A-567-93
Her Majesty the Queen (Appellant)
v.
Mary Robinson and Evelyn Gertrude Robinson, The Trustees of the Percival Samuel Robinson Trust (Respondents)
Indexed as: Canadav. Robinson (C.A.)
Court of Appeal, Isaac C.J., Stone and McDonald JJ.A."Winnipeg, December 15, 1997; Ottawa, January 8, 1998.
Income tax — Income calculation — Appeal from T.C.C. decision trust not carrying on active business because neither exercised management role nor took any part in business of partnership under Manitoba law — Income Tax Act, s. 122(2)(c) exempting trust not carrying on active business from 29% tax rate imposed by s. 122(1) — Trust created to enter into partnership to carry on business — Partnership entered into to build, operate nursing home — Appeal allowed — S. 122(2)(c) construed in light of statutory matrix under which partnership formed, registered, operated; facts — Partnership Act of Manitoba, ss. 54, 63, when viewed in context of statute as whole, particularly s. 3 and definitions of —partnership—, —person— in s. 1, contemplating all partners of limited partnership carrying on business thereof — Persons composing partnership carry on business rather than limited partnership itself — That taking no part in management of business not meaning taxpayer not carrying on that business — That all of partners carried on business in 1988 what agreed to do pursuant to partnership agreement.
This was an appeal from a Tax Court decision that a trust did not carry on any active business in 1988 because it neither exercised a management role in the partnership nor took any part in the business thereof. The trust was created in 1970 to enter into a partnership for the purpose of carrying on business. That same day, the trustees entered into a limited partnership agreement in accordance with the laws of Manitoba to build and operate a nursing home. The limited partnership retained a corporation to build the home, and it has always been operated by a management corporation. In 1988 the limited partnership carried on the business of operating a nursing home. The trust was a limited partner in the limited partnership, and in 1988 derived income from the nursing home business. Income Tax Act, paragraph 122(2)(c) exempts an inter vivos trust, other than a mutual fund trust, which did not carry on any active business in the year from the application of subsection 122(1), which imposed a 29% tax rate. The Tax Court concluded that in The Partnership Act of Manitoba a management role in the partnership was equivalent to an active role in the business of the partnership.
The issue was whether the trust "did not carry on any active business" within the meaning of Income Tax Act , paragraph 122(2)(c) in 1988.
Held, the appeal should be allowed.
The statutory matrix under which the limited partnership was formed, registered and operated must be kept in mind even though, in the last analysis, it is the language of paragraph 122(2)(c) that must be construed in the light of that matrix and of the admitted facts. The appellant neither exercised a management role in the partnership nor took any part in the business. The Partnership Act, subsection 54(1) provides that it is only when a limited partner "takes part in the management of the partnership business" that he or she has the power to bind the partnership, and subsection 63(1) renders a limited partner, to the extent described in that subsection, "liable as if he were a general partner" if he or she "takes an active part in the business of the partnership". These provisions do no more than to state the circumstances in which the actions of a limited partner will bind the partnership and in which a limited partner will become liable in the same way as a general partner for the debts of the partnership. They had no decisive bearing on the issue before the Court. Viewed in the context of the statute as a whole, particularly section 3 (a partnership is the relation between persons carrying on a business in common, with a view of profit), and the definitions of "partnership" and "person" in section 1, these provisions clearly contemplate that all of the partners of a limited partnership carry on the business of the partnership. Whether a partnership be limited or general under the Manitoba statute, it must consist of "persons carrying on business in common, with a view of profit". It is, therefore, the persons who compose the partnership that carry on the business rather than the limited partnership itself. That the respondents took no part in the management of the business did not mean that it and the other limited partners did not carry on that business in conjunction with the general partners in that year. That all of the partners carried on the business in 1988 was what they had expressly agreed to do pursuant to the partnership agreement.
statutes and regulations judicially considered
Business Names Registration Act (The), S.M. 1965, c. 8.
Income Tax Act, S.C. 1970-71-72, c. 63, ss. 115(1)(a)(ii), 122(1) (as am. by S.C. 1988, c. 55, s. 96), (2)(c).
Limited Partnerships Act, R.S.O. 1990, c. L.16, s. 13.
