Judgments

[1996] 1 F.C. 423

A-481-93

Lois Schultz (Appellant)

v.

Her Majesty the Queen (Respondent)

Indexed as: Schultzv. Canada (C.A.)

Court of Appeal, Stone, Linden and McDonald JJ.A. — Toronto, September 18; Ottawa, November 2, 1995.

Income tax — Income calculation — Appeal, cross-appeal from T.C.C. decision taxpayers equal partners in investment club strategy, convertible hedging transactions — T.C.C. having jurisdiction to decide whether partnership existed — Intention to carry on business as partners essential for partnership to exist — Trading transactions in issue “business” as defined in Ontario Partnerships Act, s. 2 — Business carried on by taxpayers in common with view to profit — Minister acting with “all due dispatch” within meaning of Income Tax Act, s. 165(3)(a) in confirming reassessments — Minister’s calculations with respect to hedging transactions valid — Taxpayer not assisted by Act, s. 39(4) election.

These were an appeal and a cross-appeal from a Tax Court of Canada decision dismissing the taxpayer’s appeal from an assessment made under the Income Tax Act for the taxation year 1983 but allowing her appeals from assessments for the years 1984, 1985, 1986 and 1987. In 1983, the appellant and her spouse, who had been practising dentistry for about ten years and was earning a relatively high income, were advised by a consulting firm to adopt an investment club strategy and later to enter into convertible hedging transactions in publicly traded securities. The objectives of both strategies were the same: income splitting and earning of extra income. Each set of hedging transactions began with Dr. Schultz taking a short position. The funds from this short trade, coupled with Dr. Schultz’s guarantee of his wife’s account, enabled the hedge transactions to proceed thereafter. The Tax Court Judge ruled that the taxpayers were in a partnership relationship in conducting those transactions rather than in an agency relationship and that the appellant had filed with the Minister on her own behalf an election pursuant to subsection 39(4) of the Act. The main issues herein were whether the Tax Court Judge had jurisdiction to decide that a partnership existed and if so, whether in law a partnership did exist. Three other issues had to be considered: whether the Minister acted with “all due dispatch” in confirming his reassessments with respect to all five taxation years under review, whether the Minister’s calculations with respect to the hedging transactions were correct and whether the Tax Court Judge erred in awarding the costs of the appeal to the respondent.

Held, the appeal should be dismissed, the cross-appeal should be allowed.

The Minister of National Revenue is not in all circumstances confined to his assumptions made at the time of an assessment. In the present case, he was not prevented from pleading the alternative defence before the Tax Court of Canada. He has not changed the basis of the assessments but merely asserted a different legal result flowing from the self-same set of facts by alleging that those facts show the existence of a joint venture or partnership if they do not show an agency relationship. Even if it could be said that the Minister has alleged new “facts” by adopting the alternative posture, the case law as developed allowed him to do so but imposed upon him the onus of proving those facts. The respondent was entitled to plead joint venture or partnership in the alternative and therefore, the Tax Court Judge had jurisdiction to consider that issue. The Judge’s conclusion, that there was a partnership consisting of the appellants and that the partnership, rather than the individual appellants in his or her own right, carried out the hedging transactions in the taxation years in question, was supported by the evidence. Section 2 of the Ontario Partnership Act defines partnership as the relation that subsists between persons carrying on a business in common with a view to profit. In determining the existence of a partnership, regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. There must be an intention to make a profit regardless of whether a profit is realized. The trading transactions in issue constituted a “business” as defined in the Ontario statute and such business was carried on in common, that is to say on the appellant’s own behalf rather than for the benefit of others. It is important to consider the taxpayers’ conduct in order to decide whether their partnership was carried on with a view to profit. During all of the relevant years, each of them guaranteed in broad terms the other’s trading account with the broker, allowing a credit to be established in one account to offset a debit in the other for margin purposes. Any additional margin deposits were always paid out of a joint bank account belonging to both appellants. It was Dr. Schultz’s initial short sale positions that made it possible for his wife to take her initial long positions. These paired transactions were each dependent upon the other. The appellants operated their accounts in tandem and in a highly co-ordinated fashion rather than independently of one another, which suggests that they carried on business in common with a view to profit.

The Tax Court Judge did not err in concluding that the Minister had acted with “all due dispatch” in confirming his reassessments for the taxation years 1984, 1985, 1986 and 1987. The significant delays on the part of the Minister in confirming his reassessments could be explained by the large number of taxpayers being investigated by the Minister with respect to investment club transactions and convertible hedging transactions. These transactions were numerous and complicated. The words “with all due dispatch” did not bind the Minister to fixed time limits, but only required him, having regard to the particular circumstances, to proceed with his review of the matters within a reasonable time after the notices of objection were received; this is precisely what he did. Moreover, the appellants could have appealed the reassessments pursuant to paragraph 169(b) of the Act. As to whether the Minister’s calculations with respect to the hedging transactions were valid and correct, it should be pointed out that the losses, expenses and gains on the hedging transactions in issue should be calculated when the leg of a particular hedge was finally closed out. The appellant filed a subsection 39(4) election in 1983 with a view to reducing her income tax burden. In her cross-appeal, the respondent correctly stated that since the matter was governed by subsection 96(3) of the Act, the election was of no assistance to the appellant. It has not been demonstrated that the disposition of costs, which was a matter for the discretion of the Tax Court Judge, should attract the intervention of the Court on the basis that it was not properly exercised.

