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Citation: 2009 TCC 450
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Date: 20090910
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Dockets: 2006-1405(IT)G
2006-1407(IT)G
2006-1408(IT)G
2006-1409(IT)G
2006-1410(IT)G
2006-1411(IT)G
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BETWEEN:
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MYRON A. GARRON and BERNA V. GARRON,
as Trustees of the GARRON FAMILY TRUST,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent;
AND BETWEEN:
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BERNA V. GARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
MYRON A. GARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the FUNDY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
ANDREW T. DUNIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the SUMMERSBY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] These
appeals concern assessments made under the Income Tax Act (the “Act”)
in respect of dispositions of shares of Canadian corporations by Barbados trusts. All assessments relate to the 2000 taxation
year.
I. Background
[2] In 1998, in the course of a
reorganization of the share structure of PMPL Holdings Inc. (“PMPL”), two trusts (“Trusts”) with Canadian beneficiaries were settled by an
individual resident in the Caribbean island of St. Vincent. The
sole trustee of each Trust was a corporation resident in Barbados.
[3] As part of
the reorganization, the Trusts subscribed for shares of newly-incorporated
Canadian corporations and the corporations in turn subscribed for shares of
PMPL. These transactions were effected at nominal consideration.
[4] In 2000, as part of an arm’s length sale of PMPL, the Trusts disposed of the majority
of the shares that they held in the holding companies. Capital gains of over
$450,000,000 were realized.
[5] Amounts
on account of potential tax on the capital gains had been remitted to the government
pursuant to the withholding procedures in section 116 of the Act. In
income tax returns filed for the 2000 taxation year, the Trusts sought a return
of the amounts withheld, claiming an exemption from tax pursuant to the Agreement Between Canada and
Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital (the “Treaty”).
[6] The exemption
relied on, Article XIV(4) of the Treaty, provides:
4. Gains from the alienation of any property,
other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.
[7] The
Minister has taken the position that this exemption does not apply, and has issued
assessments to each of the Trusts in respect of the gains.
[8] In addition to assessing the Trusts, the Minister also assessed four Canadian
residents with respect to the same gains. These persons all had interests in PMPL,
either directly or through a holding company, prior to the 1998 reorganization.
In these reasons, this group will be referred to collectively as the “Other
Appellants.”
[9] The
assessments issued to the Other Appellants were made as a protective measure
only, there being no intent to tax the same gains more than once. In oral
argument, counsel for the Minister clarified that the assessments issued to the
Trusts should take priority over these assessments.
[10] All of
the assessments have been appealed, and the appeals were heard together on
common evidence over a three-week period.
II. Summary of
issues
[11] The appeals involve several relatively complex legislative
provisions and many arguments have been raised.
[12] I would mention that the arguments made by counsel for
the Minister following the presentation of evidence varied slightly from the
arguments that were in the Minister’s replies. I have limited the discussion
below to those issues that were made in argument, either orally or in writing.
[13] There is one exception to this, which relates to the
interplay between subsection 75(2) of the Act and Article XIV(4) of the Treaty.
This was an issue that I raised during oral argument, and for which written
submissions were subsequently received.
[14] Below is a brief summary of the issues that will be
discussed. The relevant legislative provisions have been reproduced in an appendix.
[15] First, the Minister submits that the exemption in Article XIV(4) of the Treaty
does not apply because the Trusts are resident in Canada.
Although the corporate trustee of each Trust is acknowledged to be a resident
of Barbados, the Minister submits that the management
and control of each Trust is in Canada.
[16] Alternatively,
the Minister submits that the Trusts are deemed residents of Canada by virtue of
having received property from beneficiaries resident in Canada. The relevant provision is paragraph 94(1)(c)
of the Act.
[17] The
Minister also submits that the gains are taxable to the Other Appellants pursuant
to an attribution rule in subsection 75(2) of the Act.
[18] Further, the Minister seeks to invoke the general anti-avoidance rule (the
“GAAR”) in section 245 of the Act in support of all of the assessments.
[19] Finally,
the Minister submits that the allocation of the sale proceeds in the arm’s
length sale was not reasonable and that the proceeds should be partially
reallocated from the Trusts to the Other Appellants. The legislative provision
relied on is section 68 of the Act.
[20] For completeness, I would mention two other arguments that were raised
by the Minister in the replies but were not pursued in argument. The first is an
argument that the Trusts were not validly constituted. The second is that the
result sought by the appellants was an abuse of the Treaty without
resort to the GAAR.
III. Facts
A. Introduction
[21] In 1992, PMPL was incorporated as a holding company for
a Canadian corporation that
was in the business of manufacturing and assembling parts for the automotive
industry. PMPL also held shares in a small corporation that manufactured tools
for the main operating company. The specialty of the business was interior
automotive systems, such as consoles.
