Kulak v. A.G. Clark Holdings Ltd., 2013 ABQB 360

Court of Queen ’ s Bench of Alberta Citation: Kulak v. A.G. Clark Holdings Ltd., 2013 ABQB 360 Date: 20130625 Docket: 0003 13312 Registry: Edmonton Between: Laird Kulak and DLK Management Services Ltd. Plaintiffs/Respondents - and - A.G.

Clark Holdings Ltd., Giebelhaus Developments Ltd., and 680262 Alberta Ltd., carrying on business as Clark Builders, formerly known as Clark-Bowler, Clark Bowler and Douglas Cannam Defendants/Applicants Corrected judgment: A corrigendum was issued on June 27, 2013; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Gerald A. Verville _______________________________________________________ Background

[ 1 ] The trial of this matter commenced in September of 2012. At the close of the plaintiffs ’ case the defendants applied for a non-suit. The non-suit application was dismissed: Kulak v AG Clark Holdings Ltd , 2012 ABQB 672 , [2012] AJ No 1150 (Non-suit Judgment) . [ 2 ] The plaintiffs, Laird Kulak (Kulak) and DLK Management Services Ltd. (DLK) allege that they hold a partnership interest in the corporate partnership of the defendants, A.G. Clark Holdings Ltd., Giebelhaus Developments Ltd., and 680262 Alberta Ltd. (680262) which operate as Clark Builders.

The plaintiffs also allege that the shares of 680262 were held in trust by the defendant Douglas Cannam (Cannam) on behalf of DLK and others. The defendants deny these assertions. Agreed Statement of Facts [ 3 ] The parties agreed to a number of facts including the following. [ 4 ] On September 1, 1979, a partnership (the Partnership) was formed between A.G. Clark Holdings Ltd. and Bowler Management and Construction Services Ltd.

From that date until the present, the Partnership has carried on business, first as Clark Bowler Construction and later as Clark Builders. [ 5 ] As of February 27, 1987, the Partnership formalized its agreement in writing with A.G.

Clark Holdings Ltd., Bowler Management Ltd., Giebelhaus Developments Ltd. and Fliss Developments Ltd. entering into a written partnership agreement. [ 6 ] From 1987 to 2012, a number of amendments, acknowledgments, and amended and restated partnership agreements were executed by various persons associated with the Partnership. [ 7 ] Kulak was hired by the Partnership as a project manager commencing in June 1989, pursuant to a signed Offer of Employment.

DLK was incorporated under Alberta law on May 10, 1991 and is wholly owned by Kulak. [ 8 ] Kulak provided project management services to the Partnership until May 10, 1991, and to DLK from May 10, 1991 to October 16, 1998. DLK provided project management services to the Partnership from May 10, 1991 until October 16, 1998. The Partnership made payments to Kulak until May 10, 1991, and to DLK from May 10, 1991 to October 16, 1998. [ 9 ] Kulak did not report any income from any Partnership interests on his personal income tax returns for the years 1990 to 1998.

DLK did not report any income from any Partnership interests on its corporate tax returns for the years 1990 to 1998. [ 10 ] From 1980 to the present, A.G.

Clark Holdings Ltd. and Giebelhaus Developments Ltd. have been partners in the Partnership. [ 11 ] At all relevant and material times, Andrew Clark (Clark), was the President of the Partnership and William Giebelhaus (Giebelhaus) was the Vice President in charge of construction for the Partnership. [ 12 ] From February 28, 1994 to November 2, 2011, Cannam was the Vice President of Finance of the Partnership and in that role had responsibility for the preparation of financial records for the Partnership. [ 13 ] The financial statements of 680262 show that it did not have any assets for the fiscal years ending January 31, 1997; January

31, 1998; January 31, 1999 and January 31, 2000. [ 14 ] The tax returns of 680262 show that it did not receive any income for the taxation years ending January 31, 1997; January 31, 1998; January 31, 1999 and January 31, 2000. Plaintiffs' Case [ 15 ] The following is a brief

summary of the plaintiff ’ s case as set out in the Non-Suit Judgment. [ 16 ] Kulak worked for Clark Builders as a project manager. The plaintiffs led evidence that there were discussions about Kulak and others becoming partners.

On September 19, 1996, Clark, as president of Clark Builders, wrote to Deloitte & Touche advising them that Clark Builders was finalizing the admission of Kulak, Cannam (a chartered accountant), and another employee Scott Hunt (Hunt) into the partnership of Clark Builders. [ 17 ] Organizational documents including share and director documentation for 680262 were sent by Lucas Bowker & White to Clark Builders with correspondence dated September 20, 1996.