Partnership Act (The), R.S.M. 1987, c. P30, ss. 1 "partnership", "person", 3, 52, 53, 54(1), 62, 63(1).
cases judicially considered
applied:
Reed (H.M.I.T.) v. Young, [1983] BTC 430 (Ch. D.); affd (1984), 59 TC 218 (C.A.); affd (1986), 59 TC 224 (H.L.) ; Grocott v. R., [1996] 1 C.T.C. 2311; (1995), 96 DTC 1025 (T.C.C.).
distinguished:
Minister of National Revenue v. Lane, Clifton H., [1964] Ex. C.R. 866; [1964] CTC 81; (1964), 64 DTC 5049; Randall (R M) v The Queen, [1985] 1 CTC 268; (1985), 85 DTC 5208 (F.C.T.D.); Wiss v MNR, [1972] CTC 264; (1972), 72 DTC 6231 (F.C.T.D.).
considered:
Pszon, Re, [1964] O.R. 229 (C.A.).
referred to:
Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.).
authors cited
Hepburn, L. R. Limited Partnerships. Scarborough, Ont.: Carswell, 1992.
APPEAL from Tax Court's decision that a trust did not carry on any active business in 1988 because it neither exercised a management role in the partnership nor took any part in the business of the partnership (Robinson (R.S.) Trust v. Canada, [1993] 2 C.T.C. 2685; (1993), 93 DTC 1179 (T.C.C.)). Appeal allowed.
counsel:
Robert M. Gosman for appellant.
Robert B. Goodwin for respondents.
solicitors:
Deputy Attorney General of Canada for appellant.
Robert B. Goodwin, Winnipeg, for respondents.
The following are the reasons for judgment rendered in English by
Stone J.A.: This appeal from a judgment of the Tax Court of Canada of July 26, 1993 [Robinson (R.S.) Trust v. Canada, [1993] 2 C.T.C. 2685], and the appeals in Court file nos. A-566-97, A-568-97 and A-569-97, were heard together. All four appeals raise a common issue, namely, whether in the 1988 taxation year the particular trust "did not carry on any active business" within the meaning of paragraph 122(2)(c ) of the Income Tax Act [S.C. 1970-71-72, c. 63]. If the trust did not carry on an active business in that year it will be freed of the requirement in subsection 122(1) [as am. by S.C. 1988, c. 55, s. 96] to pay tax at the rate of 29% on the amount taxable for that year.
Subsection 122(1) and paragraph 122(2)(c) as they stood in 1988, read as follows:
122. (1) Notwithstanding section 117, the tax payable under this Part by an inter vivos trust upon its amount taxable for a taxation year shall be 29% of its amount taxable for the year.
. . .
(2) Subsection (1) is not applicable for a taxation year of an inter vivos trust other than a mutual fund trust if the trust
. . .
(c) did not carry on any active business in the year;
The case at trial was heard on an agreed statement of facts. It will be convenient here to set out the salient facts, which appear in paragraphs 6-13 of that statement:
6. By agreement made the 31st day of August, 1970, the Appellant Trust and other parties agreed to form a limited partnership in accordance with the laws of the Province of Manitoba;
7. The partners entered into the limited partnership for the purpose of carrying on the business of constructing and operating a Nursing Home called the Holiday Haven Nursing Home, and generally all matters connected with the Nursing Home business;
8. As required by the provisions of The Partnership Act of the Province of Manitoba, a declaration of limited partnership was made and registered as required under the provisions of The Business Names Registration Act of the Province of Manitoba on the 2nd day of September, 1970 and such registration has been renewed from time to time as required by law and subsists as at the date of this Notice of Appeal;
9. The limited partnership constituted as above retained a corporation, Shaker Investments Ltd., to construct the Nursing Home;
10. The operation of the said Nursing Home has always been managed by a management corporation, pursuant to written management agreements. The current manager of the business operations of the limited partnership is Shaker Investments Ltd.;
11. In the 1988 taxation year, the limited partnership, pursuant to the limited partnership agreement, carried on the business of operating a Nursing Home and all matters connected with the Nursing Home business;
12. At all relevant times, the Appellant Trust was a limited partner in the said limited partnership;
13. In its 1988 taxation year, the Appellant derived income from the Nursing Home Business;
It is not suggested that the business that was carried on in 1988 was not an "active business".
The learned Tax Court Judge concluded from these facts and from certain provisions of The Partnership Act, R.S.M. 1987, c. P30, that the trust did not carry on any active business in 1988 because, as he put it at page 2688 of his reasons:
. . . the appellant never exercised a management role in the partnership. Nor did the appellant take any part in the business of the partnership. Thus the appellant did not carry on an active business in its 1988 taxation year.