[22] The main subsidiary was Progressive Moulded Products Inc. (“Progressive”). The
other was called Progressive Tools Limited (“Tools”).
[23] The Other Appellants are Andrew Dunin, Myron Garron,
Berna Garron, and a trust called the Garron Family Trust.
[24] Immediately prior to the 1998 reorganization, the
shares of PMPL were owned equally by Mr. Dunin and a holding company that was
wholly-owned by the remaining Other Appellants.
[25] The
1998 reorganization was similar to a typical estate freeze in which (1) an
existing shareholder converts common shares to fixed value redeemable and
retractable preference shares, and (2) new common shares are issued for nominal
consideration to, or for the benefit of, children and other issue of the former
common shareholder.
[26] Counsel
for the Minister emphasized that the 1998 reorganization was not really an
estate freeze, as that term is commonly used, because the new common shares
were not held exclusively for children and other issue. The parents also had an
interest. Counsel suggests that the term “non-freeze” would be more accurate.
[27] The main steps in the reorganization were these. The owners of common shares of PMPL converted
these shares to fixed value preference shares. Newly-issued common shares of
PMPL were then issued for nominal consideration to newly-incorporated Canadian
holding companies. The Trusts each subscribed for shares in the holding
companies for nominal consideration. As a result, the holding companies were
wholly-owned by the Trusts.
[28] In
2000, PMPL was sold in an arm’s length transaction in which PMPL was valued at
approximately $532,000,000. As part of the sale, the Trusts disposed of the
majority of the shares of the holding companies.
[29] The parties filed an agreed statement of facts (“ASF”)
which includes many of the detailed steps in the 1998 reorganization. The ASF
is part of my factual findings and is reproduced in an appendix.
[30] Attached to the ASF are schematic diagrams that depict
the relevant corporate structure both before and after the 1998 reorganization.
The ASF also includes a schedule which summarizes the amounts that have been assessed.
This schedule has not been reproduced.
B. List of
witnesses
[31] Testimony for the appellants was provided by:
·
Andrew Dunin, one of
the two principals of PMPL;
·
Myron Garron, the other
principal of PMPL;
·
Ian Hutchinson, a resident
of Barbados who is currently president of St. Michael
Trust Corp. (“St. Michael”), the trustee of the Trusts;
·
Mary Mahabir, a
solicitor with Lex Caribbean Law Offices in Barbados. Ms. Mahabir provided expert testimony as to whether the Trusts were
resident in Barbados;
·
Peter Hatges, president
of KPMG Corporate Finance Inc. in Toronto. Mr. Hatges
provided expert testimony as to the value of PMPL at the time of the reorganization.
[32] The
only witness for the Minister was Howard E. Johnson, of Campbell Valuation
Partners Limited. Mr. Johnson provided expert testimony as to the value of PMPL
at the time of the reorganization.
[33] Mr.
Johnson also testified as to the value of a hypothetical option to acquire all
the shares of PMPL immediately after the 1998 reorganization. This evidence was
presented to support the position of the Minister that the shares held by the
Trusts had significant value at the time of the 1998 reorganization. Mr.
Johnson’s opinion was limited to the hypothetical option. He did not provide an
opinion as to the value of the shares held by the Trusts.
C. The
principal transactions
[34] By
1990, the plastic moulding business carried on by Progressive was struggling.
The principal of the corporation, Myron Garron, approached Andrew Dunin with a
view to convincing him to join the company as its general manager.
[35] Mr.
Dunin, who had a business background and experience in the automotive industry,
took up the challenge. Over time, he converted Progressive’s business from one that
manufactured a variety of plastic moulded products into one that specialized in
producing automotive interior systems.
[36] Over
the course of a decade, the business had grown exponentially and Progressive
had become a significant supplier to major automotive companies, especially
General Motors.
[37] When
Mr. Dunin joined Progressive in 1990, Mr. Garron promised him an equity
interest in the company. The terms of this were settled in 1992 and were
reflected in a shareholders’ agreement. Under that agreement, Mr. Dunin could
earn up to 50 percent of the equity, depending on the earnings of the business.
[38] To
facilitate this agreement, PMPL was incorporated in 1992 to hold the shares of
the two operating companies, Progressive and Tools.
[39] Shortly after the 1992 shareholders’ agreement was
entered into, Mr. Dunin became unhappy with its terms and he attempted to
renegotiate it. Mr. Garron
agreed, but only after Mr. Dunin had earned the maximum 50 percent equity
interest. This was achieved in 1996.
[40] By 1996, 50 percent of the shares of PMPL were held by Mr.
