Date: 19981127
Docket: 97-3592-IT-I
BETWEEN:
LUBOMIR POLIACIK,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Mogan, J.T.C.C.
[1] The Appellant is a lawyer who was called to the Bar of Ontario in 1983. From 1983 to 1994, he practised law in Toronto in partnership with K.J. Torrens. That partnership was dissolved in 1994. In 1993, the Appellant had met Paul Crum-Ewing, a lawyer who practised in North York, one of the northern suburbs of Toronto. In 1994, the Appellant entered into a business association with Paul Crum-Ewing. I use the term "business association" because the principal issue in this appeal is whether the Appellant and Paul Crum-Ewing were partners in 1995.
[2] When the Appellant filed his income tax return for 1995, he claimed a goods and services tax ("GST") credit in the amount of $2,496.38 according to his Notice of Appeal. According to the Respondent's Reply to the Notice of Appeal and Exhibit R-1 (the Appellant's 1995 income tax return) the claimed GST credit was $2,532.97. The difference in the amounts is not material or relevant because the issue is one of partnership. Although this is an appeal from an assessment under the Income Tax Act, the relevant legislation is the GST portion of the Excise Tax Act. Subsection 253(1) requires the Minister of National Revenue to pay a rebate of GST if certain conditions are met; and subsection 253(5) provides that certain parts of the Income Tax Act relating to objections and appeals apply to an assessment of the GST rebate. The Minister refused the Appellant's claim to a GST rebate on the ground that the Appellant was not an employee of a registrant or a member of a partnership which was a registrant. The Appellant has elected the informal procedure.
[3] The Appellant (a lawyer) and counsel for the Respondent agreed in argument that the relevant part of subsection 253(1) as it applied to the 1995 taxation year states:
253(1) Where
(a) a musical instrument, motor vehicle, aircraft or any other property or a service is or would, but for subsection 272.1(1), be regarded as having been acquired, imported or brought into a participating province by an individual who is
(i) a member of a partnership that is a registrant, or
(ii) an employee of a registrant (other than a listed financial institution),
...
the Minister shall ... pay a rebate in respect of the property or service to the individual for each calendar year equal to ...
The only issue is whether the Appellant was in 1995 "a member of a partnership that is a registrant" within the meaning of subparagraph 253(1)(a)(i).
[4] When the Appellant and Mr. Crum-Ewing decided to practise law together, they entered into a written agreement dated March 31, 1994 which is Exhibit A-1. The agreement is interesting in the sense that it never refers to the Appellant and Mr. Crum-Ewing as "partners". The agreement is short but I shall set out only the parts which I consider most relevant:
WHEREAS the parties hereto have agreed to become associated in the practice of Law under the name of CRUM-EWING/POLIACIK.
NOW THIS AGREEMENT WITNESSETH:
1. CRUM-EWING and POLIACIK shall be considered as carrying on independent practices – CRUM-EWING a non-litigation practise and POLIACIK a litigation practise.
2. All fees billed by CRUM-EWING shall be considered CRUM-EWING fees and all fees billed by POLIACIK shall be considered POLIACIK fees.
3. CRUM-EWING agrees to be solely liable for the operating expenses of the office, including providing bookkeeping services to the practice.
4. The parties agree to operate joint General and Trust Bank Accounts in the name of CRUM-EWING/POLIACIK.
5. CRUM-EWING shall be the sole signing officer of the Trust Account. Both parties shall have signing authority on the General Account. Poliacik signing authority shall extent (sic) to client's disbursements only.
6. The parties agree on the following annual fee split:
(a) On the first $100,000.00 received on fees billed by Poliacik the split shall be 50% Poliacik and 50% Crum-Ewing.
(b) On the next $25,000.00 received on fees billed by Poliacik the split shall be 60% Poliacik and 40% Crum-Ewing.
(c) On the next $25,000.00 received on fees billed by Poliacik the split shall be 80% Poliacik and 20% Crum-Ewing.
(d) On the next $25,000.00 received on fees billed by Poliacik the split shall be 90% Poliacik and 10% Crum-Ewing.
All billings over $175,000.00 Poliacik 90% and Crum-Ewing 10%.
7. ... Poliacik shall pay his own Canada Pension, Employers Health Tax, Income Tax and any other applicable Government Taxes. He shall also pay his Law Society membership fees and his Errors and Omission insurance fees.
9. Poliacik shall be entitled to receive Ten per cent (10) of fees billed and collected by Crum-Ewing from clients introduced to Crum-Ewing by Poliacik.
10. The parties agree that Poliacik's share of the annual operating expenses of the joint practice shall be $62,500.00 for the first full year of practice, which sum shall be adjusted as the operating expenses of the practise increases. The parties agree that until 50% of Poliacik's fees billed and collected and Poliacik's share of Crum-Ewing's fees billed and collected total the sum of $62,500.00, Poliacik shall not be entitled to receive his share of Crum-Ewing's fees billed and collected.
11. Poliacik agrees that any disbursements incurred by Poliacik on litigation files which prove to be uncollectable, shall be set off against Poliacik's share of fees billed and collected.
