Taxation

• Author: International Law Group

A Texas partnership was involved in building an apartment complex in Dallas. The sale of the Dallas Complex incurred potential losses which Philip Douglas Backman and other Canadians tried to acquire so that they could use the losses as an income tax deduction in Canada. During a single day, a series of transactions made them assignees of the interests of the original American partners. The Canadians then "disposed of" the complex to the American partners, causing the realization of accounting losses to the Canadians. Under Section 96 of the Income Tax Act, they used the accounting losses as deductions in computing their 1988 taxable income figure.

In looking behind the transactions, however, the Canadian tax authorities disallowed the claim for partnership losses. The Canadian partners also obtained a one percent interest in a Canadian oil and gas property for $5,000. These partners, however, did not manage this interest, it never produced a profit, and production stopped soon after the acquisition. Canadian authorities also disallowed this aspect of the claim for partnership losses. Backman filed a notice of objection but the authorities confirmed the reassessment. His appeals to the Tax Court of Canada and then to the Federal Court of Appeal were unsuccessful. Both tribunals reasoned that the definition of a partnership was not met in this case. Upon review, the Supreme Court of Canada dismisses Backman's appeal.

If a taxpayer wishes to deduct Canadian partnership losses through Section 96 of the Income Tax Act, he or she has to qualify under the definition of partnership under the applicable provincial or territorial law. A...