA and Preston-P) of the Old Partnership formed a second Texas limited partnership under the name "Preston/Lovers-I, Ltd.", also referred to as the "New Partnership";
(b) the Old Partnership purchased the Ellis well (in Oklahoma) and the Campbell wells (in Texas) for $25,000(USD);
(c) the Old Partnership granted an option to the New Partnership to purchase all of the assets of the Old Partnership (except the Ellis and Campbell gas wells) for an amount equal to the liabilities and obligations of the Old Partnership (estimated to be not less than $11,170,000);
(d) the New Partnership granted an option to the Old Partnership (conditional upon the New Partnership exercising its option in (c) above) to repurchase the same assets for $25,000,000(USD) on or before September 30, 1990;
(e) Siskind, Whealy, Weisler, Lovig and Pare (the "Canadians") purchased from PCV, PCA and Preston-P all of their interests in the Old Partnership for about $225,000(USD);
(f) the New Partnership exercised its option to purchase all of the assets of the Old Partnership except the Ellis and Campbell gas wells;
(g) at midnight on September 12, 1988, the only assets of the Old Partnership were the Ellis and Campbell gas wells; and the only partners in the Old Partnership were the five Canadians named in (e) above;
(h) on September 30, 1988, the Old Partnership had realized the following losses all expressed in U.S. Dollars:
- an operating loss of $1,203,936 for the period January 1 to September 30, 1988;
- a capital loss of $3,760,042 on the sale of land; and
- a terminal loss of $9,287,504 on the sale of buildings.
(i) over the next 24 months the Old Partnership did not exercise its option to repurchase (for $25,000,000 by September 30, 1990) the assets which were sold to the New Partnership on September 12, 1988.
Analysis
[20] For 1988 and subsequent years, the Old Partnership allocated certain portions of its losses among its Canadian partners; and those partners deducted their pro rata share of such losses in computing income or taxable income as the case may be. Revenue Canada (as it was then known) disallowed the deduction of such losses, and the Appellants have come to Court appealing from those disallowances.
[21] The principal issue is whether the Old Partnership continued to exist as a partnership under Canadian law after September 12, 1988. The Appellants' basic argument is that the Old Partnership, through its interests in the Ellis and Campbell gas wells, sells natural gas and is therefore engaged in a partnership business. The Respondent's basic argument is that the Old Partnership's ownership of minimal interests in two gas wells was not the carrying on of a business; and the Appellants (Siskind and Whealy) did not have a view to profit with respect to such minimal interests.
[22] For the reasons set out below, I accept the Respondent's argument and have concluded (i) that the Old Partnership did not carry on any business after September 12, 1988; and (ii) that the Appellants did not have a view to profit with respect to the minimal interests in two gas wells purchased by the Old Partnership.
[23] Counsel for both parties cited the decisions of the Supreme Court of Canada in Backman v. The Queen, 2001 DTC 5149 and Spire Freezers Ltd. et al v. The Queen, 2001 DTC 5158. Both decisions were unanimous and were delivered on March 1, 2001. In Backman, Iacobucci J. and Bastarache J. writing for the Court stated in paragraph 18 that the three essential ingredients of a partnership are (1) a business, (2) carried on in common, (3) with a view to profit. The facts in Backman are similar to the facts in these two appeals by Siskind and Whealy in the following way:
(i) In 1985, a Texas limited partnership ("the Commons") purchased land and constructed an apartment building thereon ("the Dallas Apartments").
(ii) By August 1988, the cost of the Dallas Apartments far exceeded the fair market value.
(iii) On August 29, 1988, Mr. Backman and other Canadian taxpayers acquired 99.97% of the partnership interests in Commons.
(iv) The Commons sold the Dallas Apartments to its original Amercian partners realizing a significant loss on the sale.
(v) The Commons purchased a small interest in an oil and gas property plus a condominium in Montana.
(vi) For 1988 and subsequent years, Mr. Backman and the other Canadian taxpayers deducted their allocated shares of the losses realized in the Commons from its disposition of the Dallas Apartments.