STATUTES AND REGULATIONS JUDICIALLY CONSIDERED

Income Tax Act, S.C. 1970-71-72, c. 63, ss. 39(4) (as enacted by S.C. 1977-78, c. 1, s. 16; 1980-81-82-83, c. 140, s. 18), 96(3) (as enacted by S.C. 1973-74, c. 14, s. 30; 1980-81-82-83, c. 48, s. 52; 1985, c. 45, s. 13), 152(4) (as am. by S.C. 1984, c. 1, s. 84; c. 45, s. 59), 165(3)(a), 169(b) (as am. by S.C. 1980-81-82-83, c. 158, s. 58; 1984, c. 45, s. 70), 231.2 (as enacted by S.C. 1986, c. 6, s. 121), 245(1).

Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39, s. 1(1).

Partnerships Act, R.S.O. 1990, c. P.5, ss. 1(1), 2, 3.

CASES JUDICIALLY CONSIDERED

APPLIED:

Johnston v. Minister of National Revenue, [1948] S.C.R. 486; Wise (M.) et al. v. The Queen, [1986] 1 C.T.C. 169; (1985), 86 DTC 6023 (F.C.A.); Northern Sales (1963) Ltd. v. MNR, [1973] CTC 239; (1973), 73 DTC 5200 (F.C.T.D.); Robert Porter & Sons Ltd. v. Armstrong, [1926] S.C.R. 328.

CONSIDERED:

Gardner (John) and Bowring, Hardy and Company, Limited v. Commissioners of Inland Revenue (1930), 15 T.C. 602 (Scot. Ct. Sess.).

REFERRED TO:

M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294; (1964), 64 DTC 5184 (Ex. Ct.); Brewster, N C v. The Queen, [1976] CTC 107; (1976), 76 DTC 6046 (F.C.T.D.); Tobias (D) v. The Queen, [1978] CTC 113; (1978), 78 DTC 6028 (F.C.T.D.); McLeod (C.) v. M.N.R., [1990] 1 C.T.C. 433; (1990), 90 DTC 6281 (F.C.T.D.); Continental Bank Leasing Corp. v. Canada, [1993] 1 C.T.C. 2306; (1993), 93 DTC 298 (T.C.C.); Adam v. Newbigging (1888), 13 App. Cas. 308 (H.L.); Weiner v. Harris, [1910] 1 K.B. 285 (C.A.); Thrush v. Read, [1950] O.R. 276 (C.A.); LePage (A.E.) Ltd. v. Kamex Developments Ltd. et al. (1977), 16 O.R. (2d) 193 (C.A.); Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.); Cox v. Hickman (1860), 11 E.R. 431 (H.L.); Fisher & Sons, In re, [1912] 2 K.B. 491; Mollwo, March & Co. v. The Court of Wards (1872), L.R. 4 P.C. 419; Marx v. Marx, [1964] S.C.R. 653; Greco (N.A.) v. M.N.R., [1991] 2 C.T.C. 2384; (1991), 91 DTC 1090 (T.C.C.); Jolicoeur, Joseph Baptiste Wilfrid v. Minister of National Revenue, [1961] Ex. C.R. 85; [1960] C.T.C. 346; (1960), 60 DTC 1254; Apfelbaum (H.) v. M.N.R., [1991] 1 C.T.C. 2599; (1991), 91 DTC 800 (T.C.C.); Friedberg v. Canada, [1993] 4 S.C.R. 285.

AUTHORS CITED

Lindley & Banks on Partnership, 17th ed. by R. C. I’Anson Banks. London: Sweet & Maxwell, 1995.

Lindley on the Law of Partnership, 13th ed. by Ernest H. Scamell. London: Sweet & Maxwell, 1971.

Manzer, A. R. A Practical Guide to Canadian Partnership Law. Aurora, Ont.: Canada Law Book, 1995.

APPEAL and CROSS-APPEAL from Tax Court of Canada decision ([1993] 2 C.T.C. 2409; (1993), 93 DTC 953 (T.C.C.)) dismissing taxpayer’s appeal from an assessment made under the Income Tax Act for the taxation year 1983 but allowing her appeals from assessments for the taxation years 1984, 1985, 1986 and 1987. Appeal dismissed, cross-appeal allowed.

COUNSEL:

Barry S. Wortzman, Q.C., Martin L. O’Brien, Q.C., and Donald Zaldin for appellant.

Larry Olsson, Q.C., Kathryn R. Philpott and Henry A. Gluch for respondent.

SOLICITORS:

Zaldin & Zaldin, Toronto, for appellant.

Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by

Stone J.A.: This is an appeal by Lois Schultz from a judgment of the Tax Court of Canada dated July 5, 1993 [Schultz (T.M.G.) v. Canada, [1993] 2 C.T.C. 2409], which dismissed her appeal from an assessment made under the Income Tax Act [S.C. 1970-71-72, c. 63] (the Act) for the taxation year 1983 but allowed her appeals from assessments under the Act for the taxation years 1984, 1985, 1986 and 1987 and referred the matters back to the Minister of National Revenue for reconsideration and reassessment in accordance with the reasons for judgment.

The appeal and the respondent’s cross-appeal were heard together with the appeal of the appellant’s spouse, Dr. Thomas M. G. Schultz, and the respondent’s cross-appeal in Court file No. A-482-93 from a second judgment of the Tax Court of Canada of the same date and in respect of assessments for the same taxation years. A copy of these reasons will be filed in that Court file and shall thereupon become the reasons for judgment therein.

The appellant and her spouse will sometimes be hereinafter referred to collectively as “the appellants”.

