Guy Tremblay [TRANSLATION]:—This case was heard in Montreal, Quebec on June 7, 1977.
1. General point at issue
The Board must decide whether the amounts paid by the appellant to his wife in 1972, 1973 and 1974, when they were business partners, should be included in computing his income. So far as 1972 is concerned the appellant did not file a notice of objection before appealing to the Board.
2. Burden of proof
The burden is on the appellant to show that the respondent’s assessments are incorrect. This burden of proof derives not from one particular section of the Income Tax Act, but from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.
3. Facts
3.1 The appellant was engaged to his wife in 1965 when they opened a lingerie shop for women called La Boutique Violene Enrg.
3.2 The appellant invested $3,000 at that time and his wife $500. According to the appellant and his wife, they made a verbal agreement at that time to divide the profits equally.
3.3 In June 1966 the appellant and his fiancée, in order to satisfy her father, concluded a contract giving her 100% of the profits. This contract was entered as Exhibit A-2. In point of fact, the signing parties always believed this document to be valueless and always disregarded it.
3.4 As indicated in Exhibit I-3, the partnership declaration dated October 7, 1965 nevertheless only mentions the appellant as the owner of the business: “I am the only person involved in the business.”
3.5 On a bank form dated January 10, 1966 the appellant, declaring himself to be doing business as La Boutique Violene Enrg, gave his wife general authorization to make deposits and withdrawals from the bank account, and so on, for the business.
3.6 In December 1965 the appellant and his brother, Costas Marinis, signed a lease (Exhibit A-1) in respect of the premises of the business, on which the name of Violene Angers does not appear. The lease renewal documents were sent to the appellant.
3.7 The appellant’s wife always devoted all her time to the business, both before and after the marriage took place on July 30, 1966. Mr and Mrs Marinis were married under the regime of separation as to property (Exhibit I-4).
3.8 In so far as the appellant himself is concerned, he has been employed full time by Poly Plastic Inc since 1969. Nevertheless, it is he who kept the books for La Boutique Violene Enrg.
3.9 All income was always deposited in the account of La Boutique Violene Enrg, where the profits remained. The $3,000 and $500 initially invested by the appellant and his wife respectively were never paid back to them.
3.10 According to the wife, she never received a wage, apart from fifteen dollars per week before she married. She and her husband worked to build something together.
3.11 In 1975 the business was incorporated and each owned 50% of the shares.
3.12 The insurance policy for 1971 to 1974 (Exhibit I-1) is. made out to the following policyholder: “La Boutique Violene Enrg (George Marinis, Prop).”
3.13 A loan for the business was taken out in the name of George Marinis in 1974 (Exhibit 1-5).
3.14 As the result of a robbery, the business received $9,000 from theft insurance. This money was used toward buying a home registered in the name of the appellant’s wife.
3.15 The appellant’s wife never filed an income tax return. According to their accountant, all the profits had to be taxed in the hands of the appellant. A certain amount was nevertheless deducted as the wage of the appellant’s wife in computing the net income of the business. The net profit was included in computing the appellant’s, but not his wife’s income.
The respondent, through reassessments, added the amount’of the indicated wage of the appellant’s wife to his income.
3.16 Although the appellant failed to file a notice of objection in respect of 1972, he acted in accordance with the Act in respect of 1973 and 1974.
3.17 The notifications from the Minister in respect of 1973 and 1974 upheld the inclusion of the amounts indicated as his wife’s wage in computing the appellant’s income.
3.18 On May 21, 1976 the appellant filed an appeal in respect of 1972, 1973 and 1974.
3.19 At the start of the hearing counsel for the respondent filed a motion to dismiss the appeal in respect of 1972, on the grounds that, since the appellant had not filed a notice of objection within the prescribed deadlines, the Board did not have any jurisdiction to hear this appeal.
4. Specific points at issue
Does the Board have jurisdiction to hear the appeal lodged in respect of 1972?
Was La Boutique Violene Enrg operated by the appellant alone or by the appellant in partnership with his wife?
If this is a partnership, is the “discretion of the Minister’’ mentioned in subsection 74(5) of the new Act and in Regulation 900 absolute? If there is no partnership, must subsection 74(3) be applied?
5. Act, case law and comments
5.1 Motion to dismiss the appeal in respect of 1972
Was the appellant entitled to appeal even though he had not filed a notice of objection in respect of 1972? Does the Board have jurisdiction to hear this appeal?
