Section 96

The taxpayers, spouses, bought a farm in 2003 to start a tree farming business. Hogan found that the farm was owned by the taxpayers rather than being partnership property. On that basis, their ability to claim the capital gains exemption on a sale of the farm turned on establishing that the property was used in a farming partnership rather than being used in a direct farming business of the taxpayers. The Minister argued that the taxpayers were instead engaged in activities as spouses acting for the common good of the couple.

In finding that there was a partnership, Hogan J noted that the authorities cited by the Minister to establish that the courts should be cautious in finding a business partnership between spouses were "almost exclusively dependent on their facts" (para. 45), whereas in the present case (para. 46):

[Both taxpayers] were fully engaged on a regular and continuous basis in the operation of the Tree Farm, and they pursued that venture with the plan of realizing significant annual profits when the trees were ready for harvesting.

The appellant was an equity partner at the respondent law firm, whose partnership agreement required retirement at 65. The respondent applied to have the appellant's age discrimination complaint dismissed on the grounds that, as an equity partner, he was not an employee under BC's Human Rights Code.

The Abella J stated (at para. 28) that in making this determination:

Ultimately, the key is the degree of control, that is, the extent to which the worker is subject and subordinate to someone else's decision-making over working conditions and remuneration... .

She then found (at para. 39) that "as an equity partner, he was part of the group that controlled the partnership, not a person vulnerable to its control." Therefore, he was not an employee under the Code and could not contest the mandatory retirement. Abella J went on to state (at para. 46) an employee finding "would only be justified ... where the powers, rights and protections normally associated with a partnership were greatly diminished."

Each appellant (along with 600 other taxpayers over several taxation years in the 1980's) bought units in a limited partnership. Each of the 36 limited partnerships was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") engaged in marketing activities and purchased a smaller yacht to be used for the provisioning of supplies to the envisaged fleet, and belatedly bought two more yachts, although none of the yachts was acquired by any particular partnership (paras. 348, 402). The capital raised was grossly insufficient for accomplishing the marketed objectives. Rossiter ACJ found (at para. 113, see also paras. 280, 261, 352) that "any yacht building and charter development efforts by OCGC and its related companies were mere window-dressing [to induce further investments]" and characterized the arrangements as a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).

In finding that "the Limited Partnerships were not genuine partnerships" (para. 382), Rossiter ACJ found (at para. 383) that "there was no ‘business carried on' [as] there was merely a fraud," that there was no business "in common" ("how could there be a meeting of the minds when the foundation of the scheme is fraudulent yet the investors are not aware of or are ignorant of the fraud perpetuated on them" (para. 384), and that there was no "view to profit" as the principal of the general partner "had the intention to profit at the expense of the Limited Partnerships" (para. 385).

The claimant, who was a solicitor practising as an equity member of a limited liability partnership, and who was expelled as a member, was found not to be a "worker" entitiled to protection under the Employment Rights Act 2010 (UK). This conclusion was assisted by a finding that if the firm had been a partnership rather than an (incorporated) limited liability partnership, she would have been a partner of the firm under the Partnership Act 1890 (UK). In so finding Eias LJ stated (at para 38):

That simply requires an answer to the question whether, by their actions, the parties intended to create a partnership: see M Young Legal Associates v Zahid, [2006] EWCA Civ 613, [2006] 1 WLR 2562. That would be the case where the putative partner is by agreement carrying on a business for the pursuit of profits in common with others. The Zahid Solicitors case shows that a partner need not be remunerated by reference to profit (although the claimant was) and that it is no bar to being a partner that he does not make any capital contribution, although that may be a factor pointing against finding that a partnership has been created.

He also quoted with approval the statement in Tiffin v Lester Aldridge LLP, [2012] EWCA Civ 35, [2012] ICR 647 (para 31) that:

...in law an individual cannot be an employee of himself. Nor can a partner in a partnership be an employee of the partnership, because it is equally not possible for an individual to be an employee of himself and his co-partners....

The taxpayer incorporated their business but continued to pay personally for expenses incurred in the business, and claimed a business loss on her income personally. Campbell J. did not accept that the business was carried out through a partnership between taxpayer and her sister. Apart from the pattern of incurring expenses personally, all the documentary evidence pointed to the business being carried on by the corporation. This evidence included the corporation's T2 forms, which reported the taxpayer's expenses as corporate expenses.

An individual who managed a partnership for a fixed fee "through" a corporation of which he was the sole officer and shareholder would have been an officer of the partnership but for the interposition of his corporation - so that the corporation was found to be carrying on a personal services business (with a resulting loss of the small business deduction).