(vii) The deduction of the losses was disallowed and Mr. Backman appealed.
[24] Mr. Backman's appeal to the Tax Court of Canada was dismissed (97 DTC 1468). His further appeal to the Federal Court of Appeal was dismissed (99 DTC 5602). And finally, his appeal to the Supreme Court of Canada was dismissed (2001 DTC 5149). In the Tax Court of Canada, Judge Rip stated at page 1482:
All the transactions were predetermined: the Canadians would acquire the Dallas Apartment Complex subject to an option held by a partnership consisting of the former limited partners of the Commons and the new general partner. The option allowed the new limited partnership to re-acquire the property at a price which would trigger the losses inherent in the Dallas Apartment Complex. The Canadians held an interest in the property for less than two hours. ...
According to the closing agenda (Exhibit A-1, Tab 7, subtab 1), the Appellants (Siskind and Whealy) held an interest in the Old Partnership's real estate in Dallas for only 38 minutes from 11:00 p.m. to 11:38 p.m. on September 12, 1988. The Appellants acknowledged at trial that they never intended to hold the real estate in Dallas which had been owned by the Old Partnership from its inception. Accordingly, I find that the Appellants were not partners in the Old Partnership with respect to its ownership of any real estate in Dallas.
[25] The real thrust of the Appellants' argument is that the Old Partnership continued to carry on business after September 12, 1988 through its ownership of participating interests in the two gas wells. Having regard to a similar argument put forward in Backman, the Supreme Court of Canada stated in paragraphs 29 and 30:
[29] The appellant argues that he established an ancillary intention to carry on business with a view to profit by virtue of the purchase of a working interest in an oil and gas property. Here, again, the documentary evidence indicates an intention to form a partnership. Just prior to the transactions at issue in this appeal, the partnership agreement was amended to provide for investment in oil and gas as one of the purposes of the partnership. Shortly before the scheduled withdrawal of the American partners, the alleged partnership did purchase a one percent interest in an Alberta oil and gas property for $5,000. However, as discussed above, this evidence of intention must be weighed against other factors in the context of the surrounding circumstances relating to the oil and gas property. In considering those circumstances, we are not convinced that the putative partners had the necessary intention to carry on business in common with a view to profit. It is difficult to accept that there was in fact a business being carried on when none of the factors relevant to the existence of a business supports that contention. The putative partners did not hold themselves out to others as providers of goods or services derived from their interest in the oil and gas property. They had no management duties in respect of the property. There is no evidence that the alleged partnership or its agents expended anything other than nominal time, attention or labour on the project; nor did they incur any liabilities to other persons in respect of it.
[30] Furthermore, when asked at trial, the appellant could not remember the name of the management company that was operating the oil and gas well. The only evidence of an expectation of profit was a vague and self-serving assertion at trial by the appellant of an expected return of between $1,000 and $1,500 per year. ...
[26] Exhibit A-2 shows that in the 10 years from September 30, 1989 to September 30, 1999, the net earnings of the Old Partnership's small interests in two wells was only $3,283 being an excess of positive years ($6,668) over negative years ($3,385) with no amounts available for 1994. After September 12, 1988, the interests in the Old Partnership were owned approximately 50% by Jean Pare and Grant Lovig and 50% equally by Siskind, Whealy and Weisler. In that 10-year period, Siskind's 16 2/3% interest in the net earnings ($3,283) for the two gas wells was $547.14. Whealy's was the same. Siskind and Whealy each paid $106,561 to acquire a 16 2/3% interest in the Old Partnership. See Exhibit A-1, Tab 28. Compared to that cost, a 10-year return of $547 from minimal interests in two gas wells is insignificant, miniscule and negligible.