Those documents contemplated that a single share would be issued to each of Cannam, Kulak and Hunt. [ 18 ] The corporate documents were never executed by Kulak, nor was the $3.00 consideration for the shares in 680262 ever paid. [ 19 ] In June 1998, the solicitor for Clark Builders provided revised corporate documentation to Clark Builders in which the sole shareholder and director of 680262 was identified as Cannam. [ 20 ] Cannam prepared schedules showing the allocation of income from Clark Builders through 680262 (which was referred to as the trustee company) to DLK for the years 1996 to 1999.

At least two of these schedules, together with at least the first page of the notes of the 1996 Clark Builders Audited Financial Statement and the Clark Builders Capital Account Statements, were supplied by Cannam to Canada Revenue Agency (CRA). [ 21 ] CRA provided copies of this material to the plaintiffs' accountant, John Howard (Howard), in June 2000 with correspondence stating: With respect to your letter of April 18, 2000, and our conversation this morning, we are providing schedules created by Clark Builders.

These show the allocation of income from Clark Builders through the trustee corporation 680262 Alberta Ltd., to your client ’ s company, DLK Management Ltd. We note that the corporate registry information shows that Laird is an inactive director of 680262. [ 22 ] Prior to the year ending February 29, 1996, the monies paid to DLK, which were characterized to Kulak and DLK as salary and a percentage of net profits, were dealt with as an expense of Clark Builders.

For the year ending February 29, 1996 and thereafter, this remuneration was identified as payment out of a share of the capital of the Clark Builders partnership. The audited financial statements of Clark Builders were provided to CRA showing 680262 as a partner. The financial statements of the partnership for the years 1997 to 1999 removed reference to 680262 as a corporate partner of Clark Builders from the notes of the financial statements.

However, the distribution of the net income of the partnership to the partners was still calculated in the financial statements as though it was being paid to 680262 and through that company to the companies of Cannam, Hunt, and Kulak, as draws from the capital of the Clark Builders partnership. [ 23 ] The plaintiffs assert that the T2S CRA income statements and the Clark Builders capital account statements all identify a "trustee company" as the holder of an interest in Clark Builders partnership for the Kulak, Cannam, and Hunt corporations.

The audited financial statements of Clark Builders are consistent with the representations set out in the income and capital account documentation and are approved by the two most senior partner representatives. All of this documentation was created by Cannam, the Vice President of Finance of the Clark Builders partnership, and much of it was submitted to CRA by him on behalf of the senior partners.

[ 24 ] The evidence of Kulak is that he was never told and was unaware when he left Clark Builders that he was a partner. It was only the receipt of subsequent information which led him to commence an investigation. [ 25 ] Howard, the plaintiffs' chartered accountant, did not give expert testimony.

He testified, however, that he received documentation from Cannam which led him to believe that Kulak or DLK was a partner. [ 26 ] Andrew Wingate, a chartered accountant and former Acting Auditor General and Deputy Auditor General for the Province of Alberta and former Chief Inspector of ATB Financial, was qualified to give expert testimony as to the nature of partnerships from an accounting perspective. He concluded from reviewing the financial statements that Kulak was a partner in Clark Builders and was sharing in the profit.

Defendants ’ Case [ 27 ] The defendants called four ordinary witnesses namely Clark, Giebelhaus, Cannam, and Hunt and one expert witness, Robert White (White). Clark [ 28 ] Clark testified that in 1974, while he was working in Yellowknife in the Northwest Territories, he started a construction company which has evolved into what is now known as Clark Builders. The business expanded to Whitehorse, and later to Edmonton. He took in as partners (through their corporate entities): Dale Bowler (Bowler) (for a time the company was known as Clark-Bowler), Giebelhaus and Dwayne Fliss (Fliss).

Clark stated that Fliss left the partnership in about 1991 on friendly terms and Bowler left around 1994 on not so friendly terms. With the departure of Bowler, the remaining corporate partners of Clark Builders were his company, A.G. Clark Holdings, and Giebelhaus Developments Ltd. [ 29 ] Clark testified that in the early 1990s, the economy was lean in Alberta and the company was principally doing work in northern Canada, China and Russia. He recalled that the company was doing “ OK, but not well ” .

He testified however that the philosophy was to try to attract good people to Clark Builders and to develop and maintain this talent. He retained KPMG and Ernst & Young as consultants to assist in attaining this objective. [ 30 ] Clark stated that he and Giebelhaus were of like mind about adding partners. He confirmed that they discussed adding Kulak, Cannam and Hunt and possibly others.

He stated that they wanted a business model where the partnership arrangement would grow with the business, and that they wanted to avoid the situation from becoming problematic if they simply took in one, two or three individuals and left other key employees out. He said, for example, that one individual who worked on a project for them in Russia probably made more money for Clark Builders than anyone else and deserved partnership. [ 31 ] Clark confirmed that he had ongoing discussions with Kulak about joining the partnership and recalled that they had these discussions a couple of times a year.