Notwithstanding that the appellants’ appeals to the Tax Court of Canada in respect of their 1984, 1985, 1986 and 1987 taxation years were allowed, they did not entirely succeed before that Court. It appears from the learned Tax Court Judge’s reasons that the assessments were referred back to the Minister for reassessment on the basis that the appellants were in a partnership relationship during those years in conducting the transactions referred to below rather than in an agency relationship and that Lois Schultz had filed with the Minister on her own behalf an election pursuant to subsection 39(4) [as enacted by S.C. 1977-78, c. 1, s. 16; 1980-81-82-83, c. 140, s. 18] of the Act.[1] The effect of the judgments, therefore, is that each of the appellants are to be assessed as partners in respect of those transactions and that the Minister must give effect to the subsection 39(4) election filed by Lois Schultz in 1983 in reassessing her income in respect of the 1984, 1985, 1986 and 1987 taxation years.

BACKGROUND

The circumstances surrounding the dispute may be briefly summarized. In the fall of 1983, the appellants together approached J. K. Maguire & Associates, a firm of financial and tax consultants in Toronto. Dr. Schultz had been then practising dentistry for approximately ten years and was earning a relatively high income. Lois Schultz, on the other hand, was earning a relatively low income as a part-time employee of her husband’s office. Both appellants testified at the trial as did J. K. Maguire the sole proprietor of the consulting firm. Dr. Schultz testified that the purpose of the consultation was both to earn extra income and to do some income splitting for his wife’s benefit. Mr. Maguire advised them to adopt an investment club strategy and later a convertible hedging strategy. Lois Schultz agreed under cross-examination that the basic concept was “of trying to take offsetting positions” where she would take the gains and Dr. Schultz would get the losses. She testified as follows:

Q. You have described how you met Mr. Maguire and had an initial consultation with him, Mrs. Schultz, and your husband has explained that as well. I gather both of you understood the basic concept of trying to take offsetting positions where you would take the gains and your husband would get the losses.

A. Yes.

Q. That is what was referred to as income splitting and the advantage was that your tax rates were lower, so that if you could end up more or less with gains and losses that substantially offset each other there would be a tax advantage because your husband has a high income and you have a relatively low income.

A. Yes.

Q. That concept applied both to the investment club strategy and to the later convertible hedge strategy.

A. Yes.

Q. You understood that, too.

A. Yes.[2]

The investment club strategy applied only during the 1983 taxation years of the appellants. Put simply, the concept was for Dr. Schultz to sell short Government of Canada bonds at the same time that Lois Schultz bought the same number of Government of Canada bonds long. In view of the disposition of the appeals against the 1983 tax assessments, it is not necessary to describe the various steps involved between the short sale and the long purchase. In the end, Dr. Schultz claimed a loss against other income when he purported to close out his short position before the end of the 1983 taxation year. As Lois Schultz did not finally dispose of her long position until January 1984, she reported the related income and gains from her position in that year. The appeals from the assessments for the 1983 taxation year were dismissed on the ground that neither Dr. Schultz nor Lois Schultz were members of any investment club in that taxation year. The Tax Court Judge found the transactions were solely those of J. K. Maguire. That finding was not challenged in this Court.

The remaining taxation years involved convertible hedging transactions in publicly traded securities. The objective however remained the same—that of income splitting and the earning of extra income. The plan required each appellant to open an account with a stockbroker in Toronto. That was done. Each of the appellants executed a cross-guarantee agreement in favour of the broker which allowed for lower margin requirements. Indeed, the cross-guarantees which operated throughout the 1984 and 1985 taxation years guaranteed payment to the broker of “all present and future debts and liabilities”,[3] while those which operated throughout the 1986 and 1987 taxation years guaranteed the payment of “all commissions, fees, expenses or charges which may be incurred in the execution of such orders, the payment to you of the purchase price, or the delivery to you (as the case may be) of such stocks, bonds or commodities, and of any losses which you may sustain upon said Customer’s account by reason of insufficient margin or otherwise”.[4] In both 1984 and 1985, each appellant executed a trading authorization which allowed each spouse to trade on the other’s behalf. Such an authority was not executed by either appellant in 1986 or 1987 but, that apart, arrangements between themselves remained virtually unchanged. While Mr. Maguire possessed no authority to instruct the broker on particular purchases or sales in 1984 and 1985, he worked closely with the broker in generating hedging ideas on behalf of the appellants. He could and did advise the appellants whether transactions in particular securities made sense from their standpoint. In both 1986 and 1987, instructions to the broker were given by Mr. Maguire and were confirmed by the appellants. Where the instructions could not be so confirmed, Mr. Maguire had an arrangement with the broker that the hedging transactions could proceed without confirmation if Mr. Maguire so instructed.[5]

In general, each set of transactions began with a short sale by Dr. Schultz. The effect of this was to create a credit balance in his margin account at the office of the broker. The existence of that balance and Dr. Schultz’s cross-guarantee enabled Lois Schultz to buy long without putting up the usual 50% margin. Lois Schultz’s cross-guarantee enabled Dr. Schultz to sell short without putting up that same margin. As Mr. Maguire explained in-Chief, “the brokers know that whatever one person loses the other person is making”.[6] Lois Schultz had merely to put up only the difference between the credit balance in Dr. Schultz’s account and the debit balance in her account flowing from the acquisition of her long position. This difference was invariably paid out of a joint bank account in the names of both appellants as indeed were any margin requirements of Dr. Schultz.

