Date: 20050712
Docket: T-215-05
Citation: 2005 FC 978
BETWEEN:
PATRICIA MALOSHICKY
Applicant
- and -
CANADA CUSTOMS REVENUE AGENCY
Respondent
AND
T-216-05
BETWEEN:
HENRY MALOSHICKY
Applicant
- and -
CANADA CUSTOMS REVENUE AGENCY
Respondent
[1] Henry and Patricia Maloshicky, husband and wife, operate a firewood business. They buy the wood then split, sell and deliver it. They also construct firewood splitting machines which they market through a corporation.
[2] For many years, on the advice of accountants they have had from time to time, they treated the business as a 50/50 partnership for income tax purposes. Then, a new accountant said the previous accountants had got it wrong. He characterized the business as being the sole proprietorship of Patricia, with Henry's role being limited to that of an employee. If so, 100 per cent of certain deductions or losses could be set off against Patricia's other income. Henry had no other income to speak of.
[3] The 2003 tax returns were filed on that basis. The accountant also requested that the tax years 1997 through 2002 likewise be reassessed on the basis that the business should have been reported as a sole proprietorship belonging to Patricia Maloshicky. The Minister not only refused to reassess the previous years on that basis, but reassessed the 2003 tax year on the basis of a 50/50 partnership. That is a matter which will come up in the Tax Court.
[4] What is before the Federal Court is the judicial review of a portion of what is commonly called the Fairness Package under the Income Tax Act. Section 152(4.2) provides that the Minister may, at any time after the expiration of the normal reassessment period for an individual (three years), reassess tax, interest or penalties at the request of the taxpayer.
[5] The three taxation years subject to the Fairness Package are 1997, 1998 and 1999.
[6] In a decision set out in letters dated 27 October 2004, Ms. Pat St-Hilaire, Office Audit, Canada Customs Revenue Agency ("CCRA") declined to reopen the 1997 to 1999 tax years. She was of the view that the original filings were correct and that the business was operated as a non-arm's length partnership, rather than as a sole proprietorship. The original allocation of 50 per cent of the profits and loss to each was a reasonable allocation under subsection 103(1.1) of the Income Tax Act.
[7] The Maloshickys took their complaint to the next level. By letter dated 10 January 2005, Ian Gray, Director, Winnipeg Tax Centre, CCRA, upheld Ms. St-Hilaire's decision. This is the judicial review of Mr. Gray's decision.
ISSUES
[8] The only issue properly before this Court is whether the Minister properly exercised discretion in refusing to reopen the 1997, 1998 and 1999 taxation years.
[9] Section 152(4.2) of the Income Tax Act gives the Tax authorities the discretion to grant relief against the operation of certain provisions of the Act in order to reduce tax payable even though the normal deadlines for reassessing have expired. In determining the amount of any refund or a reduction of an amount otherwise payable, "the Minister may, if application therefor has been made by the taxpayer, reassess tax, interest or penalties payable..."
STANDARD OF REVIEW
[10] The applicable standard of review is reasonableness, as stated by the Federal Court of Appeal in Lanno v. Canada (Customs and Revenue Agency), 2005 FCA 153. A reasonable decision is not necessarily a correct decision. There can be more than one reasonable decision. It does not matter whether or not I would have made the same decision. The reasonableness standard means that the decision should not be interfered with unless clearly wrong in the sense of being based on a wrong principle or a misapprehension of the facts (Dr. Q. v. College of Physicians and Surgeons of British Columbia, [2003] 1 S.C.R. 226 and Law Society of New Brunswick v. Ryan, [2003] 1 S.C.R. 247). In Ryan, the Court stated at paragraph 48:
An unreasonable decision is one that, in the main, is not supported by any reasons that can stand up to a somewhat probing examination. Accordingly, a court reviewing a conclusion on the reasonableness standard must look to see whether any reasons support it.
THE FACTS
[11] The Maloshickys, who are self-represented, began their submissions with their marriage in 1985. At that point, Henry operated a general contracting business under the registered name of Archer Services. He also cut, split and sold firewood under his own name. Following their marriage, Archer Services was renewed as the business name of both Henry and Patricia as regards the general contracting business. They "thought this is what is done when you are married". However, the firewood business, which at that point did not include wood splitting machines, remained a completely separate enterprise in Henry's name.
[12] The businesses lay fallow from 1986 through 1989 as Henry was disabled. The firewood business began again in 1989. Tax returns were filed on the basis that it was Henry's business. In 1994 they hired Coopers & Lybrand who recharacterized the firewood business as a 50/50 partnership. Henry and Patricia say they were not consulted but do say they were under the impression that this is how things were done in a marriage. What they do not say, and what appears in the CCRA file, is that Coopers & Lybrand, as the Maloshickys' representative, also requested that the business income and losses on Mr. Maloshicky's 1989 to 1991 tax returns be adjusted retroactively to reflect that the business was a 50/50 partnership. That request was granted. The business was reported on that basis until the 2003 tax returns were filed.
