18 doctors practising as a partnership acquired new premises in which the partnership would carry on the its practice as tenant of the doctors in their capacity of landlords. The individuals paid a tenant inducement payment of $1.2 million to the partnership, which was not included in the computation of the partnership's income but was deducted on a pro rata basis by the indiviuals in their capacity of property co-owners over 10 years.
After noting (at para. 12) that "in strict legal theory the true tenants under a lease entered into by a partnership are the individual partners existing as of the date of the lease", so that "the taxpayers paid themselves a tenant inducement" (para. 15), Robertson J.A. concluded (at para. 19) "that the agreement to pay the tenant inducement payment of $1.2 million was of no legal consequence and that it cannot be considered an outlay or expense made for the purpose of gaining or producing income".
He also stated (at para. 18):
In support of the proposition that a payment to oneself cannot give rise to a tax deduction, the Minister could have also relied on the common law rule against contracting with one"s self. As a general proposition it makes good sense, as does the proposition that one cannot sue one"s self: see Simpson v. Thomson (1877), 3 App. Cas. 279 (H.L.). But as with all propositions, there are exceptions. Surely, it cannot be doubted that it is possible for a partner to lease property to a partnership without offending the notion that one cannot contract with oneself: see: Brenner v. Rose, [1973] 1 W.L.R. 443. Individuals may have more than one legal personality and thus may contract with themselves in different capacities.
He also noted (at para. 19) that had the co-tenancy consisted of 18 persons of which only five were members of the partnership, "then arguably a different legal result might have been reached on the basis that the element of 'bargain' was present".