Clark stated that in 1996 Cannam was also “ knocking on the door ” . Clark acknowledged that he signed a letter dated September 19, 1996 addressed to the partner at Deloitte Touche in charge of the Clark Builders audit which stated: At the request of Doug Cannam, I am writing this letter to confirm that we are in the process of finalizing the admission of Doug Cannam, Scott Hunt and Laird Kulak to the partnership effective for the February 29, 1996 year-end.

He stated that the letter had been prepared for his signature by Cannam. [ 32 ] Clark testified however that he and Giebelhaus never reached a consensus about adding new partners during this period.

[ 33 ] Clark was shown the 1996 audited financial statement of Clark Builders and in particular the note describing the business which stated: Clark Builders (A corporate Partnership) is a general contracting firm engaged in the construction of industrial and commercial buildings. The corporate partners are A.G. Clark Holdings Ltd., Giebelhaus Developments Ltd and 680262 Alberta Ltd. Clark stated that when he signed the financial statement on behalf of the partnership he did not read the note or know that 680262 existed, and he only learned of its existence after the lawsuit was commenced.

He stated that he had hired Cannam to look after the company ’ s accounting matters which included the preparation of financial statements in conjunction with the auditors Deloitte & Touche and that Clark just looked at the bottom line. [ 34 ] Clark also testified that he was involved in a divorce in the late 1990s. He was shown an affidavit in which he had sworn that Cannam ’ s management company was a partner in Clark Builders.

He stated that what had been put in the affidavit by his divorce lawyer was wrong. [ 35 ] Clark was also shown a statement for Clark Builders that was attached as an exhibit to an affidavit sworn by his former wife. That document listed DLK in a portion of Clark Builders ’ internal capital accounts ledger along with D.G. Cannam Management Ltd and 943477 NWT Ltd. under the umbrella of a trustee company. Clark stated that he was trying to get his divorce finalized and asked Cannam to provide whatever financial information his wife ’ s accountant required.

He stated that the document was prepared by Cannam and that Clark never looked at it. [ 36 ] Clark confirmed that he continued to seek advice from various consultants and produced a letter dated February 10, 1998 addressed to him from a partner at KPMG Chartered Accountants which stated in part: ... A proposed plan to allow Laird and Doug to each acquire 4% of the ownership of Clark Builders partnership, has previously been discussed.

Although no firm commitments have been made, we understand that these ownership interests may be acquired by each of Doug and Laird at some point between their book value for a 4% interest of approximately $180,000 and the estimated fair market value of the investment of approximately $360,000. For discussion purposes, we will assume a purchase price for Doug and Laird for their 4% interest of $250,000. [ 37 ] Clark stated, however, that nothing was ever finalized and neither Kulak nor DLK was ever made a partner of Clark Builders.

Giebelhaus [ 38 ] Giebelhaus testified that he met Clark while working in Yellowknife for another construction company. He went to work for Clark Builders in about 1978 and subsequently bought into the company and became a partner while in Whitehorse. He confirmed that in the early 1980s there were four partners, but that with the departure of Fliss and Bowler just he and Clark remained as partners. Giebelhaus confirmed that the departure of Bowler, who had been a close friend, was acrimonious.

He stated that Bowler ’ s departure was “ an eye opener ” ; he learned a lot about partnerships as a result, and he became much more wary about bringing in new partners. [ 39 ] Giebelhaus confirmed that the company went through some tough times and was put into special loans by the bank. He stated that both he and Clark went to meetings with the bank and the bonding company. He stated that with the departure of Bowler, just Giebelhaus and Clark were on all the indemnities or guarantees. [ 40 ] Giebelhaus stated that he was aware that Kulak was interested in becoming a partner.

He was also aware that Clark was retaining consultants to provide advice with respect to the manner in which new partners might be added. Giebelhaus stated that in his view Clark retained too many consultants and while there was an ongoing dialogue with Clark, Giebelhaus never agreed to accept any proposal for the addition of new partners until 2005, at which time both Giebelhaus and Clark sold a portion of the business and received money in return. [ 41 ] Giebelhaus stated that he was never made aware at the material times of a trustee company or what it was, nor of the

existence of 680262. He stated further that he left the accounting to Cannam. Cannam [ 42 ] Cannam testified that he began working for Clark Builders as comptroller and Chief Financial Officer in June of 1990. He left the company at the end of December 2011. He testified that there was a significant change in the size and scope of the company ’ s operations during the period of his work for the company. [ 43 ] Cannam testified that he was on profit participation in about 1992, and was paid for tax purposes through a company owned by him and his wife.