Dr. Schultz’s transactions involved either the short sale of common shares or of share warrants. The transactions followed a pattern and may be illustrated by reference to the first set of transactions in 1984 in securities of Macmillan Inc. The broker needed to locate a lender of the number of common shares of that company to be sold short and to bring them under his control. In order to effect the short sale, Dr. Schultz became obliged to pay the lender’s “rental” fee and any dividend the owner otherwise forgave as well as the broker’s fees. The purpose of borrowing the shares was to ensure they would be returned to the lender in due course. On the same day that Dr. Schultz sold short, Lois Schultz took a long position in the form of a debenture of the same issuer convertible into the same number of common shares that Dr. Schultz had sold short. This was followed shortly by Lois Schultz short selling the same number of common shares to Dr. Schultz who claimed a short sale loss from these transactions in the 1984 taxation year. In late January 1985 Lois Schultz sold the convertible debenture, on which she reported a gain. At the same time she covered her short position in the common shares and later reported a short sale loss in her 1985 taxation year.

In the 1986 and 1987 taxation years the appellants dealt with a different broker in the hedging transactions. In these years, Dr. Schultz held both the short and the long position and claimed a loss when he shifted the long position to Lois Schultz.

THE ASSESSMENTS

In assessing the appellants, the Minister refused to recognize any disposition of securities until the leg of the hedging transaction was actually closed out. He proceeded on the assumption that Lois Schultz was Dr. Schultz’s agent and accordingly that any losses or income was for his account and taxable in his hands only. He took the further position that Dr. Schultz could not deduct the losses because no disposition of securities had taken place and in any event because he had no reasonable expectation of profit from the short transactions. The Minister maintained that same position before the Tax Court of Canada. However, he alleged in the alternative that if Lois Schultz was not the agent or nominee of Dr. Schultz in carrying out the hedging transactions, those transactions constituted a joint venture or partnership in which each partner had an equal interest in losses and gains. He also pleaded that as a “partner” rather than an individual taxpayer Lois Schultz was not entitled to take advantage of her subsection 39(4) election.

TAX COURT JUDGE’S CONCLUSIONS

The Tax Court Judge gives effect to the alternative plea, when he concluded, at page 2423 of his reasons for judgment:

Thus, the Court finds that for the 1984, 1985, 1986 and 1987 taxation years Dr. and Mrs. Schultz were equal partners in the hedging transactions and that they shared equally in, and were legally entitled to share their profits and their losses in equal shares.

On the other hand, he determined that Lois Schultz’s subsection 39(4) election “is to be applied to her only and is not to apply to Dr. Schultz, since that election was a personal election by Mrs. Schultz”. The respondent takes issue with that particular conclusion in her cross-appeal. The Tax Court Judge rejected the appellants’ contention that the Minister had not acted with “all due dispatch” within the meaning of paragraph 165(3)(a) of the Act in confirming his reassessments or that subsection 245(1) was constitutionally invalid.

THE ISSUES

The core issues before the Court are whether the Tax Court of Canada had jurisdiction to decide that a partnership existed and if so whether in law a partnership did exist. If we should conclude that the Tax Court Judge had jurisdiction to decide that a partnership existed and if he correctly decided that a partnership did exist during the 1984, 1985, 1986 and 1987 taxation years, there would be no need to canvass the appellants’ further contention that Dr. Schultz had a reasonable expectation of profit as a member of the partnership. The respondent conceded as much at trial, as is confirmed in paragraph 106 of her written argument:

106. In respect of the convertible hedge strategy Counsel for the Crown conceded that if the Appellants were in an agency or partnership relationship and considering both sides of each hedge together or collectively there was a reasonable possibility or expectation of profit. Therefore it was conceded that on the basis of the Minister’s approach the total activity could properly be viewed as a business or an adventure in the nature of trade.

If these issues should be disposed of in favour of the respondent, three issues would remain in the appeal. The first is the overriding question of whether the Minister acted with “all due dispatch” within the meaning of subparagraph 165(3)(a ) of the Act in reconfirming his assessments with respect to all five taxation years under review. The second is whether the Minister’s calculations with respect to the hedging transactions are valid and correct. A third issue is whether the Tax Court Judge erred in awarding the costs of the appeal to the respondent. There would yet remain to be considered the respondent’s cross-appeal submission that as a partner Lois Schultz would not be entitled to take advantage of the subsection 39(4) election which she filed with the Minister in 1983, unless, of course, I should conclude that the appellants are entitled to succeed in their submission that the Minister did not act with “all due dispatch”.

DISCUSSION

Findings

In deciding as he did the Tax Court Judge made the following findings, at page 2422:

The principal purpose of these transactions by both the Schultzes was income splitting, i.e., to reduce Dr. Schultz’s high income and to increase Mrs. Schultz’s low income. The evidence is that they hedged in a highly coordinated fashion. Dr. and Mrs. Schultz also had the joint intention to make a profit for their family by their coordinated transactions. They believed this was possible from the information given to them by Mr. Maguire. The Schultzes also believed that they could make this profit before taxes, not after taxes. Mr. Maguire neglected to include his advisory fees in his example which consisted of a relatively small flat fee coupled with a substantial percentage of “the taxes saved”. Nonetheless, using Mr. Maguire’s hedging example with a profit of $4,000 and including his fees, the Court finds that it was reasonably possible for the Schultzes to earn a profit both before and after taxes.

In my view, there was ample evidence to support these findings.