Before reaching this conclusion, Bédard J. noted that although it was "well established that a partner cannot be an employee in his own partnership" (given that the control of a partner in the partnership business is inconsistent with the subordinate character of the employment relationship) (para. 27), the same restriction did not apply here as "an 'office'...does not require the individual to be in the service of some other person" (para. 28).

Jorré found that the taxpayer and her husband were carrying out their garden centre business in equal partnership. He stated (at paras. 36-37):

Both spouses made contributions. The appellant gave up her existing job and worked at the garden centre; the husband worked at the garden centre. Property belonging to both of them was used to guarantee a loan. One or both took out the loan.

Both spouses could write cheques, both had access to the business account and both used money from the account to pay family expenses.

The taxpayer was a U.S. limited liability corporation (LLC) which performed jazz concerts in Canada. A CRA appeals officer stated in his testimony (para. 957) "that a U.S. LLC cannot deduct for Canadian tax purposes, the salaries paid to members of the LLC because a U.S. LLC is a partnership for U.S. federal income tax purposes...."

Favreau J. stated (at para. 26) that "the long-standing position of the CRA is that a U.S. LLC is treated as a corporation for all purposes of the Act regardless of whether the LLC is treated as a corporation or a partnership for U.S. tax purposes." Therefore, salaries paid to band members were deductible from income. However, the taxpayer failed to meet its business record-keeping obligations under s. 230 so its deductions were denied on that basis.

In connection with a limited partnership offering whose final closing was on December 31, 1993, the taxpayer bought units in the partnership for $18,000 and 18 common shares in a corporation for a dollar each. The partnership bought a stallion and a colt at the closing, and prepaid various expenses, thereby giving rise to a loss for the partnership's 1993 taxation year. As contemplated in the Offering Memorandum, two weeks later the partnership transferred its assets to the corporation in consideration for preferred shares, with the preferred shares then being distributed to the partners on the dissolution of the partnership. The taxpayer then sold his preferred shares to his RRSP, and used the cash proceeds to repay a loan that had financed his purchase of his partnership units.

The Minister argued that the taxpayer could not deduct his share of partnership losses (which were restricted farm losses) on the basis inter alia that there was no partnership. The partnership had been structured to dissolve before it would receive any returns - any returns from the business would necessarily come afterwards, from corporate dividends (after dissolution of the partnership): therefore, the alleged partnership was formed without a view to profit. Miller J. stated (at para. 72):

I disagree with the [Minister's] reasoning and logic and overly technical, rather than pragmatic, approach to [whether there was a view to profit]. In reading [Continental Bank] in a practical, commercially sensible manner, the question to ask is not whether the parties intended to profit from the business during the operation of the business as a partnership, but whether the parties intended to profit from that particular business.

In finding that the Minister properly disallowed the deduction of a $5,000 salary paid by a husband and wife partnership to the husband in computing the partnership's income, Jorré J. stated (at para. 76) that "it is settled law that the salary of a partner cannot be claimed by the partnership."

A partnership in which the taxpayers invested was found (at para. 105) not to be a valid partnership under s. 96 as "the transactions were structured so that it was virtually impossible for the Partnership revenues to meet the debt levels and consequently there was no intention to earn a profit even as an ancillary purpose".

The taxpayer, whose principal place of business was in Quebec and who purchased interests in a Texas partnership shortly after the sale of the partnership's asset (a small strip mall) to the bank to whom it was in default, were found not to have an intention to carry on business in common with the U.S. vendor partners notwithstanding that the partnership agreement was amended to provide for the possibility of investing in real property projects other than the foreclosed asset and, indeed, two years later the partnership finally invested U.S.$175,000 in a real property project that it still had at the time of trial. Lamarre J. indicated (at para. 8) that in the Backman case, "the Supreme Court of Canada confirmed the principle that a taxpayer seeking to deduct Canadian partnership losses under section 96 of the ITA must satisfy the definition of partnership that exists under the relevant provincial law", and indicated that in the case at bar, the Quebec civil law governed the question of whether there was a partnership.

The taxpayer did absolutely nothing to familiarize himself with his partners in a purported Quebec partnership, the financial quality of his investment or the reliability and credibility of the person heading the project, and signed a form for the sale of his partnership interest almost contemporaneously with his investment in the partnership. Accordingly, the taxpayer's investment "had absolutely nothing to do with a genuine partnership, the essential characteristics of which are a cooperative spirit, a contribution by combining property, knowledge or activities, and, lastly, a sharing of the pecuniary profits from this combining and from carrying on business during a certain period" (para. 98).