He stated that there were discussions before Bowler left the company about Cannam and others becoming partners. He recalled that Bowler ’ s departure was acrimonious and painful and stated that he did not push discussions with the existing partners for a period of time. [ 44 ] Cannam stated that A.G. Clark Holdings Ltd. and Giebelhaus Developments Ltd. were the corporate partners of Clark Builders after Bowler ’ s departure. Cannam provided accounting services to these companies as well as related or affiliated companies that were created for tax purposes.

He stated that aside from using a variety of tax devices which resulted in the creation of related or affiliated companies, the corporate ownership of Clark Builders did not change from the time Bowler departed until 2005. [ 45 ] Cannam stated that Clark Builders encountered significant financial risks in the early 1990s and during this period was in special loans with its bank. He stated that the bonding company was the lifeline of the company and it, like the bank, had complete access to all financial information.

He stated that he did financial statements monthly and worked with the auditors who prepared the financial statements which were available about six months after the year end. [ 46 ] Cannam stated that he also provided memos to Clark and Giebelhaus which discussed changes to the partnership structure, including the addition of new minority partners and compensation for other permanent staff. He explained that while he prepared a number of documents for discussion purposes, he knew that nothing would happen until both Clark and Giebelhaus were in agreement.

He stated further that his discussions were almost exclusively with Clark, as he knew from the dynamics of the existing Partnership that Clark would have to sign off on any new partnership arrangement and then sell it to Giebelhaus. [ 47 ] Cannam recalled that there were discussions in 1996 with respect to Kulak , Hunt and Cannam becoming partners. He prepared one memorandum in June 1996 which contemplated profit allocation of 65% to majority partners (Clark 35% and Giebelhaus 30%), 15% for minority partners (5% for each of Cannam, Kulak and Hunt), and 20% for the rest of the staff.

This memorandum contemplated each of the minority partners contributing $200,000 in equity for a 5% ownership in the new partnership. He recalled further that he prepared a number of similar memorandums for discussion purposes. [ 48 ] Cannam testified that he contemplated that the new partners ’ interests could be held through shares in a corporation, and he instructed a lawyer at the Lucas Bowker firm to create such corporation.

On September 20, 1996 he received a letter from the lawyer which stated in part: Enclosed for your information and reference are photocopies of the Certificate and Articles of incorporation for the Company which is the nominee for the new partners of Clark Builders. [ 49 ] That corporation was 680262. It was initially contemplated that Cannam, Kulak and Hunt would be directors and each hold one share in this company. He stated that he never told Clark or Giebelhaus about the creation of 680262.

At about the same time, Cannam prepared the September 19, 1996 letter to Deloitte Touche which was signed by Clark. [ 50 ] Cannam could not specifically recall his conversation with the partner at Deloitte Touche whom he was assisting with respect to the preparation of the audited financial statements, but he confirmed that the reference to 680262 being one of the corporate partners on the 1996 financial statements would have come from Cannam. Cannam further confirmed that he prepared the September 19, 1996 letter for Clark ’ s signature as he thought they were getting close to reaching an agreement.

[ 51 ] Cannam stated that as an agreement was not reached with respect to the addition of new partners, he simply kept 680262 alive and named himself as director and sole shareholder. [ 52 ] Cannam explained that in 1996 he moved Cannam, Hunt and Kulak from the expense side to the draw side and that while it was not clean accounting, it served the purpose of keeping track of profit share and was a convenient way for him to do it.

Cannam acknowledged in hindsight that this was not the smartest thing he ever did. [ 53 ] Cannam acknowledged that moving the profit share to the draw side increased the net profit of Clark Builders but stated that the bank, bonding company and auditors all knew where they were recorded in the financial statements. Further, he stated that there was no public company exposure; with Clark Builders, the only exposure was to the bank and bonding company.

As for Revenue Canada, Cannam asserted that at the end of the day the taxes were the same as they would be with Cannam, Hunt and Kulak reporting on a contractor basis. [ 54 ] Cannam confirmed that he was paid additional monies by Clark personally for preparing and providing financial documentation with respect to Clark ’ s divorce litigation. Hunt [ 55 ] Hunt testified that he was employed by Clark Builders from around 1990 until 2002. He stated that he received a base salary plus profits at the discretion of Clark and Giebelhaus. Hunt recalled that he received about 4 or 5% of the profits.