The partnership issues

I begin by addressing the appellants’ submission that the Tax Court Judge lacked jurisdiction to enter into the question of whether the hedging transactions in the 1984, 1985, 1986 and 1987 taxation years were those of a partnership composed of both appellants rather than of transactions engaged in by each of the appellants in his or her own right. It seems clear that the Tax Court Judge, who said nothing on the subject of his jurisdiction, proceeded on the assumption that there was jurisdiction to determine this issue.

It should be noted at the outset that the plea of joint venture or partnership was not attacked by the appellants as improper either before or during the trial. I do not, however, view that failure as fatal to the appellants’ arguments on this issue.

In their respective notices of appeal to the Tax Court of Canada, the appellants disputed the Minister’s position that an agency relationship existed whereby Lois Schultz was the agent of her husband in engaging in the hedging transactions. It was, indeed, conceded in the respondent’s replies to those notices that in assessing each of the appellants for the years in question Lois Schultz was treated as the agent or nominee of Dr. Schultz. At the trial itself, it was admitted by the Crown that the assessments for the 1984, 1985, 1986 and 1987 taxation years were based upon the assumption that Lois Schultz was the agent of her husband and not on the theory that the hedging transactions were those of a joint venture or partnership.[7]

The appellants contend that it was not open to the Minister to change the foundation on which his assessments rested, from the existence of an agency relationship to one of partnership. To do so, they argue, would in effect be to raise new assessments beyond the limitation period laid down in subsection 152(4) [as am. by S.C. 1984, c. 1, s. 84; idem, c. 45, s. 59] of the Act and thereby result in prejudice and injustice to them.

As I understand it, the Minister is not in all circumstances confined to his assumptions made at the time of an assessment. In the seminal case of Johnston v. Minister of National Revenue, [1948] S.C.R. 486, Rand J. stated, speaking for the majority, at page 489:

... and since the taxation is on the basis of certain facts and certain provisions of law either those facts or the application of the law is challenged. Every such fact found or assumed by the assessor or the Minister must then be accepted as it was dealt with by these persons unless questioned by the appellant. If the taxpayer here intended to contest the fact that he supported his wife ... he should have raised that issue in his pleading, and the burden would have rested on him as on any appellant to show that the conclusion below was not warranted. For that purpose he might bring evidence before the Court notwithstanding that it had not been placed before the assessor or the Minister, but the onus was his to demolish the basic fact on which the taxation rested.

In the intervening years both the Exchequer Court and the Trial Division of this Court have had occasion to consider the place and importance of the Minister’s assumptions in tax litigation: M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294 (Ex. Ct.); Brewster, N C v. The Queen, [1976] CTC 107 (F.C.T.D.); Tobias (D) v. The Queen, [1978] CTC 113 (F.C.T.D.); McLeod (C.) v. M.N.R., [1990] 1 C.T.C. 433 (F.C.T.D.).

I do not understand that the law as developed in these cases prevented the Minister from pleading the alternative defence before the Tax Court of Canada. It is true that in pleading he is subject to certain constraints. For example, he cannot plead an alternative assumption when to do so would fundamentally alter the basis on which his assessment was based as to render it an entirely new assessment. In my view, in the present cases the Minister has not so changed the basis of the assessments. What he did was merely to assert a different legal result flowing from the self-same set of facts by alleging that those facts show the existence of a joint venture or partnership if they do not show an agency relationship. Even if it could be said that the Minister has alleged new “facts” by adopting the alternative posture, the law as developed allowed him to do so but imposed upon him the onus of proving those facts: Pillsbury , supra, at page 302; Continental Bank Leasing Corp. v. Canada, [1993] 1 C.T.C. 2306 (T.C.C.), at pages 2310-2311. The same opinion is implicit in Wise (M.) et al. v. The Queen, [1986] 1 C.T.C. 169 (F.C.A.) where Pratte J.A. stated, at page 170:

It is common ground that the Minister had, in this case, the burden of establishing the correctness of the assessments since he was trying to support them on grounds that were different from those on which they were based.

In my view, therefore, the respondent was quite entitled to plead joint venture or partnership in the alternative and accordingly the Tax Court Judge did have jurisdiction to consider that issue. I am not persuaded that by relying on his alternative plea the Minister has in effect raised entirely new assessments and so prejudiced the appellants.

It now becomes necessary to consider whether the Tax Court Judge erred in concluding that there was in this case a partnership consisting of the appellants and that the partnership, rather than the individual appellants in his or her own right, carried out the hedging transactions in the taxation years in question. That conclusion was based both on an analysis of the law and the surrounding circumstances. It should be observed that circumstances may no doubt exist where spouses should not be considered to be partners in a business for income tax purposes if it is clear that each acted independently of the other. The question before us here is whether in the circumstances disclosed by the record Dr. and Lois Schultz conducted the convertible hedging transactions as partners or in their own individual capacities.

The Partnerships Act, R.S.O. 1990, c. P.5 [then R.S.O. 1980, c. 370], section 2 provides the following definition of a partnership:

2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

Only the opening portion of that section is of relevance. That portion is verbatim with the definition of partnership which appeared in subsection 1(1) of the Partnership Act, 1890 (U.K.), 53 & 54 Vict., c. 39. Section 3 of the Ontario statute sets forth a number of negative rules for determining the existence of a partnership.

I have already alluded to the Tax Court Judge’s findings on the issue of whether a partnership existed and have expressed the view that the findings are supported by the evidence. There remains the underlying issue of whether in law a partnership existed in each of the taxation years 1984, 1985, 1986 and 1987. It is trite to say that the express denial of a partnership, as in this case, does not of itself show that no partnership existed: Adam v. Newbigging (1888), 13 App. Cas. 308 (H.L.), at page 315; Weiner v. Harris, [1910] 1 K.B. 285 (C.A.), at page 290.