[5] The Appellant was still practising with Mr. Crum-Ewing at the time of hearing this appeal (November 1998) but he states that certain terms of Exhibit A-1 have been changed in fact and in practice even if Exhibit A-1 has not been amended. For example, the Appellant and Crum-Ewing can each sign cheques on the General Account and the Trust Account. The Appellant's automobile and cellular phone expenses are not "operating expenses of the office" within paragraph 3 but are expenses which the Appellant alone must pay like his Law Society of Upper Canada fees in paragraph 7. Mr. Crum-Ewing or his family company own the building in which they practise. The Appellant does not pay any specific amount as rent but any rent paid for use of the building by the Appellant and Crum-Ewing is an "operating expense of the office" within paragraph 3.
[6] The Appellant entered as Exhibit A-2 a number of accounts which he had submitted to clients in June 1995. Each account is on the letterhead "Crum-Ewing/Poliacik" with the address, phone and fax numbers of where they practise together. The Appellant argued that he and Mr. Crum-Ewing were partners in 1995 because they operated under a common name "Crum-Ewing/Poliacik"; they had common trust and general accounts on which each could sign; the accounts sent out bore the common name; they shared all of his (i.e. the Appellant's) billings; they shared office expenses like payroll and supplies; and they both promoted their common business. I can accept all of the above arguments except the question of whether they shared the office expenses. In my opinion, paragraphs 3, 6 and 10 of Exhibit A-1 show that Crum-Ewing was responsible for all of the operating expenses of the office and that the Appellant was to reimburse him for $62,500 of those expenses which would be the Appellant's share of operating expenses for the first full year of practice. According to paragraph 10, the Appellant did not participate in Crum-Ewing's fees billed and collected (even to the limited extent permitted by paragraph 9) until Crum-Ewing has recovered $62,500 from the fees billed and collected by the Appellant.
[7] For the reasons set out below, I have concluded that the Appellant and Crum-Ewing were not partners at any time in 1995. As lawyers, they carefully avoided calling themselves partners in Exhibit A-1. When I asked the Appellant why they had not declared their association to be "partners" in Exhibit A-1, he stated that they had met for the first time in 1993 and they did not know each other well enough when they signed Exhibit A-1 in March 1994 to accept the risks of partnership. To me, that is an indication that they intended in March 1994 not to be partners. Intention is an important factor when a court is trying to determine if partnership existed in the absence of an expressed declaration. Their business association may have developed into partnership by 1998 but I am directing my mind only to 1995 and the evidence. There is no evidence that the conduct of the parties (the Appellant and Crum-Ewing) had in fact changed from the terms of Exhibit A-1 to a sufficient degree by the end of 1995 to justify a conclusion that the Appellant and Crum-Ewing had changed their original intention not to be partners.
[8] The Ontario Partnerships Act states in section 2:
Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, ...
The Appellant and Crum-Ewing shared certain premises; they co-operated in the practice of law; and, with defined limitations, they shared certain fees which had been billed and collected but that degree of sharing and co-operation does not necessarily mean that in 1995 they were carrying on business in common with a view to profit. The Appellant's 1995 income tax return does not contain a statement of profit and loss indicating that he carried on business with any partner. Line 122 on the face of the return (Net partnership income) does not show any amount. The Appellant stated in evidence or argument that he did not attach to his return the Revenue Canada partnership form because he was not entitled to a fixed percentage of profit. I would say that he was not entitled to any percentage of profit. What he was entitled to was (i) a varying percentage of the fees which he billed and collected (paragraph 6 of Exhibit A-1 uses the word "received"); and (ii) if his fees billed and collected reached a certain threshold, 10% of the fees billed and collected by Crum-Ewing from clients introduced by the Appellant.
[9] Revenues and Expenses are the components of profit. There is a big difference between sharing revenues (fees) and sharing profit. The Appellant shared all of his fees with Crum-Ewing but he did not participate in all of Crum-Ewing's fees. Nor did he share in the operating expenses of the office. A person who shares only fees and not expenses will usually end up with a net amount of income but a person who pays all of the expenses could end up with a loss. I should think it is an essential ingredient of partnership that all partners have an equal opportunity for profit and equal risk of loss even if such profit or loss is distributed or allocated in unequal portions. There is no evidence that the Appellant and Crum-Ewing had an equal opportunity for profit or equal risk of loss in 1995. Exhibit A-1 indicates that the opposite is true.
[10] There is no evidence that the Appellant and Crum-Ewing filed reports with the Law Society of Upper Canada in 1995 showing themselves to be partners. Paragraph 7 of Exhibit A-1 indicates that, by paying his own Law Society membership fees and his own Errors and Omissions insurance cost, the Appellant was not a partner of Crum-Ewing. The Appellant made no capital contribution to the firm when he joined Crum-Ewing's established practice.
[11] In making the assessment under appeal, the Minister assumed that the Appellant was not a member of a partnership that is a registrant. The Appellant has fallen a long way short of proving that he was in partnership with Crum-Ewing in 1995. Even if he had proven such a partnership, it appears that the GST registration number (R116015645) appearing on all of the firm's bills (Exhibit A-2) was registered only by Mr. Crum-Ewing. I am not certain, however, if the requirement that the partnership be a registrant is mandatory or directory if one partner is a registrant and all of the firm's bills are issued disclosing his registration number. This question will be left for another time because of my conclusion that the Appellant and Crum-Ewing were not partners at any time in 1995. The appeal is dismissed.
Signed at Ottawa, Canada, this 27th day of November, 1998.
"M.A. Mogan"
J.T.C.C.