Dunin and the remaining 50
percent were held by Garron Holdings Limited (GHL). The shareholders of GHL
were Mr. Garron, his spouse Berna Garron, and a family trust known as the Garron Family Trust. Mr. and Mrs. Garron
were the trustees of the trust.
[41] Following protracted and difficult negotiations between
Mr. Garron and Mr. Dunin, a new
arrangement was implemented in April 1998. By this time, Mr. Garron was no
longer playing an active role in the management of the business.
[42] The
new arrangement was quite comprehensive. It included a reorganization of the
share structure of PMPL, an increased equity ownership and salary for Mr.
Dunin, an amendment to the buy/sell provisions in the shareholders’ agreement,
and terms under which Mr. Dunin could manage the business, including its
disposition.
[43] The
revised shareholders’ agreement contains a number of provisions that purport to
affect the shares held by the Trusts (sections 6.2, 6.4, 6.6), but the Trusts
are not parties to the agreement.
[44] The steps
undertaken as part of the reorganization, in brief, are:
·
Mr. Dunin transferred
his common shares[1]
of PMPL to a newly-incorporated holding company, Dunin Holdings Inc. (DHI). Mr.
Dunin was the sole shareholder of DHI;
·
the common shares of
PMPL, which were then equally owned by DHI and GHL, were converted into voting,
redeemable preference shares. The redemption amount was equal to the fair
market value of the common shares immediately prior to the conversion. The
amount was to be determined by PMPL, and was set at $50,000,000. The redemption
amount was subject to adjustment in the event that the valuation was determined
to be incorrect by a taxing authority or by a court;
·
non-voting common shares
of PMPL were issued for nominal consideration to two newly-incorporated
Canadian corporations, 1287325 Ontario Ltd. (“325”) and 1287333 Ontario Ltd.
(“333”). The shares issued to 325 had slightly greater rights of participation than
the shares issued to 333; and
·
shares of 325 were
issued to Summersby Settlement (a Dunin family trust) and shares of 333 were
issued to Fundy Settlement (a Garron family trust), both for nominal
consideration.
[45] On or
about December 1998, an unsolicited expression of interest in buying PMPL was
made to Mr. Dunin. The prospective buyer was owned by a Swiss company, Sarna
Knuststoff Holding AG (“Sarna”).
[46] Mr.
Dunin informed the representative for Sarna that he was interested in pursuing
sale negotiations. Upon being asked what the business was worth, Mr. Dunin
suggested $400,000,000.
[47] Negotiations
with Sarna were conducted over the next several months. They did not lead to a
sale, however, because Sarna walked away shortly before the intended closing. As
a result, Mr. Dunin had some concern that Sarna never truly was interested in
buying the company.
[48] Immediately
after the Sarna deal fell through around June 1999, Mr. Dunin instituted a
process to facilitate the sale of PMPL. He thought that this made sense because
PMPL was doing well and the work necessary for a due diligence process had just
been completed for the Sarna negotiations.
[49] Mr.
Dunin selected Timothy W. Carroll of the Chicago
office of Arthur Anderson to manage the sale process. Arthur Anderson estimated
a value for PMPL of approximately $500,000,000.
[50] Mr.
Carroll attempted to find potential buyers for PMPL from its competitors and
from equity firms. An equity firm based in New York, Oak Hill Capital Partners, L.P. (“Oak Hill”), expressed an interest
and eventually bought the business.
[51] The
sale to Oak Hill was completed in August 2000 at a value for PMPL of
approximately $532,000,000. The consideration was paid in the form of equity shares
of the buyer, as to the amount of $50,000,000, and the balance was paid in
cash.[2]
[52] As
part of the negotiations, Mr. Dunin agreed to continue to work for PMPL for a
period of time.
D. Summersby and Fundy
(1) General trust terms
[53] Summersby
and Fundy were each established as irrevocable trusts on April 2, 1998. The
terms of the trusts are similar.
[54] The
beneficiaries of Summersby are Mr. Dunin, his spouse, children and other issue,
and any trust established for the benefit of any of them. When Summersby was
established, Mr. Dunin had two children, aged 2 and 4.
[55] The
beneficiaries of Fundy are Mr. Garron, his spouse, his children and other
issue, and any trust established for the benefit of any of them. Mr. Garron has
two children, who were 31 and 35 years of age when Fundy was established.
[56] In
accordance with the trust indentures, distributions of income or capital could be
made at any time in the trustee’s discretion to one or more beneficiaries.
[57] At a
“division date,” defined as 80 years from the date of the trust indentures or
such date prior to that as selected by the trustee, the trust property is to be
distributed as follows:
(a) for Summersby, if
Mr. Dunin is living the trust property is to be distributed to him, and if he
is deceased the property is to be distributed to his issue; and
(b) for Fundy, the trust
property is to be distributed to the issue of Mr. Garron and his spouse.
