October 07, 2011

Spire Freezers Limited, Edward Butcher, John Dobrei, Patrick Gouveia, Maroje Miloslavic and John O’Neill (Appellants) v. Her Majesty the Queen (Respondent)

98 DTC 1287
Tax Court of Canada
November 28, 1997

(Court File Nos. 95-4033(IT), 95-4038(IT), 95-4001(IT), 95-4000(IT), 95-4032(IT) and 95-4002(IT)G.)

Deductions in computing income from partnership — Corporate and individual taxpayers members of a Californian partnership — Whether taxpayers entitled to deduct their proportionate share of partnership’s losses on sales of a condominium project and on sales of certain corporate shares — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 67, 96 and 245(1).

On November 30, 1987, the corporate and individual taxpayers became members of a Californian partnership. In computing its partnership income for Canadian income tax purposes for its year ending December 31, 1987, the partnership deducted its losses on its sale of a condominium project and on its sale of its shares of a Californian corporation owning a subsidized rental project. The Minister disallowed the taxpayers’ attempts to deduct their proportionate share of such losses in computing their income for 1987. The taxpayers appealed to the Tax Court of Canada.

Held: The taxpayers’ appeals were dismissed. The whole transaction was not artificial, and the losses in issue were the result of a decline in the market value of the assets involved. Hence, the “reasonable amount” provisions of section 67 and the “artificial transaction” provisions of subsection 245(1) of the Act were both inapplicable. However, in acquiring their partnership interests, none of the taxpayers intended anything other than to obtain a tax loss. Thus the relationship among the taxpayers was not that of carrying on a business in common with a view to profit (which is the very essence of a partnership). The taxpayers accordingly were not partners with respect to the ownership of the said condominium project and the Californian corporate shares. The taxpayers, therefore, were not entitled to the loss deductions claimed. The Minister’s assessments were affirmed accordingly.