[27] In evidence, there was reference to the fact that Siskind or Whealy or both neglected, in at least one year, to report his miniscule share of earnings from the Old Partnership. This neglect was remedied by a voluntary disclosure to Revenue Canada around the time the Appellants were examined for discovery for these appeals. I find the oversight easily understandable given the insignificant earnings from the Old Partnership in the overall picture of each Appellant's income. It is not surprising that no documents can be found with respect to earnings from the two gas wells for 1994. I conclude that the earnings (if any) in any particular year were not material for either Appellant.
[28] In Backman, the Supreme Court of Canada discussed "carrying on business" at paragraph 19:
[19] In law, the meaning of "carrying on a business" may differ depending on the context in which it is used. Provincial partnership acts typically define "business" as including "every trade, occupation and profession". The kinds of factors that may be relevant to determining whether there is a business are contained in the existing legal definitions. One simple definition of "carrying on trade or business" is given in Black's Law Dictionary (6th ed. 1990), at p. 214: "To hold one's self out to others as engaged in the selling of goods or services." Another definition requires at least three elements to be present: (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit: see Gordon v. The Queen, [1961] S.C.R. 592 per Cartwright, J., dissenting but not on this point, at p. 603.
After September 12, 1988, the Old Partnership did not hold itself out to anyone as engaged in the sale of goods or services. The minimal interests in the two gas wells did not give the Old Partnership any voice whatsoever in the management of those wells. The receipt of insignificant revenue from year to year (if any was received at all) did not require the occupation of time, attention or labour by Siskind, Whealy, Weisler, Lovig or Pare. The Old Partnership did not incur any liabilities to any third parties. And no one relied on the minimal interests of the Old Partnership in two gas wells for livelihood or profit.
[29] Counsel for the Appellants relied on the decision of the Supreme Court in Spire Freezers which is also (like Backman) similar to these appeals by Siskind and Whealy:
(i) In 1978, a partnership ("HCP") was formed in California to develop a residential condominium project on an island.
(ii) To obtain approval for the project, HCP was required to build a low-rent apartment building (Tremont) on the island.
(iii) Tremont was owned by a corporation ("TAC") which was wholly owned by HCP.
(iv) By 1980, "BDI" and "Peninsula" were the only remaining partners (50/50) in HCP, and Peninsula was a wholly-owned subsidiary of BDI.
(v) By 1986, the costs of the residential condominium project exceeded the fair market value of that project by $10 million(USD).
(vi) In 1987, Spire Freezers Ltd. ("Spire Freezers") and other Canadian persons learned that they could purchase the tax losses of the HCP project at 20 cents on the dollar.
(vii) On November 30, 1987, the following transactions occurred:
(a) HCP purchased Tremont from TAC for $2.9 million, borrowing the purchase money from BDI.
(b) HCP sold its shares of TAC to BDI, and the amounts owing between HCP and BDI were cancelled by a set-off.
(c) Peninsula sold its 50% interest in HCP to Spire Freezers; BDI sold a 25% interest in HCP to Spire Freezers; for a brief moment, the partners of HCP were BDI and Spire Freezers; and then BDI sold its remaining 25% interest in HCP to a group of individual Canadians.
(d) The total purchase price for a 100% interest in the HCP partnership was $34,530,000(USD) paid by the purchasers in (c) above.
(e) HCP sold the residential condominium project to BDI for $33.3 million (USD), realizing an operational loss of $10.4 million (USD).
(viii) In effect, Spire Freezers and the group of individual Canadians paid $1.23 million (USD) to acquire Tremont and the realized losses of $10.4 million (USD).
(ix) Spire Freezers and the individual Canadians have managed Tremont since its acquisition by HCP in November 1987.
(x) In the fiscal year ending December 31, 1987, the HCP partnership claimed a loss of $10 million (USD) and allocated it to Spire Freezers and the individual Canadians partners.
(xi) The losses were disallowed by Revenue Canada.