He also recalled discussing the possibilities of becoming a partner, but stated that he knew things moved slowly with Clark and Giebelhaus and he did not pursue the issue as he did not think he could afford the risk. He stated that Cannam shared some paperwork with him, but that there were never any commitments or agreements, and Hunt never owned any units in Clark Builders. [ 56 ] Hunt stated that he was paid personally rather than through a management company while employed by Clark Builders and further that 943477 NWT Ltd. was not his company. [ 57 ] Hunt stated that he left the company on good terms in 2002.

He said that he knew Cannam was not a partner, and that neither Cannam nor anyone else held Cannam out as being a partner. Hunt stated further that he understood that Kulak was a project manager and that to his knowledge, Kulak was never held out as a partner by anyone. White [ 58 ] White was qualified to give expert testimony with respect to the indicia of partnership. He is a chartered accountant, chartered business valuator, chartered financial analyst, certified fraud examiner and partner in the firm PricewaterhouseCoopers.

White prepared a report which set out the financial documentation and other information he relied upon in forming an opinion. He confirmed that he held discussions with Cannam who was the Chief Financial Officer of Clark Builders at the relevant times. [ 59 ] At paragraph 73 of his report, White stated: In discussions with Mr. Cannam, we understand: a. The intention of reflecting the income of Mr. Cannam, Mr. Kulak and Mr. Hunt (through his company 943477 NWT Ltd.) was simply to allocate profit sharing income, not to suggest any of the three were Partners.

b. Mr. Cannam was working 3,000 hour years at that time and was consistently seeking opportunities to ease the burden of accounting for CB. The method of accounting was selected as it was convenient to Mr. Cannam, simplified his bookkeeping for this element of the business, and Mr Cannam was familiar with all of the parties and their interests in CB. c. Mr. Cannam assessed the risk related to selecting this method of accounting for income allocation (as opposed to correctly reflecting Mr.

Kulak as a profit sharing employee in the statement of Partnership income) and considered that the presentation worked for the internal users of the financial statements. d. Mr. Cannam was not a Partner of CB at that time and he accounted for himself in the same fashion as Mr. Kulak (i.e. by including himself in the Partnership Equity accounts). e. Mr Cannam did use nominal units as a mechanism to allocate the appropriate amount of income to Mr. Cannam, Mr. Kulak and Mr. Hunt.

These nominal units were used solely for this purpose and were never intended to be construed as actual CB Partner units. [ 60 ] White confirmed that certain documentation when viewed in isolation, indicated that Kulak or DLK was a partner. He stated however that in conducting his analysis he considered a number of key elements including profit sharing, capital contributions, exposure to risk, ownership in 680262, written partnership agreements, and the method of accounting for income allocations.

He accepted information provided to him by Cannam. [ 61 ] With respect to profit sharing, White stated that this in and of itself does not normally convey ownership or partnership and that normally more data and documentation would be required. As to capital contributions, White stated that in order to appropriately fund operations, owners contribute capital that is at risk in the event of losses.

His review indicated that no capital was contributed by Kulak and concluded that the absence of such contribution was an indication that a partnership interest was not conveyed to Kulak. [ 62 ] As to exposure to risk, White noted that the lack of capital contribution is suggestive of lack of risk assumption and further that Kulak was not required to provide personal indemnity for construction bonding or personally guarantee loans of Clark Builders.

He concluded that a lack of exposure to or assumption of any risk, other than variances in the amount of profit sharing, suggests that Kulak was not a partner. [ 63 ] White reviewed the articles of incorporation, by-laws and share register of 680262 and concluded that there were no indications that Kulak was ever an owner of that company. He also reviewed the Clark Builders partnership agreement, and various amendments and did not note any reference to 680262 being a partner in Clark Builders.

He stated that the only entities indicated as holding partnership units were companies controlled by Clark and Giebelhaus. He concluded that a lack of partnership units suggests a lack of partnership. [ 64 ] Finally, with respect to accounting for income allocations, White confirmed that while the manner in which Cannam did the accounting was suggestive of ownership by Kulak, he accepted Cannam ’ s representation that it was done out of convenience.

He concluded in his report: “ While accounting ought to reflect the economic substance of a transaction, it can be the case that factors such as convenience and perceived risk will not always reflect the underlying economic substance ” . [ 65 ] White concluded that there was insufficient information to conclude that Kulak or DLK was a partner of Clark Builders or a shareholder in 680262.

Positions of the Parties [ 66 ] The plaintiffs submit that the only reasonable conclusion that can be drawn from the financial documentation is that DLK was a partner in Clark Builders, effective March 1, 1995, holding a 4% interest in the partnership. The plaintiffs further submit that the evidence of Clark and Cannam was not credible, and further that it is hard to believe that Giebelhaus was not aware of the most fundamental financial aspects of the partnership.

