Nov 13, 2014

In a very short time a group of Canadians took assignment of a apartment complex under construction from a US partnership and sold the interest back to the same US partnership. The flip was intended to generate accounting losses for the Canadian group.

Iacobucci and Bastrache JJ write for a unanimous Court that the Canadian group cannot apply these accounting losses against income from other sources, because they are not a partnership at law. The appellants did not intend to carry on business with a view to profit; the alleged partnership was an empty shell.

The Canadians engaged in the transaction for tax planning purposes. In attempting to make use of partnership losses the appellants suggest that they became partners of a business. The allowance of a deduction depended on if a partnership had been created.

The provincial partnership Acts in Canada are based off of 1980 UK Partnership Act. The Court refers to Continental Bank (1988) SCC, in defining a partnership by three necessary elements: (1) A business (2) carried on in common (3) with a view to profit. In this case there was a business carried on in common, but no view to a profit.

(1) Business

A business is understood as any trade, occupation or profession. Blacks Law Dictionary defines carrying on a trade or business as holding ones self out to others as engaged in the selling of goods or services. Notably, business can exist for a single transaction. There has to be a substantive intention to carry on business.

(1)In common

The Court cites Lindley and Banks on Partnership for the proposition that the management of a business by one partner does not alone mean that the business is not carried out in common. Intention to carry on business considers the contribution of skill, knowledge, assets, interest in property, and sharing of profits and losses.

(2)View to profit

The court comments that there is an important distinction between motivation and intention. Motivation is that what compels action. The existence a tax planning as motivation does not derogate from the validity of transactions for tax purposes or formation of a partnership for tax purposes.

To be considered a partnership there must still be an intention to make profit; whether or not tax was a motivation. The intention to make profit is sufficiently met if its purpose is even ancillary. The Court states at paragraph 25 “. . . regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. This should not be a mechanical application, rather evidence of context should be considered.” In this investigation “the Court should not adopt a purely quantitative analysis” The law does not require a net gain over a certain period of time to constitute a view for profit. In this case the Appellants had no long-term view to earn income.

Where a Canadian taxpayer wishes to apply losses from a foreign partnership the essential elements of a partnership under Canadian law must be met.