[58] Each
of the trust indentures provides for the appointment of a protector, who has
the ability to remove and replace the trustee at any time.
[59] Further, under each of the trust indentures the protector may be replaced at any time
by a majority of the beneficiaries who have attained a certain age. That age is
35 in the case of Summersby, and 40 in the case of Fundy.
[60] The
trust indentures each specify that the protector has full discretion with
respect to his powers. The relevant provision is reproduced below:
8.4 Protector not Agent. The
Protector shall not be subject to any fiduciary duty in favour of any person in
the exercise of his powers hereunder and shall not be regarded as a trustee of
the Trust nor as the agent or nominee of any person. The exercise of any
discretion by the Protector hereunder shall be absolute and uncontrolled. No
provision of this Trust Indenture shall impose on the Protector a duty of any
kind to act in accordance with any provision in this Trust Indenture. The
Protector shall not be liable for any loss to the Trust Property arising out of
decisions made or actions taken (or not taken) by the Trustee.
(2) The trustee, settlor
and protector
[61] The
sole trustee of each Trust is St. Michael Trust Corp. (“St. Michael”). St.
Michael is incorporated and licensed in Barbados and is regulated by the central bank of Barbados.
[62] St.
Michael began operations around 1987. At that time, its shares were owned by
the partners of a Barbados accounting firm called Price Waterhouse. Subsequently,
this firm merged with another Barbados accounting firm, Coopers & Lybrand, and
thereafter St. Michael became owned by the partners of the merged Barbados firm which operated under the name
PricewaterhouseCoopers. It is not exactly clear from the evidence when the
merger took place but nothing turns on this. For convenience, I will refer to
the firm both before and after the merger as PwC-Barbados.
[63] In
2002, PwC-Barbados sold the shares of St. Michael to Oceanic Bank & Trust,
a bank located in The Bahamas. In January 2008, it was sold again to Premier
Bank International NV, a bank located in Curacao.
[64] During
the period of ownership by PwC-Barbados (1987 – 2002), the accounting firm
operated St. Michael through its trust division. St. Michael had no employees
of its own.
[65] The
persons at PwC-Barbados who in 1998 were in charge of Summersby and Fundy for
St. Michael were Peter Jesson, a tax partner of PwC-Barbados and a director of
St. Michael, and Jim Knott, who was the general manager of St. Michael.
[66] Mr.
Jesson left PwC-Barbados some time ago. He practiced with PricewaterhouseCoopers
in Canada for a time, and then retired. It is not
clear from the evidence when Mr. Jesson ceased to be involved with the Trusts.
[67] Mr.
Knott was involved with Summersby and Fundy until his retirement on June 30,
2003. His role was then taken over by Ian Hutchinson.
[68] Mr.
Hutchinson is currently the president of St. Michael and a director. He also
remains the person primarily responsible for Summersby and Fundy on behalf of
St. Michael.
[69] Mr.
Hutchinson’s background is as an accountant with Coopers & Lybrand in Barbados. In 1999, he moved into the trust division of
PwC-Barbados and had only minor involvement with Summersby and Fundy before
assuming Mr. Knott’s role in 2003.[3]
Mr. Hutchinson described his pre-2003 activity as “investment recording.”
[70] The
settlor of each Trust was Paul Ambrose, a friend of Mr. Garron’s who lives on
St. Vincent, an island relatively close to Barbados.
[71] The protector of each Trust is Julian Gill, another friend of Mr. Garron’s
who also lives on St. Vincent.
(3) Memoranda
re intentions of trustee
[72] Shortly
after the Trusts were established, Mr. Jesson prepared an internal memorandum
for each Trust that sets out the trustee’s intentions. The memoranda are
reproduced in full in Appendix III.
(4) Transactions undertaken by the Trusts
[73] The appellants did not provide detailed evidence
regarding all the transactions undertaken by the Trusts. The following is a general summary of the
main transactions as far as I could determine.
Transactions by Summersby:
·
April
1998 – acquisition of shares of 325 for nominal consideration;
·
August 2000 – sale of majority
of shares of 325 to Oak Hill for cash proceeds of $240,366,978. Summersby
retained an equity interest valued at $25,000,000;
·
August 2000 – cash
proceeds received from sale were deposited in a bank account at UBS (Bahamas) Ltd.;
·
August 2000 – retained
shares in 325 were distributed to a new trust with the same beneficiaries as
Summersby. St. Michael was the trustee of that trust;
·
Late in 2000 –
approximately 90 percent of cash proceeds received by Summersby and income
earned thereon was distributed to a new trust, Sandfield Settlement, with the
same or similar beneficiaries as Summersby. The trustee of Sandfield was Abacus
Bank and Trust Ltd., which was also owned by the partners of PwC-Barbados.
