Section 103

The taxpayer bought an 80% share of a partnership from his wife's business corporation for $1 million and then reported 80% of the partnership's $7.5 million loss. The minister disputed the loss under ss. 103(1) and (1.1).

Subsection 103(1) applies to agreements where apportionment of income or loss is distorted for tax purposes. There was no such distortion here - the $1 million the taxpayer paid represented 80% of the partnership at the time of purchase, so he was entitled to claim 80% of the loss.

Capital gains realized by a partnership, of which the taxpayer was a partner, as a result of land being disposed of by the partnership which had a low cost amount attributable to the partnership acquiring the land from other taxpayers on a rollover basis were not allocable to the taxpayer in light of a clause in the Partnership Agreement that provided that all tax consequences of the transfer of the land to the partnership by a partner were the sole responsibility of that partner.

In order to accomplish a sale of two oil and gas properties that were held by a partnership of which the taxpayer was a substantial partner, it was agreed that the purchaser ("Phillip") would become a 5.27% partner of the partnership and, some days later, receive a distribution to it of the two properties in substantial satisfaction of its partnership interest and, pursuant to a clause in the partnership agreement that was amended with this transaction in mind, be allocated 100% of the proceeds of disposition arising under subsection 98(2) to the partnership as a result of the resulting disposition of the two properties (as well as its 5.27% share of the partnership income for the 25 days that it was a member of the partnership).

After "tentatively" indicating his view that partnership income for purposes of section 103 meant income computed using the rules of the Act, so that such income included notional items of income such as deemed proceeds of disposition arising under subsection 98(2), Bowman C.J. went on to find that the allocation of 100% of the proceeds of disposition to Phillips was unreasonable given that the gain on the transferred properties was not attributable to Phillips having rolled assets into the partnership, it was only entitled to 5.27% of the other income of the partnership and it merely joined the partnership (for 25 days) in order to extract the two properties.

A partnership owned by the taxpayers admitted a third party ("Woodward") as a member of the -partnership with a view to selling an apartment building of the partnership and allocating 80% of the resulting gain for tax purposes to Woodward with Woodward also receiving 80% of the net proceeds of sale of the property (which was to be a substantiated lower amount due to the leveraging of the property) and would cease to be a partner.

The allocation of 80% of the income to Woodward was found to be unreasonable given that "Woodwards' contribution was both ephemeral and for all practical purposes risk free". The reasonable treatment of the arrangement under s. 103 would be to treat Woodward's share of the income as the amount of income it actually received.

In discussing the nature of a partnership, Lord Oliver stated (p. 900):

"A partner working in the business or undertaking of the partnership is in a very different position from an employee ... If, with the agreement of his partners, he pays himself a 'salary', this merely means that he receives an additional part of the profits before they fall to be divided between the partners in the appropriate proportions. But the 'salary' remains part of the profits."

The taxpayers were a married couple. Mrs. Paajanen ran a retail business, and formed a partnership with her sister, whose husband had died and who was facing financial hardship. While Mrs. Paajanen and her sister contributed equal labour to the business, Mrs. Paajanen took only around 15% of the partnership income in many taxation years, and as little as 6.5% in one of the years under review. Mr. Paajanen claimed personal credits based on his wife's reported income. Woods J. allowed the credits, stating that "it would be wrong in my view to state as a general principle that allocations between non-arm's length partners must always be based solely on business criteria." She determined (at para. 24):

In this case, the agreement between Mrs. Paajanen and Mrs. Andet to share income unequally was not at all motivated by tax considerations. There was a modest tax saving to Mr. Paajanen with respect to personal credits, about $1000 per year. It does not make sense that this factor influenced the partners' agreement to share income unequally.

The taxpayer bought an 80% share of a partnership from his wife's business corporation for $1 million and then reported 80% of the partnership's $7.5 million loss. The minister disputed the loss under ss. 103(1) and (1.1).

Subsection s. 103(1.1) did not apply. The subsection non-exhaustively lists two indicia of reasonableness - capital invested and work performed. The members' respective investment and work supported the 80% allocation to the taxpayer. It was irrelevant that the taxpayer's purchase of the partnership interest was partially motivated by claiming the loss.

The taxpayer and her son transferred real estate on a rollover basis to a partnership in consideration for Class A units of the partnership having a redemption value, subject to a price adjustment clause, of approximately $1.25 million for each of them. Several days later, the partnership issued Class C units to a family trust for consideration of $100. In the following taxation year, the partnership earned approximately $343,000, of which approximately $127,000 was allocated to the family trust in respect of the Class C units.

McArthur, J. stated (at para. 58) that:

"To the extent an estate freeze can be effected through a corporate vehicle, if the same economics can be replicated through a partnership, ... an estate freeze could be effected through a partnership."

However, he went on to find that the above transaction did not replicate an acceptable estate freeze transaction as the Class A units were not retractable by their holders and were required to fund ongoing cash requirements in respect of the partnership properties. Furthermore, it was patently unreasonable for the family trust to receive a 126,721% return on its nominal capital investment given that the trust did not make any contribution of services or (more than nominal) capital to the partnership.

The taxpayer borrowed $707,000 from a bank, contributed this sum to a partnership between her, her husband and her sister (but without any increase to the number of units in the partnership held by her), with her sister then withdrawing the same sum from the partnership in order to make a matrimonial settlement with the sister's husband. It was reasonable for the partnership to make special allocations of cash and income to the taxpayer equal to the interest on her loan given that the purpose for her borrowing and contribution of the $707,000 was to facilitate carrying on the partnership business by avoiding lengthy litigation from her sister's estranged husband.

A partnership between the taxpayer and his wife provided that she was to receive a commission equal to 10% of sales, and 30% of residual profits, with the taxpayer to receive 70% of residual profits and to bear all losses of the partnership. Lamarre Proulx TCJ. accepted the Minister's view that the losses of the partnership instead should be shared for income tax purposes on a 50-50 basis in light of the taxpayer's admission that he would not have entered into the same agreement if he had been directed by business reasons and had been dealing at arm's length, and taking into account that all the capital of the partnership had been provided by the taxpayer. However, the partnership was permitted to deduct the amounts paid to the wife as salary in the computation of its income.