As was observed by Collier J. in Northern Sales (1963) Ltd. v. MNR, [1973] CTC 239 (F.C.T.D.), at page 244: “prior to the Act of 1890 the law of partnership was the result of judge-made law ... and the Act of 1890 introduced no great change in the law”. At page 245, Collier J. recited the following passage from Lindley on The Law of Partnership, 13th ed., (London: Sweet & Maxwell, 1971), at page 65:

As will appear more clearly hereafter, the main rule to be observed in determining the existence of a partnership, a rule which has been recognized ever since the case of Cox v. Hickman, is that regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. Although this principle is not expressed in the Act it is still law.

That same test of intention was applied in Thrush v. Read, [1950] O.R. 276 (C.A.) and in LePage (A.E.) Ltd. v. Kamex Developments Ltd. et al. (1977), 16 O.R. (2d) 193 (C.A.). In the present case we can find no declaration to the effect that the appellants intended to carry on business as partners. However, an intention to do so may be inferred from all of the surrounding circumstances and especially from the manner in which the parties conducted themselves in arranging their affairs and in transacting the business in question. This point is made with characteristic brevity by Duff J. (as he then was) in Robert Porter & Sons Ltd. v. Armstrong, [1926] S.C.R. 328, at page 329:

Partnership arises from contract, evidenced either by express declaration or by conduct signifying the same thing. It is not sufficient there should be community of interest; there must be contract.

For a partnership to exist, according to the language of section 2 of the Partnerships Act of Ontario, two or more persons must be “carrying on a business in common with a view to profit”. By subsection 1(1) of that statute the word “business” is defined to include “every trade, occupation and profession”. Lindley & Banks on Partnership, 17th ed., (London: Sweet & Maxwell, 1995), concludes at page 8, that “virtually any activity or venture of a commercial nature ... will be regarded as a business for this purpose”. Again, in Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.), at page 258, Jessel M.R. expressed the view that,

... anything which occupies the time and attention and labour of a man for the purpose of profit is business. It is a word of extensive use and indefinite signification.

In my view, the trading transactions here in issue constituted a “business” as defined in the Ontario statute.

I am similarly of the view that such business was carried on in common, that is to say on the appellant’s own behalf rather than for the benefit of others: Cox v. Hickman (1860), 11 E.R. 431; Fisher & Sons, In re, [1912] 2 K.B. 491.

A partnership will not be found to exist unless the business was carried on “with a view to profit”. The requirement here is that there be an intention to make a profit regardless of whether a profit is realized. This is made clear in Lindley & Banks on Partnership, supra, at page 10:

The intention to make a profit (even if a profit is not actually realised) lies at the heart of the partnership relation. As Lord Lindley put it:

“An agreement that something shall be attempted with a view to gain, and that the gain shall be shared by the parties to the agreement, is the grand characteristic of every partnership, and is the leading feature of nearly every definition of the term.” [Footnotes omitted.]

See also Mollwo, March & Co. v. The Court of Wards (1872), L.R. 4 P.C. 419. It has been suggested that the word “profit” would likely have “both its ordinary commercial meaning of an increase in value of assets or revenue generated in excess of expenses” (A. R. Manzer, A Practical Guide to Canadian Partnership Law (Aurora: Canada Law Book, 1995, at pages 2-3). I am satisfied for the reasons more fully developed below that the partnership here in issue was carried on with a view to profit.

The appellants contend they were never partners but, on the contrary, at all times acted independently of one another. They assert that they kept separate accounts with their brokers and that in their dealings with third parties neither had authority to bind the partnership. It is important to consider the appellants’ conduct. During all of the years in issue, each of the appellants guaranteed in broad terms the other’s trading account with the broker and thereby allowed a credit to be established in one account to be used to offset a debit in the other account for margin purposes. Any additional margin deposits were always paid out of a joint bank account belonging to both appellants. During the 1984 and 1985 taxation years each of the appellants gave the other written authorization to trade in securities on his or her behalf. In 1986 and 1987, a new arrangement allowed the appellants’ advisor, Mr. Maguire, to transact business with the broker on their behalf without prior authorization but subject to confirmation. While the evidence suggests that in those years the broker usually confirmed his instructions with each appellant before proceeding with either side of a hedging transaction, it is apparent that each appellant well understood that Dr. Schultz could sell short only if Lois Schultz agreed to buy long and vice versa. To that end the accounts worked together on a marginal basis.

From a purely mechanical standpoint it was Dr. Schultz’s initial short sale positions that made it possible for Lois Schultz to take her initial long positions. These paired transactions were each dependent upon the other. Thus Dr. Schultz could never expect to claim losses from short positions taken unless Lois Schultz agreed to take and did take correspondingly long positions. The evidence at trial strongly suggests, as the Tax Court Judge found, that the appellants operated their accounts in tandem and in a highly co-ordinated fashion rather than independently of one another. There was evidence that some profit was realized and that more was in prospect. All of the foregoing, in my view, strongly suggests that the appellants did carry on business in common with a view to profit. That was the conclusion of the Tax Court Judge who had advantages as trier of fact that are not available to this Court (cf. Marx v. Marx, [1964] S.C.R. 653, per Martland J., at pages 654-655). The Tax Court Judge heard the various witnesses including the appellants themselves. While they and their advisor denied the existence of a partnership the Tax Court Judge concluded from their conduct that the appellants had agreed and intended to carry on business in common with a view to profit. In my view, that conclusion was reasonably open to the Tax Court Judge on the evidence, particularly having regard to the way the appellants conducted their affairs and transacted their business. I accept the submission of counsel for the Crown that each of the appellants acted for the common benefit of both and that the overriding objective in view was to bring about an actual increase in family wealth.