[ 67 ] The defendants state that at all material times, Clark and Giebelhaus (through their corporate entities) were the only partners in Clark Builders. They further state that Clark continued to negotiate with Kulak after a number of the alleged representations were made, speaking with consultants to discuss methods by which to admit potential new partners. These demonstrate that Clark never believed Kulak was a partner. As well, Giebelhaus, who had to agree to the admission of any new partner, was never approached about and never agreed to the admission of either Kulak or DLK.

The defendants submit that this Court should not make a contract that the parties expressly declined to make for themselves. Law [ 68 ] The relevant portions of the Partnership Act , (Act) RSA 2000, c P-3 provide: 1 In this Act, ...(g) “ partnership ” means the relationship that subsists between persons carrying on a business in common with a view to profit... 4 In determining whether a partnership does or does not exist, regard shall be had to the following rules: (

a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share profits made by the use of it; (

b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in property from which or from the use of which the returns are derived; (

c) the receipt by a person of a share of the profits of a business is proof, in the absence of evidence to the contrary, that that person is a partner in the business, but the receipt of the share, or of a payment contingent on or varying with the profits of the business, does not of itself make the person receiving the share or payment a partner in the business, and in particular: (

i) the receipt by a person of a debt or other liquidated amount by instalments or otherwise out of the accruing profits of a business does not of itself make that person a partner in the business or liable as a partner; (ii) a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as a partner; (iii) a person who is a surviving spouse or adult interdependent partner or child of a deceased partner and who receives by way of annuity a portion of the profits made in the business in which the deceased person was a partner does not by reason only of that receipt become a partner in the business or liable as a partner; (iv) the advance of money by way of loan to a person engaged or about to engage in a business on a contract with that person that the lender shall (

A) receive a rate of interest varying with the profits, or (

B) receive a share of the profits arising from carrying on the business,

does not of itself make the lender a partner with the person or persons carrying on the business or liable as a partner, so long as thecontract is in writing and signed by or on behalf of all the parties to the contract; (

v) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by the person ofthe goodwill of the business is not by reason only of that receipt a partner in the business or liable as a partner. [69] In addition to the Act, the parties cite a number of authorities including: Backman v Canada, 2001 SCC 10, [2001] 1 SCR367; Dallin v Montgomery, 2010 ABQB 470, 498 AR 269; Prince Albert Co-operative Assn v Rybka, 2010 SKCA 144, 362 Sask R232; Pen-Bro Holdings Ltd v Demchuk, 2007 ABQB 282, 419 AR 313; Volzke Construction Ltd v Westlock Foods Ltd (1986), 1986ABCA 136 , 70 AR 300, [1986] AJ No 424 (CA); Boychuk v Boychuk (1975), (AB KB), 55 DLR (3d) 751,[1975] AJ No 488; Prothroe v Adams (1997), (AB KB), 203 AR 321, [1997] AJ No 761 (QB); Radojcic v Ryall,Walker & Radojcic, [1996] OJ No 8 (Gen Div); Maize v McFarlane, [1919] OJ No 337 (HC Div); and Devon Canada Corp vPE-Pittsfield, LLC (cob Pittsfield Generating Co, LP), 2008 ABCA 393, 446 AR 62.

Analysis [70] The parties agree that the three essential elements of a partnership are: 1) a business, 2) carried on in common, 3) with a viewto profit. The Act provides guidance as to what factors may or may not be relevant in determining whether a partnership exists. [71] In Backman, the Supreme Court discussed the essential ingredients of partnership at paragraphs 17 to 24. With respect towhether a business is carried on in common, the Court stated: 21 In determining whether a business is carried on "in common", it should be kept in mind that partnerships arise out of contract.

Thecommon purpose required for establishing a partnership will usually exist where the parties entered into a valid partnership agreementsetting out their respective rights and obligations as partners. As was noted in Continental Bank, supra, at paras. 34-35, a recognition ofthe authority of any partner to bind the partnership is relevant, but the fact that the management of a partnership rests with a singlepartner does not mandate the conclusion that the business was not carried on in common.

This is confirmed in Lindley & Banks onPartnership (17th ed. 1995), at p. 9, where it is pointed out that one or more parties may in fact run the business on behalf of themselvesand the others without jeopardizing the legal status of the arrangement. It may be relevant if the parties held themselves out to thirdparties as partners, but it is also relevant if the parties did not hold themselves out to third parties as being partners.

Other evidenceconsistent with an intention to carry on business in common includes: the contribution of skill, knowledge or assets to a commonundertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, the filing of income taxreturns as a partnership, financial statements and joint bank accounts, as well as correspondence with third parties: see Continental Bank,supra, at paras. 24 and 36. [72] As to the approach to determining whether a partnership exists, the Court stated: 25 As adopted in Continental Bank, supra, at para. 23, and stated in Lindley & Banks on Partnership, supra, at p. 73: "in determiningthe existence of a partnership ... regard must be paid to the true contract and intention of the parties as appearing from the whole facts ofthe case".