The trust was created pursuant to a written agreement dated August 31, 1970. The following "powers and authorities" conferred on the trustees under clause 42 of Schedule A to that agreement are worthy of note:
(q) . . . to enter into partnership or limited partnership for the purpose of carrying on any business . . .;
(r) . . . to carry on any business or businesses either alone or in partnership . . . and do all things necessary or advisable for the carrying on of any such business or businesses . . .;
(s) With respect to any business, enterprise or investment or venture which the Trust may own or be financially interested in the Trustees shall be empowered and authorized to delegate such duties, with the requisite powers, to any employee, manager or partner, or otherwise as they may deem proper . . .;
(t) The net annual profit of any such business or the share of the Trust Estate in any such annual profits, shall be deemed to be the income of the Trust Estate . . . .
The trustees of the trust and those of the trusts involved in the other three appeals (described as "the parties"), entered into the partnership agreement dated August 31, 1970 with two corporations, Cedar Lake Enterprises Ltd. and St. Andrews Enterprises Ltd. They acknowledged in the first recital of that agreement that they wished to "enter into a partnership for the purpose of constructing and carrying on a Nursing Home and generally all matters connected with the Nursing Home business". Clause 1 of that agreement reads in part:
Cedar Lake and St. Andrews and the Parties shall carry on business as a limited partnership pursuant to the Partnership Act, Statutes of Manitoba, 1965 Chapter 59 and amendments thereto . . . . [Emphasis added.]
Clause 2 reads:
The purposes for which the partnership shall be carried on are to carry on the business of constructing and operating a Nursing Home and generally all matters connected with the Nursing Home business.
Control and management of the business together were provided for in clause 4, which reads in part:
St. Andrews and Cedar Lake together shall have sole and complete charge of the partnership and St. Andrews shall be responsible either to manage or arrange for the management of the said business and shall operate or cause the said business to be operated for the benefit of the said partnership.
The limited partnership was registered on September 2, 1970 pursuant to The Business Names Registration Act, S.M. 1965, c. 8. All of the parties declared by this registration that "the said partnership (commenced) (intends to commence) business on the 31st day of August 1970". Later in a "Changed or Alteration in Membership" form dated December 22, 1975, and registered pursuant to that statute, the partners declared in clause 1 that, "We have been carrying on business as a Nursing home . . . under the firm name and style of HOLIDAY HAVEN NURSING HOME". This declaration was repeated in renewal statements that were registered by the partners on August 31, 1975 and June 19, 1980.
The written management agreements into which the limited partnership entered acknowledged that the limited partnership had been "duly created and registered under the Partnership Act, Statutes of Manitoba, 1970, Chapter 30 and amendments thereto for the purpose of carrying on business as a nursing home under the firm, name and style of Holiday Haven Nursing Home". Clause 1 of each agreement is identical. It reads:
The Partnership hereby engaged the Manager to be employed by the Partnership for the purpose of providing management and supervisory services to the Partnership in general and specifically to perform the duties for the Partnership hereinafter set forth. [Emphasis added.]
As the Tax Court Judge noted, section 3 of The Partnership Act of Manitoba describes a "partnership" relationship in the following terms:
3 Partnership is the relation which subsists between persons carrying on a business in common, with a view of profit; but the relationship between members of an incorporated company or association is not a partnership within the meaning of this Act.
The Tax Court Judge also considered some of the language in sections 52 and 53, subsection 54(1), section 62 and subsection 63(1) of that statute.1 After doing so, he concluded as follows, at pages 2687-2688:
Thus a common law partnership is the relationship between persons carrying on a business in common with a view to profit. In a limited partnership one or more persons, the "general partners", are partners within the common law concept. A limited partner contributes capital to the partnership but is not liable for its debts beyond his or her specific capital contribution unless the limited partner takes part in the management of the partnership to the knowledge of the general partners. Then the limited partner "has the power to bind the partnership" pursuant to subsection 54(1). Taking part in the management of the partnership within subsection 54(1) is synonymous with taking "an active part in the business of the partnership" as stated in subsection 63(1).
Thus in the Partnership Act of Manitoba a management role in the partnership is equivalent to an active role in the business of the partnership.
The appellant submits that the Tax Court Judge misconstrued the effect of the Manitoba statute, and also that he paid insufficient attention to the undisputed evidence in the record. Counsel argues that the words "partnership" and "person" which appear in section 3 must be read in light of their definitions in section 1, which read:
1 . . .
"partnership" includes a limited partnership;
"person" includes a sole proprietorship, partnership, unincorporated association, syndicate or organization, a trust, and a natural person in his capacity as trustee, executor, administrator or other legal representative.
The appellant contends that because a "partnership" includes a limited partnership, and is the relationship that subsists between persons"including a trust" carrying on business in common with a view of profit, the appellant, like the general partners, did carry on the business of the limited partnership in common with a view of profit. She further contends that evidence that the respondent did in fact do so is contained in the various agreements already referred to as well as in the various declarations registered by the partnership from time to time pursuant to the provisions of The Business Names Registration Act of Manitoba.