In short, once the master plan was conceived by Mr. Maguire it remained for him, the brokers and the appellants to see to its execution. The evidence suggests that after a potential hedge was identified by Mr. Maguire and the broker, the remaining steps followed rather automatically—where necessary the broker put it before the appellants who readily approved unless sufficient funds were not available. There is no evidence to suggest that either of the appellants ever refused their approval where funds were available. Neither is there evidence that they conducted unhedged transactions. The situation bears some resemblance to that in Gardner (John) and Bowring, Hardy and Company, Limited v. Commissioners of Inland Revenue (1930), 15 T.C. 602 (Scot. Ct. Sess.), a tax case, where the question was whether an arrangement between a coal importer and exporter and a coal merchant whereby the latter shared with the former the net profit earned on coal sold to the merchant at cost price, amounted in law to a partnership. In deciding that it did, Lord President Clyde noted, at page 610, that the sales between the two parties had become,

... the subject of a transaction in which both parties were interested, and in which, when one of them carried out the purpose and intention of the scheme which had been pre-arranged and sold the coal, the sale was not on his own behoof but for behoof of the two together....

“All due dispatch”

I turn next to the issue of whether the Minister acted with “all due dispatch” in confirming his reassessments for the taxation years 1984, 1985, 1986 and 1987. If he failed to do so then the reassessments would have to be vacated. In this sense the issue is overriding. By paragraph 165(3)(a ) the following obligation was imposed upon the Minister:

165. ...

(3) Upon receipt of a notice of objection under this section, the Minister shall,

(a) with all due dispatch reconsider the assessment and vacate, confirm or vary the assessment or reassess, or

…

and he shall thereupon notify the taxpayer of his action by registered mail.

It is obvious that there were significant delays on the part of the Minister in confirming his reassessments following the filing of the various notices of objection. Whether the Minister failed in his duty under the Act depends on the circumstances under which these delays occurred. The appellants were but two of over 200 taxpayers involved in similar investment club transactions being investigated by the Minister. More than 1000 taxpayers including the appellants were being investigated by the Minister with respect to convertible hedging transactions. The Minister had to resort to issuing requirements pursuant to section 231.2 [as enacted by S.C. 1986, c. 6, s. 121] of the Act to third parties after the appellants’ advisor failed to provide the requested information. The Minister proposed that a number of taxpayers whose reassessments would be confirmed be identified so as to serve as test cases. The appellants’ advisor did not respond. In time the Minister confirmed the reassessments in six cases for the purpose of litigating representative test cases. These were the “Greco et al” cases. However, when these cases were finally brought on for hearing in June 1991, counsel for the appellants’ advisor abandoned the substantive arguments and relied only on the “due dispatch” argument.[8] Shortly after the disposition of these cases, the Minister confirmed the remainder of the assessments in investment club cases including those of the appellants.

In rejecting the appellant’s argument under paragraph 165(3)(a), the Tax Court Judge stated, at pages 2419-2420:

Given the complicated transactions in which some of the brokers themselves had never before participated prior to receiving instructions from JKM & A or its clients, and the lack of responses, Revenue Canada obviously had great difficulty in preparing its reassessments and in deciding on its position in respect to these reassessments. In the 1983 “investment clubs”, payments of accounts were made from other alleged accounts with no apparent authority whatsoever. Given this conduct by Mr. Maguire, and allegedly Nesbitt, it is only reasonable for Revenue Canada to have proceeded slowly and cautiously first respecting 1983 and thereafter in the later years among the myriad of JKM & A clients and clients’ brokerage accounts which in the instant case involved different tax years for Dr. and Mrs. Schultz and different and varying capital and income positions.[9]

Later, at pages 2420-2421, he concluded:

It is the Court’s view that, in the circumstances of this case, the actions of the respondent were conducted with due dispatch given the conduct of JKM& A and the multitude of cases and matters for review respecting the transactions which are the subject matter of this case. The appellants had a right to appeal pursuant to section 169 once they had filed their notices of objection and the appropriate time had lapsed. This right of appeal was reviewed extensively by Associate Chief Judge Christie of this Court in Apfelbaum (H.) v. M.N.R., [1991] 1 C.T.C. 2599, 91 D.T.C. 800 (T.C.C.), where he stated that the right to appeal pursuant to subsection 169(1) is the appellant’s remedy for any alleged delay by the respondent. This Court agrees with that determination.

In my view, the appellants have not shown that the Tax Court Judge erred in concluding that the Minister had acted with “all due dispatch” in the circumstances. These transactions were indeed numerous and complicated. This was also the view taken by Mogan T.C.J. in Greco, supra, who noted, at page 2387 that the issues were serious and “indicate a high degree of complexity”. He added the following [at page 2388]:

Assuming he [the Minister] is a responsible administrator of a statute, that he should not conduct an audit of a transaction that seems as complex as this without thoroughly reviewing files in the offices of all parties involved ....

I am further of the view that the words “with all due dispatch” did not bind the Minister to fixed time limits. Indeed, it has been suggested that they confer a “discretion of the Minister to be exercised, for the good administration of the Act, with reason, justice and legal principles”, (per Fournier J. in Jolicoeur, Joseph Baptiste Wilfrid v. Minister of National Revenue, [1961] Ex. C.R. 85, at page 98). In my view the phrase required the Minister, having regard to the particular circumstances, to proceed with his review of the matters within a reasonable time after the notices of objection were received. I am satisfied that he did so.