Sandfield qualified as an international trust in Barbados with the result that it
was exempt from tax in Barbados on investment income;
·
2000 – 2003 - the cash held
by Summersby was invested in government bonds and similar instruments based on
advice from Graham Carter of CAP Advisers Inc. in Toronto;
·
Around 2004 – Cranston, Gaskin, O’Reilly & Vernon (CGOV) in Toronto became the investment manager for Summersby. The
investment policy that CGOV followed was developed by Mr. Dunin and Colin
Carleton, a consultant based in Toronto.
Transactions by Fundy:
·
April 1998 –
acquisition of shares of 333 for nominal consideration;
·
August 2000 – sale of
shares of 333 for cash proceeds of $217,118,436;
·
August 2000 – cash
proceeds received from sale were deposited with Barclays Bank PLC (Barbados);
·
Late in 2000 –
approximately 90 percent of cash received by Fundy and income earned thereon
was distributed to a new trust, Tidal 2000 Trust, with the same or similar
beneficiaries as Fundy. The structure of Tidal 2000 was similar to Sandfield;
·
Around 2001 – the property
of Fundy became managed by a team of investment managers overseen by Doug
Farley of Guardian Capital Advisers Inc. in Toronto.
[74] The investments
were not always made by Summersby and Fundy directly. At some point, the
investments were made by corporations incorporated in the British Virgin
Islands (BVI). Summersby and Fundy owned common and preference shares in those
corporations.
[75] Very
few details about the BVI corporations were provided. According to one of the
exhibits, the corporation that invested Fundy’s property was incorporated on
April 12, 2001, and Mr. Knott and Mr. Hutchinson were directors of this
corporation at the time of Mr. Knott’s retirement (Ex. R-1, Tab 135).
[76] In addition to the
above investments, part of the cash proceeds received by Summersby was
transferred to other trusts
for the benefit of Mr. Dunin and his family at Mr. Dunin’s request. The funds
were used for:
·
a $20,000,000 real
estate investment consisting of land adjacent to the Dunin family home near Toronto; and
·
two real estate
investments consisting of islands in the Bahamas,
which were purchased for a total of $5,000,000. These properties are being held
for the personal use of the Dunin family and for investment purposes.
E. Value of PMPL at time of 1998 reorganization
[77] The appellants and
the respondent each led
evidence as to the fair market value of all the shares of PMPL on April 6, 1998,
the date at which the common shares of PMPL were converted to fixed value
preference shares.
[78] In making the assessments, the Minister
assumed that the fair market value of the preference shares of PMPL on April 6,
1998 was substantially greater than $50,000,000.
[79] The valuations expert for the Minister,
Howard E. Johnson of Campbell Valuation Partners Ltd., determined a value for
all the shares of PMPL at $102,000,000. He did not value the different classes
of shares.
[80] I would mention that this valuation was
subject to several restrictions, qualifications and assumptions. In particular,
Mr. Johnson’s report noted that certain information was provided to him by
management and was not independently verified (Campbell Valuation Report, Appendix
F).
[81] The valuation expert
for the appellants was Peter
Hatges, president of KPMG Corporate Finance Inc. in Toronto.
He was of the opinion that the fair market value of all the shares of PMPL as
at April 6, 1998 was $50,000,000.
[82] Mr. Hatges’ opinion was based largely on a
valuation that he had prepared in 1998 for the purpose of assisting PMPL in
setting the redemption amount of the preference shares as required by the share
terms in the Articles of Amendment.
[83] The valuations of
both experts are far lower than the valuations used for purposes of subsequent arm’s length negotiations.
In December 1998, Mr. Dunin suggested a value of $400,000,000 to Sarna. In August
1999, a report by Arthur Anderson stated the following (Ex. R-1, Tab 69 – 2):
Based on our due diligence and further
analysis, we continue to believe that Progressive could achieve an equity value
of greater than $500 million.
[84] Notwithstanding this
difference, counsel for the Minister did not suggest that the value of PMPL was
in excess of $102,000,000 as at April 6, 1998. I would note that the expert for
the Minister provided a detailed explanation as to the reason for the large
discrepancy. At the relevant time PMPL was a corporation in transition, and as
it turned out PMPL was on the cusp of a meteoric rise that was not entirely
foreseeable at April 6, 1998.
[85] I would note in
particular that the 1998
reorganization took place at a time that PMPL was in the process of launching two
significant business lines for General Motors. The products were consoles referred
to as the GMT800 and the GMT425. At the time of the 1998 reorganization, there
were business risks associated with these new lines.
[86] I now turn to the
opinion of Mr. Hatges, whose factual assumptions were in part supported by the
testimony of Mr. Dunin.