[13] In 2004, the Maloshicky's new accountant filed a return for the 2003 year on the basis that the wood splitting business was solely owned by Patricia. He requested that the years 1997 through 2002 be readjusted. Since the years 1997 through 1999 were otherwise timebarred, he invoked the "Fairness Package".
THE LAW
[14] In Information Circular 92-3 "Guidelines for Refunds Beyond the Normal 3-year Period" the CCRA states it will issue a refund or reduce the amount owed "if it is satisfied that such a refund or reduction would have been made if the return or request had been filed or made on time, and provided that the necessary assessment is correct by law and has not been previously allowed".
[15] Ms. St-Hilaire was not satisfied that the business was a sole proprietorship. In her view, the business had been correctly described as a partnership, and that a 50/50 split was reasonable, if not generous. In discussions, particularly with Mr. Maloshicky, he suggested it was a 100 per cent partnership (a contradiction in terms) but if not, it should be something like 97/3 in favour of his wife. They discussed the possibility of her sending a questionnaire which might assist in determining a reasonable partnership division. However, she ultimately decided against that on the grounds that the best possible result for the Maloshickys was a 50/50 split.
[16] There is no dispute over how the partnership worked. Patricia supplied the capital and Henry supplied, if not 100 per cent, then almost 100 per cent of the labour. Patricia had other employment. She was a teacher. Henry had no other employment. It was Henry who collected the wood, split it, sold it and delivered it. It was also Henry who developed the wood splitter and either constructed them himself or hired others to do so.
[17] The Maloshickys are sadly mistaken as to the meaning of a partnership. They seem to think that both have to be contributing capital and labour. Since all the capital was supplied by Patricia (which is not disputed) they conclude that there is no partnership. He or she who provides the capital owns the business. They rely on the Partnership Act of Manitoba, CCSM c. P-30, but they cite no specific section. There is nothing in that Act which aids the Maloshickys. Section 3 provides that partnership is the relationship between persons carrying on a business in common with a view of profit. Section 4 provides that the receipt by a person of a share of the profits of a business is prima facie proof that he or she is a partner therein. There is nothing peculiar to Manitoba law requiring that all partners contribute capital. There are any number of ways in which partners may establish their mutual rights and obligations. Section 27 provides that the interests of partners are to be determined, subject to any agreement, express or implied, to the contrary that they share equally in the capital and profits of the business and must contribute equally towards the losses. It was expressed or implied that the capital was Patricia's, but the labour was Henry's, and a 50/50 split was objectively reasonable, be it under Manitoba law or section 103(1.1) of the Income Tax Act.
OTHER ISSUES
[18] In their submissions following the initial decision of Ms. St-Hilaire, the Maloshickys brought in issue taxation years 1985 through to 2003. Except for 1997 - 1999, those years are not subject to this decision. They will have to make other requests if they consider that the years 1986 through 1996 should have been treated as Patricia's sole proprietorship as regards the wood splitting business.
[19] They also make comments with respect to Archer Services. Archer Services eventually became a business name of Archer Services Inc., which they incorporated in 1996. The respondent mildly objected to the fact that a number of documents which were produced in the applicant's record were not before the CCRA. Consequently, I do not take them into account, but cannot fail but to note that they do not help the Maloshickys. For instance, they are equal shareholders in Archer Services Inc., through which they market firewood splitting machines.
[20] Mr. Maloshicky also complains with respect to the 2003 tax year. They filed on the basis that the wood splitting business was Patricia's. They were reassessed to divide a business loss 50/50. Patricia has appealed. The CCRA claims that Henry cannot appeal because in any event the taxes he owes are still "nil". That decision is not before me as it does not relate to the 1997 - 1999 returns.
COSTS
[21] Costs normally follow the event, and I see no reason why I should depart from that rule in this case. The Maloshickys saw fit to fire their accountant because he wanted to consult a lawyer. They came to Court with a completely ill-conceived concept of partnership. Consequently, the respondent shall have its costs. However, there shall be only one preparation for hearing and one hearing fee.
"Sean Harrington"
Judge
Ottawa, Ontario
July 12, 2005
FEDERAL COURT
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKETS: T-215-05, T-216-05
STYLE OF CAUSE: PATRICIA MALOSHICKY
AND
CANADA CUSTOMS REVENUE AGENCY
AND HENRY MALOSHICKY
AND
CANADA CUSTOMS REVENUE AGENCY
PLACE OF HEARING: WINNIPEG, MANITOBA
DATE OF HEARING: JULY 6, 2005
REASONS FOR ORDER : HARRINGTON J.
DATED: JULY 12, 2005
APPEARANCES:
Patricia Maloshicky FOR APPLICANT (self)
Henry Maloshicky FOR APPLICANT (self)
Gérald Chartier FOR RESPONDENT
SOLICITORS OF RECORD:
John H. Sims, Q.C. FOR RESPONDENT
Deputy Attorney General of Canada