In finding that investors who sought to deduct investment tax credits for expenditures on scientific research and experimental development were not in partnership with each other , Archambault J adopted (at para. 17) a statement in McKeown v. The Queen, [2001] 4 C.T.C. 2197 (TCC) at para. 393 that "the investors…were merely seeking substantial tax benefits and never demonstrated any intention of working together to undertake scientific research and experimental development activities." Furthermore, the interest of each investor was bought a few weeks after his or her investment.

The predecessor of the corporate taxpayer and other Canadian purchasers of a general interest in a New Mexico partnership that subsequently sold raw land at a reported loss of $21.4 million were found not to be carrying on business in common with a view to a profit, and, therefore not to be in partnership. The purchase by the partnership of interests in three oil and gas leases for $15,000 was a passive investment, and the holding by the partnership of an option on real estate would not give them any entitlement to participate in the development of the subject property.

The original partners in a Texas partnership (the "Old Partnership") formed a second Texas partnership (the "New Partnership"), the Old Partnership purchased interests in an Oklahoma and Texas gas well, and granted an option to the New Partnership to purchase all of its assets other than the interests in the wells, the taxpayers purchased all the partnership interests in the Old Partnership from the previous partners, and the New Partnership exercised its purchase option.

In finding that the taxpayers were not carrying on business in common following their purported purchase of the partnership interests, so that losses on the sale of assets by the Old Partnership could not be allocated to them, Mogan J. noted that the total purchase price for the wells was U.S.$25,000, such wells generated only $3,283 in net earnings over the following 10 years and that the owning of these minimal interests in the wells was so passive that the Old Partnership did not carry on any business after the date the taxpayers acquired their interests.

The taxpayer and other investors in a supposed partnership were found not to be partners given that there was no manifestation of any intention to work together on the part of the investors including the taxpayers, and there were no discussions on how to manage the partnership and what its activities would be.

In finding that a partnership had been formed notwithstanding that it never made any sales of its software, Archambault J. noted that a partnership agreement was executed in writing between the general partner and the initial limited partner, the partnership also worked on its marketing plan and gave some demonstrations; and in the subsequent year it pursued a potential lead and hired consultants to evaluate the software and prepare numerous marketing evaluation documents and prepare demonstrations for potential customers. Archambault J. noted (at p. 2623) that "when a partnership is being formed, it is normal that its energies be devoted initially to raising the capital necessary to finance its business activities".

In finding that a husband and wife carried on a business involving the buying and selling of automobiles as a partnership, Campbell T.C.J. noted that they shared one joint account, there was a joint insurance policy on the vehicles, the husband (who alleged that it was his wife who carried on the business alone) had a greater knowledge of the business activity than his wife, the business operated out of the residence that they shared, and the husband handled all of the types of relevant business transactions.

The taxpayer and five other individuals made a decision to form a partnership ("Fairway") to purchase units in a limited partnership ("Pinecrest") that had been formed to build and operate a golf club. In rejecting the position of the Crown that Fairway was not a partnership, Sarchuk T.C.J. noted that there was a written partnership agreement for Fairway which had been registered under provincial laws of partnership, existence of the partnership was represented to third parties (both the taxpayer and another individual were authorized to attend meetings of the other partnership at which they always set themselves out as representatives of Fairway) and there was clear evidence that the partners of Fairway had a mutual right of control of management of the enterprise (a joint property interest in Pinecrest) and to share in profits and losses.

On December 13, 1991 some Canadian promoters acquired a 98% interest in a U.S. partnership ("Klink") that has been carrying on a business of leasing a computer which was now fully depreciated for U.S. tax purposes and had a nominal value; and on November 20, 1991 the taxpayers purchased a 93.6% interest in Klink from the promoters. Minutes thereafter, Klink conveyed the computer to another partnership ("ILP") for an agreed price of $50,000 as a contribution of capital to ILP, thereby giving rise to a terminal loss.

Bowie T.C.J. found that neither the promoters nor the taxpayers had any intention of carrying on business in common with the remaining U.S. partners and, instead, "simply intended to create a large tax loss for themselves at a relatively modest cost". Accordingly, the Klink partnership came to an end on December 13, 1991 or, at the latest, on December 20, 1991 and, therefore, there were no partnership losses to be allocated to the taxpayers.

In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer, which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for the taxpayer to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to the taxpayer), or (2) that the share of the profits of the silent partnership paid to the taxpayer could be treated as dividends paid by GmbH to the taxpayer.

Respecting the first issue, Peter Gibson LJ stated (at p. 258) that the court was required

to consider the characteristics of an English or Scottish partnership which make it transparent and then to see to what extent those characteristics are shared or not by the silent partnership in order to determine whether the silent partnership should be treated for corporation tax purposes in the same way.