In other words, to ascertain the existence of a partnership the courts must inquire into whether the objective, documentaryevidence and the surrounding facts, including what the parties actually did, are consistent with a subjective intention to carry on businessin common with a view to profit. 26 Courts must be pragmatic in their approach to the three essential ingredients of partnership. Whether a partnership has beenestablished in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surroundingcircumstances.

That the alleged partnership must be considered in the totality of the circumstances prevents the mechanical applicationof a checklist or a test with more precisely defined parameters. [73] In this case the existence of a partnership is not in dispute. Simply put, the issue is whether Kulak or DLK was one of thepartners. This is a highly unusual case in many respects.

[ 74 ] The plaintiffs put the credibility of Clark, Giebelhaus and Cannam in issue and point to numerous documents which indicate or suggest that Kulak/DLK was a partner. For example, a memo dated October 6, 1999 from Cannam to Clark states in part: Kulak ’ s participation in the activities of the Clark Builders Group was recorded on the basis of an equity interest from March 1, 1995 until he left in October of 1998.

Prior to that time his participation was reported as an expense, either through wages or consulting fees. .... [ 75 ] Further Cannam completed documentation which showed Kulak as holding units in the Clark Builders partnership, T2S documentation identifying 680262 as a trustee partner in Clark Builders and DLK as one of the beneficiaries under that trust, which documentation was provided to Canada Revenue Agency. [ 76 ] The plaintiffs question why a chartered accountant - a highly trained individual with well defined professional duties and obligations - would deliberately select a method which created considerably more work for him and placed him in danger of breaching one of his fundamental professional duties. [ 77 ] The plaintiffs believe that Clark or Cannam, or both, saw an opportunity to greatly increase the audited profits of Clark Builders at a time when the partnership appeared to be having a poor year financially without affecting the amount of tax that any of the participants had to pay. [ 78 ] The plaintiffs submit that the objective was to make the bottom line more favourable as the company ’ s financial difficulties at the time may have made the bank and bonding companies nervous.

They further assert that given the Cannam and Kulak ’ s desires to be admitted to the partnership and the positive discussions which had been taking place, this alteration in the accounting appeared to be beneficial to all. From Clark ’ s perspective, the absence of a signed partnership agreement would act as his ostensible security: they would not be partners until an agreement was signed, even though the finances said otherwise.

It was the equivalent of having your "fingers crossed" when making what you intended to be a misrepresentation. [ 79 ] The defendants note that no questions were asked of Clark, Giebelhaus or Cannam regarding this alleged motive which they characterize as an allegation of a conspiracy to commit fraud.

The defendants assert that the allegation ignores the actual evidence and point to the fact that the financial documentation, clearly shows that in 1997 and 1998, Clark and Giebelhaus drew significantly less income from Clark Builders in order to ensure that their valued employees (Kulak, Cannam and Hunt) were protected from the monetary effects of two successive bad years. [ 80 ] Cannam ’ s explanation regarding the documents he prepared is that he did so for purposes of convenience. [ 81 ] It is apparent that Cannam anticipated that he, Hunt and Kulak or their companies would become partners in Clark Builders through an interest in 680262 which was referred as the trustee company.

I am mindful that the financial statements of 680262 show that it did not have any assets and tax returns show that it did not receive any income for the fiscal years ending January 31, 1997; January 31, 1998; January 31, 1999 and January 31, 2000. I find that Cannam gave a credible explanation as to why he did what he did.

While these accounting practices might not win Cannam kudos from The Institute of Chartered Accountants of Alberta, in my view these acts did not in and of themselves make Kulak or DLK a partner. [ 82 ] Clark ’ s evidence was that he just looked at the bottom line and did not read the audited financial statements line by line. I note with respect to the 1996 audited financial statement, that reference to 680262 being a corporate partner of Clark Builders is on a different page than the page he and Giebelhaus signed. I accept Clark’s evidence on this point.

Again, while careful scrutiny of the financial records is always advisable, failure to do so in this case so did not create a partnership. Further, as previously mentioned Clark was still soliciting advice with respect to introducing new partners as late as February of 1998, as evidenced by the letter to him from a partner at KPMG. [ 83 ] In the circumstances, I accept Clark ’ s evidence that he never intended to make Kulak, DLK or 680262 a partner in Clark Builders. Further, I accept Giebelhaus ’ s evidence that he never agreed to the addition of new partners during the material time in

question. [ 84 ] Kulak made the following significant admissions on behalf of himself and DLK: - prior to a telephone call from Bowler in 1999 or 2000, he did not believe he was a partner in Clark Builders; - he knew both Clark and Giebelhaus (through A.G.