[87] I did not find Mr.
Hatges’ opinion to be convincing. Overall, his report and testimony appeared to
significantly over-emphasize PMPL’s business challenges and under-emphasize the
business opportunities.
[88] Mr. Hatges’ view of the
GMT800 and GMT425 new business lines is an example of this. It was Mr. Hatges’
opinion that a potential purchaser would not put a positive value on the profit
potential for either business line. I am not satisfied based on the evidence as
a whole that this was a reasonable view to take.
[89] The GMT800 contract had been awarded by General Motors
approximately three years earlier, and at the time of the valuation the
business line was a few months away from an expected launch. I accept that
there were business risks associated with this business line at the relevant
time, but I am not satisfied that Mr. Hatges gave sufficient weight to its
profit potential.
[90] As for the other new business line, the GMT425,
this console was already in production but at the relevant time there was a
pricing dispute between General Motors and PMPL. I accept that the pricing
dispute would depress value, but I would conclude from the evidence as a whole
that Mr. Hatges over-estimated the risk on this business line.
[91] I would also mention that I have concerns
about the independence of Mr. Hatges in relation to his opinion. Mr. Hatges was
with KPMG and/or KPMG Corporate Finance Inc. at all relevant times. KPMG had a significant
business relationship with PMPL as PMPL’s auditors in 1998, and the firm had
also provided tax advice to Mr. Dunin and Mr. Garron.
[92] A further concern is
that in providing an opinion
for purposes of these appeals, Mr. Hatges was essentially defending the valuation
that he had previously prepared for PMPL to assist with the 1998
reorganization.
[93] I now turn to Mr. Johnson’s opinion. Mr. Johnson’s report and
testimony impressed me as being unbiased and thorough.
[94] The appellants criticized Mr. Johnson’s opinion
for taking into account information that was not available at the April 6, 1998
valuation date. One example is financial forecasts that were not available at
the relevant time.
[95] Although I accept
that the use of subsequent information is a weakness in Mr. Johnson’s
methodology, it was appropriate for Mr. Johnson to take expected future
profitability into account in some fashion. There is no reason for me to conclude
that Mr. Johnson’s use of this information led to an unreasonably high valuation.
[96] Where does that
leave us? The conclusion that I have reached is that the fair market value of
all the shares of PMPL as at April 6, 1998 was substantially greater than
$50,000,000. Since it is not necessary for this decision to determine an actual
value, I will refrain from doing so.
F. Other facts
[97] The gains realized by the Trusts on the sale to Oak
Hill were not subject to income tax in Barbados.
[98] Summersby and Fundy were subject to income
tax in Barbados on income earned in a year (not capital
gains) unless the income was distributed in the year. As mentioned earlier, in
2000 the Trusts distributed all but a small portion of their investment income.
[99] The preference shares of PMPL that were
created in the 1998 reorganization were redeemable at the option of PMPL and
their holders (DHI and GHL). If, however, one of the holders opposed a
redemption of shares requested by the other, the preference shares would not be
redeemed at that time. Instead all preference shares would begin to accrue a
fixed dividend.
[100] As mentioned earlier, the Minister introduced evidence
from Mr. Johnson regarding the value of a hypothetical option to acquire all
the shares of PMPL. The option was valued in the range of $2,400,000 to
$21,600,000.
[101] This evidence was provided to support the argument of the
Minister that the common shares acquired by the Trusts had considerable value
at the time that they were issued.
[102] I have some difficulty in making the leap suggested by
the Minister that the value of an option is a proxy for the value of the shares
acquired by the Trusts. I could understand the analogy better if the preference
shares of PMPL were not immediately redeemable and retractable (or
dividend-bearing). One of key assumptions that Mr. Johnson relied upon in
valuing the option is the length of time that the option could be exercised.
IV. Issue 1 –
Are the Trusts resident in Canada under
general principles?
A. Overview of
treaty exemption
[103] The appellants submit that the Trusts are entitled to the exemption provided in
Article XIV(4) of the Treaty. It is worthwhile reproducing it again:
4. Gains from the alienation of any
property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only
in the Contracting State of which the alienator is a resident.
[104] The
expression, “resident of a Contracting State,” has a defined
meaning for purposes of the Treaty. Article IV(1) of the Treaty
provides:
1. For the purposes of this Agreement, the
term “resident of a Contracting State” means any person who, under the law of
that State, is liable to taxation therein by reason of his domicile, residence,
place of management or any other criterion of a similar nature. The terms
“resident of Canada” and “resident of Barbados” shall be
construed accordingly.
[105] In light of the definition, each of the Trusts is a “resident of Canada” for
purposes of the Treaty if it is liable to taxation in Canada by virtue
of residence or by one of the other listed criteria.
