October 07, 2011

Spire Freezers Limited (Appellant) v. Her Majesty the Queen (Respondent)

99 DTC 5297
Federal Court of Appeal
May 25, 1999

(Court File No. A-899-97.)

Deductions in computing partnership income — Partnership losses — Whether taxpayers entitled to deduct their share of a Californian partnership’s losses on a certain condominium project, and on its sale of its shares of a Californian corporation owning a subsidized rental project — Whether a valid partnership ever created — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 67, 96 and 245(1).

The corporate taxpayer and the individual taxpayers were members of what they characterized as a Californian partnership (“the partnership”). In computing its partnership income for Canadian tax purposes for 1987, the partnership deducted its losses on a certain condominium project, and on its sale of its shares of a Californian corporation owning a subsidized rental project. On reassessment, the Minister disallowed the taxpayers’ attempts to deduct their share of the said partnership losses in computing their income for 1987. In dismissing the taxpayers’ appeals (98 DTC 1287), the Tax Court of Canada concluded, inter alia, that, although the transactions in issue were not artificial, the taxpayers’ purpose in acquiring the alleged partnership interest in issue was only to obtain a tax loss. Their purpose was not to carry on business with a view to profit, so that no partnership had ever actually been created. The taxpayers appealed to the Federal Court of Appeal.

Held: The taxpayers’ appeals were dismissed. It is perfectly legitimate to use a partnership to obtain tax savings, but, in order to do so, it is necessary to actually create the partnership. In addition, the expert evidence adduced in this case indicated that the fundamental components of partnership are the same in California as in the Canadian jurisdictions. Furthermore, applying the leading case on the taxation of partnerships, (i.e., Continental Bank Limited v. The Queen (98 DTC 6505) (S.C.C.)), partnership is traditionally defined as persons carrying on business in common with a view to profit. And in this context, the factual circumstances of each case must be considered. In this case the Tax Court judge weighed the evidence, and made a decisive finding of fact that, when the contract of partnership was entered into, there was no intention to carry on business in common with a view to profit. That finding, moreover, was not a perverse or capricious one. In addition, the evidence indicated that even if the Canadian parties intended to become partners, such intention was not shared by the U.S. parties. As a result of all of the foregoing, the taxpayers were not entitled to the deductions which they had claimed. The Minister’s reassessments were affirmed accordingly. Per Robertson, J.A. dissenting: The Tax Court judge applied the Continental Bank decision reached by the Federal Court of Appeal. That decision, however, was subsequently overruled by the Supreme Court of Canada’s decision to which the Tax Court judge did not have access. In addition, if the Tax Court judge meant to imply that there was no objective evidence that the taxpayers intended to carry on business with a view to profit, such finding was erroneous. It contradicted the fact that the partnership continued to hold a profit-generating asset in the form of an apartment building, for at least a decade after the sale of the condominium development. On the evidence, moreover, the taxpayers had held themselves out as partners, and had conducted themselves in a manner consistent with the partnership agreement. Finally the losses in issue fell squarely within section 96 of the Act. The taxpayers, therefore, were entitled to the deduction of their share thereof.