Counsel for the respondent cited the following case law to support his argument that it does not:
Douglas Richard Wilson v MNP, 11 Tax ABC 331 ; 54 DTC 474;
Georges Pinard v MNP, 16 Tax ABC 68; 56 DTC 504;
Joseph Cioch v MNP, 40 Tax ABC 36; 66 DTC 18;
Donald M White v MNR, 40 Tax ABC 83; 66 DTC 50;
Leonard G Hough v MNP, 41 Tax ABC 168; 66 DTC 401;
Sam Lazis v MNP, [19701 Tax ABC 605; 70 DTC 1400;
Arnold Guetta v MNP, [1971] Tax ABC 77; 71 DTC 45.
The beginning of section 169 of the new Aci, which is concerned with appeals to the Tax Review Board, reads:
169. Appeal
Where a taxpayer has served notice of objection to an assessment under section 165, he may appeal to the Tax Review Board to have the assessment vacated or varied after either
(a) the Minister has confirmed the assessment or reassessed, or
(b) 180 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 text is clear. The legislator made the notice of objection a condition sine qua non for allowing an appeal to the Board.
The Board therefore does not have jurisdiction to hear the appeal in respect of 1972 and dismisses it.
5.2 Is there a partnership?
5.2.1 Argument of the appellant
The appeilant, who maintains that a partnership does not exist, cited paragraph 4 of Interpretation Bulletin IT-231, issued by the Department of National Revenue on June 30, 1975 concerning subsection 74(5) of the new Act. Subsection 74(5) and paragraph 4 of IT-231 state:
74. (5) Where husband and wife partners in business. Where a husband and wife were partners in a business, the income of one spouse from the business for a taxation year may, in the discretion of the Minister, be deemed to belong to the other spouse.
IT-231, para 4:
In determining whether or not either spouse is actively engaged in the business of the partnership, consideration is given to the amount of services rendered and any special expertise that such spouse contributes.
According to the appellant, the evidence showed that his wife worked full time in the business for the years in question; without actually receiving any remuneration. Even though the appellant invested $3,000 and his wife only $500, are not the services she rendered a guarantee of her contribution to the partnership? As she herself said, “We wanted to build something together.”
5.2.2 Arguments of the respondent
Counsel for the respondent, for his part, maintains that since partnership is not defined in the Income Tax Act, the principles governing the setting up of a partnership are the civil laws of the province in which the partnership is alleged to exist: In the case of Quebec, these are Articles 1830 to 1838 of the Civil Code.
With respect to the declaration of firm name submitted as Exhibit I-3, counsel for the respondent cited Articles 1834 and 1835 of the Civil Code:
1834. In partnerships for trading, manufacturing or mechanical purposes, or for the construction of roads, dams and bridges, or for the purpose of colonization, or of settlement, or of land traffic, the partnership must deliver to the prothonotary of the Superior Court in each district, in which they carry on business, a declaration in writing, in the form and subject to the rules provided in the statute intituled: Partnership Declaration Act.
The omission to deliver such declaration does not render the partnership null; it subjects the contravening parties to the penalties imposed by the Statute.
1834a. A similar declaration must be also made by any person carrying on business alone under a firm name.
1835. The allegations contained in the declaration mentioned in the last preceding article cannot be controverted by any person who has signed the same, nor can they be controverted, as against any party not being a partner, by a person who has not signed but was really a member of the partnership at the time the declaration was made; and no partner, whether he has signed or not, is deemed to have ceased to be a partner until a new declaration has been made and filed aforesaid, stating the alteration in the partnership.
Counsel argued that the appellant cannot therefore contradict the declaration (Exhibit 1-3) made on October 7, 1965. The article was written to protect third parties and respondent, being a third party, is entitled to rely unconditionally on this document in determining whether there was a partnership and tax the appellant accordingly.
Counsel for the respondent cited the following cases:
Dame Moreau v Litvack, [1959] R J 1360:
No 138 v MNR, 9 Tax ABC 419; 54 DTC 42:
Phillip Prunell v MNR, 20 Tax ABC 163; 58 DTC 545;
MNR v Samuel L Shields, [1962] CTC 548; 62 DTC 1343;
MNR v Robert P Ouellette and John E Brett, [1971] CTC 121; 71 DTC 5094;
Fred Spady v MNR, 5 Tax ABC 123; 51 DTC 385.
5.2.3 Legal Theory and comments
Hervé Rock and Rodolphe Paré comment on Article 1835 as follows in their book Traité de droit civil du Québec, vol 3, 360-361 :
The effect of our article is that once the partnership declaration is registered it cannot be challenged by those who have signed it. It is a generally recognized rule that one who signs a document does not have the right to question the facts to which he has attested by his signature. However, this applies only as against third parties; in so far as they are concerned, the declaration must be taken as true. As for those who signed the declaration themselves, they can prove that. the declaration does not speak, the truth if, in actual fact, there is no partnership between them.
In the case at bar, it may be said that this is not a partnership declaration, but a declaration of firm name, provided for in Article 1834a of the Civil Code. This declaration was also designed, however, to inform third parties and to bind the .signing party where they are concerned.