The appellant relies on a line of cases in which it was held that a person is just as much a partner for tax purposes though he or she be a "silent" or "passive" partner: Minister of National Revenue v. Lane, Clifton H. , [1964] Ex. C.R. 866, at page 878; Randall (R M) v The Queen, [1985] 1 CTC 268 (F.C.T.D.), at page 270; Wiss v MNR, [1972] CTC 264 (F.C.T.D.), at page 264. I note, however, that each of these decisions concerned a general rather than a limited partnership.
The respondents argue that paragraph 122(2)(c) is "taxpayer specific". Their submissions are that the trust did not carry on any business in 1988 and that the only business that was carried on was carried on by the limited partnership. Several judicial decisions are relied upon, including that of Laidlaw J.A., speaking for himself, in Re Pszon , [1946] O.R. 229 (C.A.), at page 234, where he stated:
A person who devotes no time or attention or labour, by himself or by servants or employees, to the working or conduct of the affairs of an enterprise does not carry on the business of such enterprise. He might, for instance, be only financially interested. But to carry on business he must give attention, or perform labour, for the maintenance or furtherance of the undertaking, and devote time to the accomplishment of its objects.
That case involved the interpretation of bankruptcy legislation. Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.), at pages 277-279, involving the interpretation of English companies' legislation, is similarly relied upon.
That the income of a partnership receives particular treatment under various provisions of the Income Tax Act is a point well made by L. R. Hepburn, Limited Partnerships (Scarborough, Carswell, 1992), at page 5-3:
The basic principles for the taxation of income, transactions between the partners and the partnership, and transactions involving partnership interests apply equally to both general and limited partnerships and their partners. The fact that the liability of certain partners may be limited does not alter the manner in which partnership income is taxed . . . .
Although a partnership itself is not a taxpaying entity, the income (or loss) from the partnership activities is determined at the partnership level as if it were a separate person. Such income (or loss), whether or not actually distributed, is taxed on an annual basis in the hands of the members of the partnership according to their share. Income from the partnership generally retains its characteristics as to source and nature in the hands of the partners.
The statutory matrix under which the limited partnership was formed, registered and operated must, of course, be kept in mind even though, in the last analysis, it is the language of paragraph 122(2)(c) that must be construed in light of that matrix and of the admitted facts. The question, then, is whether the trust "carried on any active business" in 1988. It is true, as the Tax Court Judge observed, that the appellant never exercised a management role in the partnership nor took any part in the business. Subsection 54(1) of The Partnership Act provides that it is only when a limited partner "takes part in the management of the partnership business" that he or she has power to bind the partnership, and subsection 63(1) renders a limited partner, to the extent described in that subsection, "liable as if he were a general partner" if he or she "takes an active part in the business of the partnership".
In my view, the effect of these provisions do no more than state the circumstances in which the actions of a limited partner will bind the partnership as well as the circumstances in which a limited partner may become liable in the same way that a general partner is liable for the debts of the partnership. They have no decisive bearing on the issue that is before the Court in the present case.
That being said, these provisions must be viewed in the context of the statute as a whole, particularly section 3 and the definitions of "partnership" and "person" in section 1. These provisions, in my view, appear clearly to contemplate that all of the partners of a limited partnership carry on the business of the partnership. Whether a partnership be limited or general under the Manitoba statute, it must consist of "persons carrying on business in common, with a view of profit". It is, therefore, the persons which compose the partnership that carry on the business rather than the limited partnership itself. The position of limited partners under the corresponding English statute would appear to be similar to that prevailing under the Manitoba statute. In Reed (H.M.I.T.) v. Young , [1983] BTC 430 (Ch. D.),2 a tax case, Nourse J. stated at page 446:
For present purposes, the essential features of a limited partnership are twofold. First, there must be one or more general partners who are liable for all the debts and obligations of the firm. Secondly, there must be one or more limited partners who at the time of entering into the partnership must contribute capital (which cannot be drawn out during the continuance of the partnership) and who are not liable for the debts and obligations of the firm beyond the amount so contributed . . . . There is another distinctive feature, which is that a limited partner cannot take part in the management of the partnership business and does not have power to bind the firm . . . . These three features apart, there is no inordinate difference between a limited and an ordinary partnership. The result is that while the partnership is a going concern a limited partner adopts a pose as supine, and profits or loses as much or as little, as a sleeping partner in an ordinary partnership. The only difference between the two is that the sleeping partner may be rudely awoken to find that his liability for the debts and obligations of the firm is unlimited. [Emphasis added.]
That the appellant took no part in the management of the business does not, in my view, mean that it and the other limited partners did not carry on that business in conjunction with the general partners in that year. Neither must the direct evidence in the record be neglected. That all of the partners carried on the business in 1988 is precisely what they expressly agreed to do pursuant to clause 1 of the August 31, 1970, partnership agreement.
The recent decision of the Tax Court of Canada in Grocott v. R., [1996] 1 C.T.C. 2311, supports this conclusion. That case involved a question of whether a non-resident limited partner of a limited partnership formed pursuant to Ontario's Limited Partnerships Act, R.S.O. 1990, c. L. 16, had derived "incomes from businesses carried on by him in Canada" within the meaning of subparagraph 115(1)(a )(ii) of the Income Tax Act, despite the fact that the taxpayer had taken "no part in the control of the business" in the sense described in section 13 of the Ontario statute.3 The Tax Court concluded that the taxpayer had derived income from a business carried on by him in Canada. I would here adopt the following reasoning of Bowman J.T.C.C., at pages 2316-2317:
Limited partnerships are created by statute. In Ontario, unlike certain other provinces, the Limited Partnerships Act is a separate statute from the Partnerships Act. One of the most salient features is that the liability of the limited partner is, under section 9, limited to his capital contribution. Also, under section 13 a limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business. Mr. Grocott took no part in the control of the business. A limited partner of course has the right to be informed as to the business of the partnership and to receive his or her share of the income. A limited partner is nonetheless a partner in a partnership. It is simply that his liability is limited by statute provided that he does not participate in running the business.
I do not think it can be said that this limitation of liability and prohibition against any active part in the control of the business means that he is not carrying on business through the partnership. A non-resident partner who did not actively participate in the business of a general partnership but who was nonetheless a participant in the profits was held in Randall v. R. (sub nom. Randall v. The Queen, [1985] 1 C.T.C. 268, 85 D.T.C. 5208 (F.C.T.D.) to be carrying on business in Canada. I do not think that the fact that the partnership is a limited partnership alters the nature of the non-resident limited partner's participation. I trust that I am being neither . . . "results oriented" (Tennant v. R. (sub nom. Tennant v. Canada ), [1994] 2 C.T.C. 113, 94 D.T.C. 6505, 175 N.R. 332 (F.C.A.)) nor . . . "purely mechanical" (Swantje v. R. (sub nom. Swantje v. Canada ), [1994] 2 C.T.C. 382, 94 D.T.C. 6633, 174 N.R. 224 (F.C.A.)) in my interpretation of these provisions when I observe that it would be a rather surprising result if a non-resident who is a limited partner in a Canadian limited partnership that carried on business in Canada could escape taxation under section 115 on his Canadian source profits from the partnership on the basis that he was not carrying on business in Canada.4 [Footnote omitted; emphasis added.]
In the result, I would allow the appeal with one set of costs in this and the other three appeals, set aside the judgment of July 26, 1993, and restore the Minister's assessment. I would grant the same relief in the other three appeals for the same reasons which, upon filing in those matters, shall constitute my reasons for doing so.
Isaac C.J.: I agree.
McDonald J.A.: I agree.
1 52 A limited partnership may consist of one or more persons, who shall be called "general partners", and of one or more persons who contribute a specific or determinable amount, whether in cash, kind, specie, or money's worth or by any other means whatsoever, as capital of the partnership, who shall be called "limited partners".
53 Subject to section 63, general partners are jointly and severally responsible as general partners are by law; but limited partners are not liable for the debts of a limited partnership beyond the amounts by them respectively contributed to the capital of the limited partnership; except that where a limited partner has already paid into the capital of the limited partnership the amount of his contribution, he shall not be further liable for any of the debts of the partnership.
54(1) The general partners only are authorized to bind the partnership; but where a limited partner, to the knowledge of the general partners, takes part in the management of the partnership business, he has power to bind the partnership.
. . .
62 A limited partner may, by himself or his agent inspect the books of the firm and examine into the state and progress of the partnership business, and may advise as to its management.
63(1) Where a limited partner takes an active part in the business of the partnership, he is liable as if he were a general partner, to any person with whom he deals on behalf of the partnership and who does not know that he is a limited partner for all debts of the partnership.
2 Appeal dismissed (1984), 59 TC 218 (C.A.); appeal dismissed (1986), 59 TC 224 (H.L.).
3 S. 13(1) of that statute reads:
13. (1) A limited partner is not liable as a general partner unless, in addition to exercising rights and powers as a limited partner, the limited partner takes part in the control of the business.
4 In footnote 2, Bowman J.T.C.C. compared this conclusion with that which the Tax Court reached in the present case.