Clark Holdings Ltd. and Giebelhaus Developments Ltd.) had to agree to new partners being admitted; - he did not sign a partnership agreement, although he knew one existed at the time; - he did not contribute any capital to Clark Builders; - he did not assume any of Clark Builders' liabilities; - he did not sign any written risk documentation, such as bank commitments, guarantees, bonding indemnities or warranties; - he did not sign anything agreeing to be held jointly or severally liable for Clark Builders; - he did not attend or participate in partnership meetings; - he did not review or approve any of Clark Builders' financial statements; - he was not involved in any of the formalities associated with partners leaving Clark Builders; - upon termination of his relationship with Clark Builders, he did not sign a partnership resolution regarding departure from the partnership; - when he left Clark Builders in October 1998, he was paid out all income allocated to him, with the exception of a small tax hold back which has since been paid out to him; - prior to the telephone call from Bowler he: - had no knowledge whatsoever of 680262; - never consented to being a director, did not attend any director's meetings and did not vote on any resolutions; - was never asked to or agreed to be a shareholder of 680262, never signed a share subscription, never provided any consideration for a share or received a share certificate;

- did not receive notice of or attend any shareholders' meetings; - never authorized anyone to transfer any share in 680262 from his name to DLK; - was not aware of any trust indenture or agreement with respect to 680262, and was never told by Cannam that he would hold shares in 680262 for him. [ 85 ] The defendants argue that when these additional factors are examined against the facts in this case, it becomes clear that most of them fall on the "non-partnership" side of the scale: - neither 680262, nor Kulak nor DLK had any authority to bind Clark Builders; - while Kulak contributed skills to Clark Builders, he did so in his capacity as a valued senior employee, not as a partner; - 680262, Kulak and DLK did not contribute assets to any common undertaking; - 680262, Kulak and DLK did not own any joint property with the partners of Clark Builders; - 680262 did not receive any income for the taxation years ending January 31, 1997; January 31, 1998; January 31, 1999 and January 31, 2000; - Kulak did not file income tax returns claiming partnership income and DLK did not file income tax returns claiming partnership income; - with the exception of a single error in the 1996 financial statements, there is nothing in the financial statements that identifies 680262 as a partner and the financial statements do not identity Kulak or DLK as a partner; and - 680262, Kulak and DLK had no joint bank accounts with the partners of Clark Builders. [ 86 ] As stated in Backman , whether a partnership has been established in a particular case will depend on an analysis and weighing of the relevant factors in the context of all the surrounding circumstances. [ 87 ] The plaintiffs have raised issues regarding a number of confusing, if not at times misleading, documents.

Questions arise in particular as to the reasons for calculation of the distribution of the net income of the partnership to the partners in the financial statements in the late 1990s as though it was being paid to 680262 and through that company to the companies of Cannam, Hunt, and Kulak, as draws from the capital of the Clark Builders partnership.

I note that there was some confusion in the evidence about 943477 NWT Ltd. but in the end, it is immaterial. [ 88 ] Other documentary evidence referred to by the plaintiffs might be explained by Cannam ’ s optimism that partnership would be accorded Cannam, Hunt and Kulak. [ 89 ] Despite the issues raised by the documentation, I have found Clark, Giebelhaus and Cannam to be credible witnesses on the

question of whether or not Kulak or DLK was ever made partner. I also found the analysis conducted by White to have been very helpful; he had a much greater opportunity to and did review considerably more correspondence and other documentation than did Wingate. [ 90 ] I have considered the totality of the circumstances. In the end result, I find that despite the questions raised by Cannam ’ s accounting, Kulak ’ s admissions and the other factors referred to above overwhelmingly support a finding that neither Kulak nor DLK ever became a partner.

Conclusion [ 91 ] I find that neither Kulak nor DLK acquired a partnership interest in the Partnership. Costs [ 92 ] The defendants will have their costs, and may speak to me within 45 days of this Judgment if they wish to speak to the issue. Heard on the 23 rd , 24 th , 25 th and 26 th days of April, 2013. Dated at the City of Edmonton, Alberta this 25 th day of June, 2013. Gerald A. Verville J.C.Q.B.A. Appearances: Roger C. Stephens, Simons & Stephens for the Plaintiffs Donald J. Wilson, Patrick Stratton, Alexandra C. Bochinski, Davis LLP for the Defendants

_______________________________________________________ Corrigendum of the Reasons for Judgment of The Honourable Mr. Justice Gerald A. Verville _______________________________________________________ Alexandra C. Bochinski has been added under Appearances for the Defendants.