The spirit of these articles tends to indicate that third parties means the creditors of the partnership or business. Article 1836 of the Civil Code reads:
Article 1836. Any partner, although not mentioned in the declaration, may be sued jointly and severally with the partners mentioned therein, or the latter may be sued alone and, if judgment be recovered against them, any other partner or partners may be sued on the original cause of action on which such judgment was rendered.
The purpose of a document such as a declaration of firm name is to inform third parties and to make the person who signs it financially liable in order to protect the. creditor. Further, according to. Article 1836 of the Civil Code, the latter can sue others who have not signed and who may, in fact, be members of the partnership.
On these grounds, the Board believes that the respondent is entitled to sue the signing party and those who may, in fact, be members of the partnership actually operating the business, La Boutique Violene Enrg, even if the declaration had not been mentioned. Thus, for example, if a business owed the respondent a debt for source deductions, the Department of National Revenue would be entitled, under Article 1836 of the Civil Code (independent of any section applicable under the Income Tax Act) to sue the party signing the declaration of firm name of a business, as well as other persons of whom it could be proven thai they did indeed form a partnership operating the business that originated the debt.
However, should we not regard the Department of National Revenue from another point of view, when the latter intervenes to divide income which will give rise to debts, namely, the tax calculated on the income earned by the various persons in fact operating the business. The Department of National Revenue first seeks to determine whether a partnership exists before it can divide the income, establish the amount of tax owing and then become the. sole creditor. It becomes a creditor not of the partnership but of the partners individually, and this debt is not joint and several.
From this viewpoint, the Board is of the opinion that, in the case at bar, the respondent cannot be considered to be a creditor of the partnership. He is the creditor of each partner for the personal tax owed by each, on the condition, of course, that a partnership exists.
The Board further concludes that it must consider the evidence— other than merely the declaration of firm name—in order to determine whether there is a partnership between the appellant and his wife.
First, the appellant and his wife state that they had agreed between them to share the profits equally when they started the business in 1965. This agreement was a verbal one. The only proof that such an agreement existed is the oaths made by the appellant and his wife.
What is the written evidence—other than the declaration of the existence of the business—which on its very face seems to deny the existence of a partnership?
(a) The contract of June 14, 1966, wherein Violene Angers is said to be the full owner of the business.
The appellant and his wife, however, deny the value of this document (paragraph 3.3).
(b) The banking authorization of January 10, 1966 (paragraph 3.5).
(c) The lease concluded in December 1965 (paragraph 3.6).
(d) The contract of insurance for March 1971 to March 1974 (paragraph 3.10).
(e) The appellant’s tax returns never mentioned the existence of a partnership contract. The statement that the accountant had misled them is doubtful; stronger proof should have been submitted.
(f) Finally, even if the Board does not feel it is irrevocably bound by the declaration of firm name made in October 1965, this document nevertheless has an intrinsic and not insignificant probative value. Can the appellant, upon whom the burden of proof rests, say in light of all this written proof that his and his wife’s testimony in respect of the verbal agreement about the partnership contract alone reversed this burden? The Board does not believe so.
Additionally, does the fact that the business was incorporated in 1975 and that the appellant and his wife divided the shares between them equally necessarily imply that a partnership existed previously? The Board does not believe so.
Does the fact that all the income earned was left in the business’ bank account not imply, as the wife stated, that they wanted to build up a business together? The Board believes that it does. However, does that constitute proof that a partnership contract existed? In the Board’s view it does not. Mr Fisher, a Board member, gave an identical ruling in No 138 v MNR, cited earlier.
Since the appellant did not submit sufficiently strong proof, the Board must conclude legally that the partnership alleged by the appellant and his wife is nonexistent, the appellant being the sole owner of the business La Boutique Violene Enrg during 1973 and 1974.
5.2.4 Discretion of the Minister
In view of the fact that the partnership is nonexistent, subsection 74(5) of the new Act cannot be applied and the Board need not rule on the pertinence of the discretion that could have been exercised by the Minister.
5.3 Remuneration of the spouse
The question arises whether subsection 74(3) of the new Act should apply:
74. (3) Where a person has received remuneration as an employee of his spouse, the amount thereof shall not be deducted in computing the spouse’s income and shall not be included in computing the employee’s income.
The Board has no choice but to rule that this section cannot apply in the case at bar. According to the evidence however, the money in fact always remained in the bank account of the business, and hence the appellant’s wife did not draw a wage. Needless to say, that is all the more reason why no deduction can be allowed and all the net income from the business must be included in computing the appellant’s income.
6. Conclusion
The appeal is dismissed in accordance with the above reasons for judgment.
Appeal dismissed.