Continental Bank Leasing Corp v Canada

Continental Bank Leasing Corp v Canada
Supreme Court of Canada
Hearing: January 26, 1998
Judgment: September 3, 1998
Full case name Continental Bank Leasing Corporation v Her Majesty the Queen
Citations [1998] 2 SCR 298
Docket No. 25532
Holding
A partnership does not dissolve by section 34 of the Partnership Act simply because a bank, contrary to the Income Tax Act section 174, unlawfully owns or invests in one of the partners.
Court Membership
Reasons given
Majority McLachlin J. (para. 103) joined by L'Heureux-Dubé, Gonthier, Cory, Iacobucci, and Major JJ.
Dissent Bastarache J.

Continental Bank Leasing Corp. v Canada, [1998] 2 SCR 298 is a commercial law and tax law decision of the Supreme Court of Canada where the Court validated a partnership arrangement where one partner's involvement was contrary to the Bank Act. A separate hearing, Continental Bank of Canada v Canada [1998] 2 SCR 358, dealt with the related transactions that followed the creation of the partnership.

Background

Continental Bank, a banking corporation, decided to wrap up its operations in December 1986 by selling its assets and those of its subsidiaries. Central Leasing Corp agreed to buy most of the leases in one of Continental's fully owned subsidiaries, Continental Bank Leasing Co. Because the assets were depreciable, and Leasing Co would have to pay recaptured Capital Cost Allowance (CCA) on them, Central Leasing Corp proposed a partnership arrangement wherein Leasing Co could retain its deductible CCA.

In the series of transactions, which occurred over a period of five days during the Christmas holidays, Leasing Co entered into a partnership with some of Central Leasing's subsidiaries. Leasing Co then transferred the leases to the partnership, in a rollover under section 97(2) of Canada's Income Tax Act, in exchange for a 99% interest in the partnership. Then, Leasing Co transferred its share in the partnership to its parent corporation, Continental Bank, in a tax-free transfer under section 88(1) of the Income Tax Act. Continental Bank promptly sold the shares in the partnership to Central Leasing, and Leasing Co was able to avoid paying tax on its recovered CCA.

Analysis

Definition of "Partnership"

Justice Bastarache outlines the details of the transactions and discusses the elements of the definition of a "partnership" in section 2 of the Partnership Act. Bastarache J ultimately dissents on the later issue of Continental Bank's contravention of the Banking Act, but the court unanimously agrees that the initial partnership between Continental Bank Leasing Co and the subsidiaries of Central Leasing Co was valid.

The court defines a "partnership" as having three elements: it is a business, it is carried on in common, and it is carried on with a view to profit. On the first, Bastarache J passes the partnership because it is a trade, occupation, or profession as per section 1(1)(a) of the Partnership Act. The partnership is also deemed to carry on business in common because, as long as management and duties are outlined in the partnership agreement, there are no requirements about the length of a partnership relationship, or that the partnership need expand its business in that time—even if, as in this case, the partnership business was fairly idle over the Christmas holidays. Last, the court concluded that the pursuit of profit need only be an ancillary purpose to the creation of the partnership.

Dissolution of Partnership for Illegality

The second major issue for the court was the validity of the partnership in light of section 174 of the Banking Act, which prohibits banks from entering into partnership relationships. Because section 34 of the Partnership Act invalidates partnerships where partners are carrying on business illegally, the Minister of National Revenue argued that neither Continental Bank nor its subsidiary could be a partner. On this issue, the majority decision (written by McLachlin CJ) and the dissent (Bastarache J) differed. The majority concluded that this did not affect the validity of the partnership because Continental Bank Leasing was a distinct entity from the bank, and the bank was only an investor in the partnership without directly participating.

Dissent

Bastarache J differs on the issue of the validity of the partnership under section 34 of the Partnership Act. Because Continental Bank Leasing Co had received a tax benefit by violating a provision of the Banking Act, Bastarche J determined that the partnership was invalid for reasons of public policy.

See also

This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.