I am also of the view that the appellants could have appealed the reassessments pursuant to paragraph 169(b) [as am. by S.C. 1980-81-82-83, c. 158, s. 58; 1984, c. 45, s. 70] of the Act. That paragraph provides:

169. Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Court of Canada to have the assessment vacated or varied after either

…

(b) 90 days have elapsed after service of the notice of objection and the Minister has not notified the taxpayer that he has vacated or confirmed the assessment or reassessed;

but no appeal under this section may be instituted after the expiration of 90 days from the day notice has been mailed to the taxpayer under section 165 that the Minister has confirmed the assessment or reassessed.

The delays on the part of the Minister in confirming his reassessments did not stand in the way of the appellants launching and pursuing appeals in the Tax Court of Canada under that paragraph. (See Jolicoeur, supra, at pages 97-98.) The appellants can scarcely be heard to complain of undue delays on the part of the Minister when, had they wished to do so, they could have attacked his reassessments in the Tax Court of Canada notwithstanding that they had not yet received his confirmations. (See Apfelbaum (H.) v. M.N.R., [1991] 1 C.T.C. 2599 (T.C.C.), at page 2601.)

Minister’s calculations

In disposing of the appeals, the Tax Court Judge stated, at page 2423:

The Court finds that the Minister of National Revenue’s calculations on the basis that the appellants’ transactions concluded when both positions were closed are valid and correct and the calculations for the years in question are to proceed on that basis.

The appellants contend that the Minister was wrong in not calculating losses and expenses incurred in the hedging transactions until both sides of the hedge were closed out. I agree with counsel that the question is one of timing. The appellants cite Friedberg v. Canada, [1993] 4 S.C.R. 285 for the proposition that losses incurred may be deducted from income for income tax purposes when only one leg of a hedge is closed out in a particular taxation year. In that case, the taxpayer claimed business losses realized from the trading of gold futures on the commodities market. I can find no suggestion there that the trading involved transactions within a partnership or that the transactions were not otherwise at arm’s length. It seems to me that the losses, expenses and gains on the hedging transactions here in issue should be calculated when the leg of a particular hedge was finally closed out. The respondent concedes that if the appellants had truly closed out one leg of a hedge there would have been a disposition of securities even though the other leg was still held. For example, the Minister allowed losses to be deducted when both sides of a hedge were actually closed out but refused to recognize “losses” on the mere shifting of a position between the appellants.

Subsection 39(4) election

As we have seen, Lois Schultz filed a subsection 39(4) election in 1983 with a view to reducing her income tax burden. By doing so, she elected to have every Canadian security owned by her deemed to have been a capital property. In disposing of the appeals, the Tax Court Judge concluded, at page 2423:

The election by Mrs. Schultz contained in Form T123 is to be applied to her only and is not to apply to Dr. Schultz, since that election was a personal election by Mrs. Schultz.

The respondent attacks this conclusion in her cross-appeal. It seems to me that the respondent is correct that the matter is governed by subsection 96(3) [as enacted by S.C. 1973-74, c. 14, s. 30; 1980-81-82-83, c. 48, s. 52; 1985, c. 45, s. 13] of the Act. In the years in question, that subsection contained a number of rules one of which stated that a subsection 39(4) election “is not valid unless ... it was made or executed on behalf of the taxpayer and each other person who was a member of the partnership during the fiscal period”.[10] The evidence quite clearly shows that the subsection 39(4) election was executed by Lois Schultz personally. Accordingly, in computing her income from the partnership business in the years in question that election is of no assistance to her. The cross-appeal should succeed. In fairness to all parties and to the Tax Court Judge, it should be noted that subsection 96(3) was not argued in the Court below.

Disposition of costs below

The appellants submit that costs below should have been awarded to them because their appeals were largely allowed in consequence of the respondent’s position of agency being rejected. As the issue of partnership was not part of the assessment process, and was raised for the first time in the respondent’s reply to the notice of appeal before the Tax Court of Canada, costs should have been awarded to them rather than to the respondent. Alternatively, in these circumstances there should have been no order as to costs.

It is to be noted that Dr. Schultz did not succeed in claiming trading losses in the taxation years in question; nor did Lois Schultz succeed in claiming substantial losses.

I would not disturb the disposition of costs made by the Tax Court Judge, notwithstanding that the appellants enjoyed some measure of success in having their incomes assessed as partners, rather than in the hands of Dr. Schultz alone on the basis that Lois Schultz was his agent, and in persuading the Tax Court Judge that Lois Schultz should have the benefit of the subsection 39(4) election. The fact remains that, in reality, the appellants’ success before the Tax Court fell far short of that which they had sought—that income and losses should be treated for income purposes on the basis that each of them acted independently of the other. It has not been demonstrated that the disposition of costs, which was a matter for the discretion of the Tax Court Judge, should attract the intervention of this Court on the basis that it was not properly exercised. Nor am I persuaded that the appellants were denied an opportunity of making submissions on the issue of costs in the Tax Court proceedings.

Disposition

I would dismiss the appeal and allow the cross-appeal with costs. In the circumstances, there should be one set of costs in the appeal and one set of costs in the cross-appeal in this matter and in the appeal and cross-appeal in Court file No. A-482-93.

Linden J.A.: I agree.

McDonald J.A.: I agree.

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