Canada v. Robinson
A-8-96
Robertson J.A.
25/3/98
11 pp.
Appeal from Tax Court decision holding taxpayers entitled to deduct from income their proportionate share of $1.2 million tenant inducement payment-18 doctors, practising as partnership, entering into co-tenancy agreement with intention of developing professional building in which partnership would lease space-Remainder would be rented out-In fact, cotenancy was agreement respecting co-ownership of lands to be acquired in trust by company to be incorporated for that purpose and which would act as agent or bare trustee for co-tenancy-Lands acquired by bare trustee in trust for eighteen coowners-Each co-owner equal shareholder of corporate bare trustee which was to construct and operate new building on behalf of co-tenancy-In May 1985, partnership and bare trustee signed lease agreement in which partnership agreed to lease part of building, lease providing for payment of lease inducement totalling $1.2 million-All revenue received and expenses incurred by bare trustee with respect to building flowed through members of co-tenancy-In calculating income of each taxpayer, partnership did not include $1.2 million lease inducement payment as income of partnership, either for accounting or taxation purposes, apparently in belief payment constituted non-taxable capital benefit-But, for 1985 to 1988 taxation years, each doctor deducted respective share of rental inducement amount paid by bare trustee to partnership as deferred leasing cost amortized over ten years-Minister's main argument "artificial and not reasonable for landlord to pay rental inducement amount to himself"-Appeal allowed-Partnership and co-tenancy not separate legal entities-At common law and for tax purposes, partnership not constituting distinct legal person separate from members-In strict legal theory, true tenants under lease entered into by partnership individual partners existing as of date of lease-In present case, each of 18 doctors in partnership must be deemed to have been tenant under lease agreement-Based on principles of agency law, bare trustee cannot be deemed landlord-When bare trustee entered into lease agreement with partnership in 1985, bare trustee acted as agent for 18 co-owners-Bare trustee not party to contract-As principals, 18 co-owners deemed landlords-Therefore 18 doctors members of partnership and co-tenancy both tenants and landlords under agreement for lease-Sufficient for purposes of dealing with appeal to rely on ITA, s. 18(1)(a) which prohibits deduction from income except to extent "made or incurred by taxpayer for purpose of gaining or producing income"-Payment to oneself cannot be said to be in accordance with ordinary principles of commercial trading or accepted principles of business practice-Minister could also have relied on common law rule against contracting with oneself-Therefore, agreement to pay tenant inducement payment of no legal consequence and cannot be considered outlay or expense made for purpose of gaining or producing income within meaning of ITA, s. 18(1)(a)-Income Tax Act, S.C. 1970-71-72, c. 63, s. 18(1)(a).