[106] The test
is the same in determining whether the Trusts are resident in Barbados.
B. Are the Trusts
resident in Barbados?
[107] The appellants submit that the Trusts are resident in Barbados for purposes of the Treaty.
[108] The Minister has not taken a view one way or the other on
the issue, noting that the residence tie-breaker provision in the Treaty
has not been engaged by an agreement of the competent authorities.
[109] Since
this matter has not been put in issue by the Minister, I will not decide the
appeals on the basis of whether or not the Trusts are resident in Barbados.
[110] Nevertheless, it may be useful to set out a summary of
the evidence presented regarding Barbados residence.
[111] The
appellants introduced expert evidence in the form of testimony from Mary
Mahabir, a Barbadian solicitor. In her opinion, the Trusts are resident in Barbados for the purposes of the Treaty because they
are resident in Barbados according to its domestic tax law and they
are subject to the most comprehensive basis of taxation there. In effect, this
opinion was only in respect of the relevant law, as it should be. The necessary
facts to support the opinion were assumed.
[112] Ms.
Mahabir prefaced her opinion regarding Barbados domestic tax law by stating
that there is no statutory or judicial authority in Barbados concerning the residence of a trust.
[113] Notwithstanding
the lack of Barbados’ judicial precedent, Ms. Mahabir was of the view that,
under the common law, the residence of a trust is determined by reference to
the place of residence of the trustees, upon the assumption that the control
and administration of the trust was exercised in that place by resident
trustees.
[114] I would make two comments concerning this opinion.
[115] First, Ms.
Mahabir stated in cross-examination that her opinion was based on the
assumption that St. Michael exercised its duty as trustee in a manner
consistent with its fiduciary obligations and on the basis that St. Michael had
sole control of the management and administration of the Trusts in Barbados. She did not conduct an independent investigation of
this, and acknowledged that her opinion could differ if this was not the case.
[116] Second, as for Ms. Mahabir’s opinion as to the common law
test, she refers to two authors in support.
[117] In one reference, the author suggests that Barbados would follow the principles stated in the Canadian Thibodeau
decision, referred to below, and in Canadian administrative policy. In this
regard, Ms. Mahabir comments:
[The above common law test] is consistent
with the approach taken by Professor Gilbert Kodilinye, in his text Commonwealth Caribbean Trusts Law, who stated that “… These principles of
interpretation of the residence of a trust [stated in the leading Canadian case
of Thibodeau Family Trust v. The Queen and in Interpretation Bulletin
IT-447 Residence of a Trust or Estate May 30, 1980*] are given full weight
and acceptability in the Commonwealth Caribbean jurisdictions […].”
* Not edited.
[118] The other supporting reference referred to by Ms. Mahabir
is of questionable relevance. Ms. Mahabir refers to an excerpt from Stanley & Clarke, Offshore Tax
Planning (London: Butterworths, 1986), at 75. This appears to be a reference
to a legislative test of residence, not a common law test.
[119] For this
reason, I question the relevance of the reference to Offshore Tax Planning.
We are left, then, with the Canadian authorities referred to by Ms. Mahabir,
namely Thibodeau and Canadian administrative practice.
[120] Based on
Ms. Mahabir’s opinion and my findings of fact below, there appears to be a
serious question about the correctness of the appellants’ position that the
Trusts are resident in Barbados for purposes of the Treaty. In
light of the fact that the issue has not been engaged, I do not propose to
comment further.
C. Are the Trusts
resident in Canada?
(1) Overview
[121] In determining Canadian residence for purposes of Article
IV(1) of the Treaty, it must be considered whether the Trusts are liable to taxation under the Act
by reason of residence or one of the other listed criteria.
[122] The
Minister submits that the Trusts are liable to taxation under the Act by
reason of residence. This is the question to be determined.
[123] In reference to the Act, there is no legislative definition
of the term “resident” that is relevant here. Residence must therefore be interpreted in
accordance with general principles.
(2) Positions of the parties
[124] The
appellants submit that, for purposes of the Act, the Trusts are not
resident in Canada under general principles.
[125] They
submit, first, that the residence of a trust is determined by the residence of
the trustee and that the actual management and control of the trust is not a
relevant consideration.
[126] The
applicable judicial authority, it is submitted, is the decision of the Federal
Court – Trial Division in Dill and Pearman, Trustees of the Thibodeau Family
Trust v. The Queen, 78 DTC 6376 (“Thibodeau”).
[127] According to the appellants, Thibodeau establishes that a trust is resident in the jurisdiction where its
trustee resides. In this case, there is no dispute that St. Michael, the
trustee, is resident only in Barbados.
[128] Further,
it is submitted that the court in Thibodeau concluded that the central
management and control test (which has historically been applied in determining
the residence of corporations) is inapplicable to trusts.