[30] When allowing the appeals of Spire Freezers Ltd. and the individual Canadians, the Supreme Court of Canada distinguished the different result in Backman by the following comment at paragraph 20 of the Spire Freezers judgment:
[20] However, despite the similarities between the transactions in this case and those in Backman, there are some essential differences. For example, in respect of whether there was a carrying on of business, it is notable that there is a significant difference between the subordinate assets in Backman and Spire in terms of the degree of effort required of the appellants and expended by them in management. In Backman, the subordinate asset was a one percent interest in an oil and gas property, purchased for the sum of $5000 during the transition between American and Canadian control of the alleged partnership. The alleged partnership in Backman had no significant management control over that asset, nor did the acquisition of that asset represent a continuation of a pre-existing business of one of the putative partners. When production was shut-down shortly after purchase, no other investments in oil and gas were made. Thus, in Backman, the alleged partnership was "an empty shell that does not in fact carry on business" (see Backman, supra, at para. 20). In this case, the subordinate asset held by the partnership was the entire interest in an apartment building. The property management business that was associated with that asset was pre-existing and continued by the Canadians. Tremont required a substantial management effort which the appellants provided, and from which they benefited by generating profit. As noted by Robertson, J.A., "the partnership continued to hold title to a profit-generating asset, namely, the apartment building, for at least a decade after the sale of the condominium development".
In a similar vein, the Supreme Court stated in Backman at paragraph 33:
[33] In contrast, the appellants in Spire Freezers, supra, made a considerable investment in a pre-existing business which they continued to operate after entering the partnership. Ultimately, they acquired an asset, an apartment building, requiring substantially more than nominal management effort. The common purpose requirement was met by the parties' having entered into a valid partnership agreement, and by the fact that they were joint owners of the apartment building, albeit briefly. The appellants in Spire Freezers must have entered into the transaction with a view to profit since they were apprised of the potential to make a profit from the apartment building and they clearly intended to continue that business. In that case, the requirements of partnership were met.
[31] In my opinion, the facts in these appeals by Siskind and Whealy are closer to the Backman case than the Spire Freezer case. There was no prior asset or business of the Old Partnership which Siskind or Whealy or their Edmonton colleagues (Weisler, Lovig or Pare) were required to manage or operate. The Old Partnership was gutted of all significant assets on September 12, 1988 and left with only newly acquired minimal interests in two gas wells. To me, the ownership of those minimal interests was as passive as owning a few shares in a public listed company a level below "blue chip" status; the kind of company which, in a given year, may or may not pay a dividend. Owning the minimal interests in the gas wells was so passive that the Old Partnership did not carry on any business at all after September 12, 1988. From and after September 12, 1988, Siskind, Whealy, Weisler, Lovig and Pare were co-owners of tiny interests in a couple of gas wells but they were not partners with respect to those wells.
[32] There is no evidence that Siskind or Whealy or their Edmonton colleagues had any voice in the decision as to what minimal interest would be acquired in the Ellis and Campbell wells or any other wells in Texas, Oklahoma, Alberta or any other oil patch in Canada or the U.S.A. There is no evidence that the Appellants or their Edmonton colleagues ever complained about the low rate of return on the Ellis and Campbell wells. There is no evidence that the Appellants or their Edmonton colleagues really cared about their co-ownership of small interests in the Ellis and Campbell wells. The appeals are dismissed. The Respondent is awarded full costs until after discoveries but only one set of costs thereafter.
Signed at Ottawa, Canada, this 8th day of June, 2004.
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"M.A. Mogan" |
Mogan J.
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CITATION: |
2004TCC377 |
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COURT FILE NOS.: |
98-793(IT)G and 98-794(IT)G |
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STYLE OF CAUSE: |
Thomas Whealy and Robert Siskind and Her Majesty the Queen |
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PLACE OF HEARING: |
Edmonton, Alberta |
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DATE OF HEARING: |
June 2 and 3, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Justice M.A. Mogan |
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DATE OF JUDGMENT: |
June 8, 2004 |
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APPEARANCES: |
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Counsel for the Appellant: |
Cheryl Gibson |
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Counsel for the Respondent: |
Dan Misutka |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Cheryl Gibson |
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Firm: |
Fraser Milner Casgrain |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |