Partnership Income – Considerations for Spouses and Common-law Partners: When is there a Partnership?
DiFlorio v The Queen, 2014 TCC 67
The issue was whether Ms DiFlorio was a partner with her husband in a business of selling drugs, and therefore jointly liable for any GST owed by the partnership. Specifically, the question was whether the business was carried out in common and the appropriate considerations in answering this question in circumstances of spouses.
Chief Justice Rip, in a common-sense decision, provided a list of factors to consider and stated that a higher standards applies to finding an partnership as between spouses than as between non-spouses. Where the evidence is equally consistent with a good spousal relationship (supportive of spouse’s business as a partner in marriage) as with a partnership (business partner) the courts won’t infer a partnership.
The GST assessment followed on the heels of a net-worth assessment under the Income Tax Act as against both Mr and Mrs DiFlorio (since divorced) for their 2004-06 tax years. They were both assessed as having failed to report income from a partnership carrying on the business of selling drugs for race horses. Mrs DiFlorio appealed the assessment and consented to a judgment reducing the assessment to less than $28,000 a year.
The husband was charged with, and pled guilty to, criminal charges related to the business of the partnership. The appellant was not charged. She claimed to be a stay at home mom who had no knowledge of her husbands work. She did most of the banking, shared bank accounts with Mr DiFlorio, deposited cheques there. The bills were paid by Mr DiFlorio. She occasionally gave packages to couriers when they came to the house, but she never went to the courier business or boxed the packages, and knew non of the addressees.
She was licensed as a race horse owner, but claimed not to know about this. The address on the license was her husbands work.
The CRA auditor noted that although the Appellant was not charged with criminal activity, she benefited from her husband’s criminal activity, used the proceeds to support her lifestyle and day-to-day expenditures, and didn’t have other significant sources of income. The CRA saw her actions as being involved in the business activities and properly included in the GST assessment. The Court noted that the CRA has not made a finding that the appellant was involved in the dug business or racing business but allocated 50% of the increased net worth to her.
The activities took place in Ontario, and the TCC referred to the Ontario Partnerships Act (“OPA”) to determine if a partnership existed. Section 2 of the OPA states that a “Partnership is the relation between persons carrying on a business in common with a view to profit”. Section 3 of the OPA provides a list of rules that must be referred to when determining whether a partnership exists, being:
In determining whether a partnership does or does not exist, regard shall be had to the following rules:
1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.
2. The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.
3. The receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that the person is a partner in the business, but the receipt of such a share or payment, contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular,
(a) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as such;
(b) a contract for the remuneration of a servant or agent or a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such
;(c) a person who, (i) was married to a deceased partner immediately before the deceased partner died, (ii) was living with a deceased partner in a conjugal relationship outside marriage immediately before the deceased partner died, or (iii) is a child of a deceased partner, and who receives by way of annuity a portion of the profits made in the business in which the deceased partner was a partner is not by reason only of such receipt a partner in the business or liable as such;
(d) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender is to receive a rate of interest varying with the profits, or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such, provided that the contract is in writing and signed by or on behalf of all parties thereto;
(e) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such.
The Supreme Court of Canada has determined that the essential ingredients of a partnership are( see Continental Bank Leasing Corp v R,  4 CTC 77; Backman v R, 2001 SCC 10; Spire Freezers Ltd v R, 2001 SCC 11):
- carried on in common
- with a view to profit
The existence of the essential ingredients is a fact specific inquiry(facts and circumstances test) that is based on subjective intentions of the parties (what they actually intended) as determined from all of the facts (see Continental Bank Leasing Corp v R,  4 CTC 77).
The only issue here was whether the business carried on with a view to profit was carried on in common or not. The use of the phrase “in common” means that partners carry on a business based on a contract (see Backman v R, 2001 SCC 10). The contact can be express or inferred from conduct. The following factors indicate the existence of a partnership:
- Sharing profits;
- Sharing responsibility for losses, including guaranteeing partnership debts;
- Jointly owning property;
- Controlling the partnership business;
- Participating in management;
- Stating an intention to form a partnership in a contract;
- Making government filings showing partnership (e.g., registration under business names legislation, tax returns);
- Access to information regarding the business;
- Signing authority for contracts, bank accounts;
- Holding oneself out as a partner;
- Contributing money, services, or property as capital (especially if the contribution is complementary to the contribution of others for the purpose of running a business);
- Full-time involvement in the business;
- Use of a firm name, perhaps in advertising; and
- A firm having its own personnel and address.
Regard must be had to the whole facts of the case ( Continental Bank Leasing Corp v R,  4 CTC 77), though a common-sense lens that looks at the factors in light of the surrounding circumstances (see Backman v R, 2001 SCC 10).
In the context of Marriage the Courts are reluctant (though not unwilling) to find a partnership in the absence of an express agreement (Sedelnick Estate v MNR,  2 CTC 2102). Evidence of a good spousal relationship is not enough. There is a different standard or proof for spouses than as between non-spouses. Specifically:
- Where the conduct of spouse is equally consistent with the community of interest created by marriage as that of a partnership, the courts won’t infer a partnership between spouses – Sedelnick;
- being joint owners of income producing property and using joint bank accounts is not indicative of a partnership in the marital context – Bains v The Queen, 2005 FCA 378;
- Having registered and signed ban loans are not determinative of a partnership between spouses – Scott-Trask v The Queen, 2008 TCC 638;
The community of interest goes beyond that created by marriage when there is clear evidence of:
- Sharing of profits – Loewen v R,  GSTC 6; Neufled v R, 2009 TCC 352;
- Signed partnership agreement – Stefanson Farms Ltd v R, 2008 TCC 682;
- Sharing responsibility for losses by guaranteeing partnership debts – Duivenvoorde v R, 2011 TCC 525;
- Contributing services and full-time involvement in the business – Duivenvoorde; or
- filing income tax returns as partners – Denhaan v R, 2008 TCC 126.
In this case, the Court accepted that the appellant was a stay at home mom. Running errands is not the same as participating in the business of the partnership. It’s not unreasonable for a spouse to sign documents when asked by his/her spouse without realizing the legal significance. The evidence was consistent with a spouse supporting the other spouse’s business as a partner in marriage and not a business partner.
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