In applying this test he noted that although a silent partnership (like an English partnership but not a Scottish partnership) was not a separate legal entity, the silent partner did not have any proprietary right in the shares of the subsidiaries or in the dividends arising on those shares (albeit, not a strong point of contrast with a Scottish partnership), it did not (unlike a partner in a Scottish partnership) have even an indirect interest in the profits of the silent partnership as they accrued or in the assets, with its interest instead being purely contractual, and the business was solely that of the GmbH rather than the business being carried on with the silent partner in common with a view to profit.

As the second argument also failed, the taxpayer's appeal was dismissed.

The taxpayers and other Canadians purchased a 99% interest in a partnership ("CL 1") which, in turn, owned a 99% interest in a Texas gen(at CL A had lost over $59 million in about four years and that the taxpayers had no right to reduce the costs of CL A given that all decisions regarding management of the partnership were required to be made by unanimous written consent of the partners.

In obiter dicta, Bowman TCJ. indicated that his decision - that the taxpayer, by virtue of being a limited partner in an Ontario limited partnership, was carrying on business in Canada - was not based solely on the definition of partnership in the Partnerships Act (Ontario), and stated (at p. 1027) that "something that is done by an individual - such as deriving rent from property - that would not constitute carrying on business, does not become a business simply because the individual takes in a partner."

At the end of 1981 the taxpayer was a partner in a real estate partnership units of which he had subscribed for on December 28, 1981, notwithstanding that in June 1982 the taxpayer negotiated a reversal of the subscription and a refund of the subscription proceeds on the basis of the failure of the general partner to provide notice of acceptance of the taxpayer's subscription and to amend the partnership certificate to reflect the taxpayer's admission as a limited partner, and in light of the filing of various liens against title to the partnership development.

A club, which had adopted the standard constitution prescribed by Rotary International, was not a partnership because members were only entitled to benefits conferred by the club's constitution and were only liable to pay subscriptions, rather than being entitled to profits and being responsible for losses.

A general partner who received a fee for managing the partnership but no share of the profits was a partner. "The Partnership Act does not require that the partners share in the profits of the business. The definition essentially excludes non-profit relationships from the purview of the legislation. The Act simply requires a profit motive."

The defendant, which signed an agreement for the acquisition of an undivided 20% interest in a shopping centre, was held to be a partner of the company ("Bonel Properties Ltd.") holding the other 80% interest, in light of such factors as "the introduction of the principals of Bonel Properties Ltd. as his partners: the bank account and the printed cheques [in the name of both companies]; the Treasury Branch and Investors Syndicate financing [creating joint and several liability]; the right to be consulted about new tenants; the sending of prospective tenants; the 'on the spot' looking after the construction faults and repairs; the bank account and the admission that they were to share the costs on an 80-20 basis as well as the profits being divided on that same basis."

An agreement between Telesat Canada and the nine principal Canadian telephone companies setting up the Trans-Canada Telephone System did not create a business, the profits from which were shared by the parties but instead provided for the interprovincial connection of the parties' individual telecommunication signals and for a complicated method of revenue settlement, whereby certain revenues received from the operation of the system were attributed to each party in order that it could receive a return on its investment for its particular part in the transmission of telecommunications. There was no community of capital and there was a well-defined separation of interest and ownership (i.e., there was no partnership business as such), and by virtue of the requirement of unanimity for every decision taken that affected the group, there was no delegation of management powers to the partnership. The consortium accordingly was not a partnership.

A New York private company whose two shareholders (including the taxpayer, who was a U.S. citizen resident in Canada) had elected under subchapter S of the Internal Revenue Code to be dealt with as a partnership, was not a partnership for purposes of the Act. Accordingly, the taxpayer was not entitled to deduct his share of a loss of the company that he was permitted to recognize for purposes of the Code.

Although it may be that there cannot be a partnership between an individual and a corporation to entertain on television (since a corporation cannot be a television entertainer), there is no reason why the corporation and the individual entertainer cannot agree to join in partnership to exploit his skills.

The assumption of both co-owners of a real estate property that the second co-owner was free to assign his interest in the property to a third party was inconsistent with the presence of a partnership. "English law does not regard a partnership as a persona in the legal sense. Nevertheless, the property of the partnership is not divisible among the partners in specie. The partner's right is a right to a division of profits according to the special arrangement, and as regards the corpus, to a sale and division of the proceeds on dissolution after the discharge of liabilities. This right, a partner may assign, but he cannot transfer to another an undivided interest in the partnership property in specie."