[129] In the
alternative, the appellants submit that the evidence establishes that the management
and control of the Trusts was in fact with St. Michael.
[130] The
Minister, on the other hand, submits that Summersby and Fundy were controlled
by Mr. Dunin and Mr. Garron, respectively. St. Michael was a compliant trustee,
it is submitted, that implemented decisions made by or on behalf of Mr. Dunin,
in respect of Summersby, and by or on behalf of Mr. Garron, in respect of
Fundy.
[131] It is submitted that the Trusts should be viewed as
resident in Canada on these facts, following the central management and control test that
has been accepted for corporations.
[132] Counsel for the Minister acknowledges that the court in Thibodeau rejected the central management and control test in obiter.
However, counsel notes that the judge had actually taken this factor into
account in coming to the conclusion that the Thibodeau Family Trust was not
resident in Canada. She suggested that Thibodeau is an
“odd” case that is not of much assistance in these appeals.
[133] As for
other judicial authorities, the Minister relied on two decisions of the Special
Commissioners in the United Kingdom: Wensleydale’s Settlement Trustees v.
Inland Revenue Commissioners, [1996] STC (SCD) 241 (“Wensleydale”);
and Smallwood and Smallwood, Trustees of the Trevor Smallwood Trust, et al
v. Commissioners for Revenue and Customs, [2008] UKSPC SPC0069 (“Smallwood”).
My understanding is that Smallwood is currently under appeal after the
decision of the Special Commissioners was reversed by the High Court of
Justice for reasons unrelated to the issue here ([2009] EWHC 777 (Ch)).
(3) What is appropriate
test of trust residence?
[134] An
appropriate starting point for the analysis is a consideration of the decisions
referred to by the parties: Thibodeau, Wensleydale, and Smallwood.
[135] For the
reasons below, I have concluded that none of these decisions are of much
assistance.
[136] First, I cannot agree with the appellants’ submission
that Thibodeau sets out a test of trust residence based
solely on the residence of the trustee.
[137] It is clear
from the reasons in Thibodeau that the judge did not purport to state a
general test of trust residence. The decision was intended to be limited to the
particular facts of the case. At page 6386:
In this case, […] a judicial formula
applicable to the facts of this case alone must be employed, […].
[138] I would also comment that there was nothing on the
particular facts in Thibodeau that would support a finding that the
trust was resident in Canada. In that case, the Minister had argued that one trustee resident in Canada effectively
controlled the Thibodeau Family Trust, notwithstanding that there were two
other trustees resident in Bermuda. The judge rejected this and made a factual
finding that the Canadian trustee did not control the trust.
[139] It would
be wrong in my view to conclude that Thibodeau stands for the
proposition that the residence of a trustee is always the deciding factor in
determining the residence of a trust.
[140] The Thibodeau decision is more relevant in these appeals
for Gibson J.’s comment in obiter that rejects the application of a central
management and control test to trusts.
[141] The
basis for rejecting this test is stated in Thibodeau at p. 6385:
The judicial formula for this respecting a
corporation, in my view, cannot apply to trustees because trustees cannot
delegate any of their authority to co-trustees. A trustee cannot adopt a
“policy of masterly inactivity” as commented upon in Underhill on the Law of
Trusts and Trustees, 12th Edition, page 284; and on the evidence,
none of the trustees did adopt such a policy.
[142] If the above comment is intended to be applicable in all
cases, regardless of the particular facts and circumstances, I respectfully
cannot agree with it.
[143] It may be correct that trustees would generally be in
breach of fiduciary obligations if they adopted a policy of “masterly
inactivity.” The difficulty that I have with applying the obiter comment
in all circumstances, though, is that it presumes that trustees always comply
with their fiduciary obligations.
[144] This may have been a reasonable conclusion for Gibson J.
to make on the particular facts before him, but it is not always the case.
[145] The facts in a decision of the Federal Court of Appeal
rendered shortly before Thibodeau provide an example where trustees may
not have complied with their fiduciary duties: Robson Leather Company Ltd.
v. MNR, 77 DTC 5106 (“Robson Leather”).
[146] I would mention in particular that the argument accepted
in Thibodeau that trustees should be presumed to comply with their
fiduciary obligations was rejected by the Federal Court of Appeal in Robson
Leather. The decision was not referred to in Thibodeau.
[147] Robson Leather is a case about arm’s length
dealing, not residence. The issue was whether one trustee had de facto control
of a trust notwithstanding that there were other trustees.
[148] Although the context in Robson Leather is quite
different, the decision is instructive because the amount of control exercised
by the trustees was examined by the Court.
[149] The relevant excerpt from the decision of Urie J. in Robson
Leather is set out from p. 5112:
[…] It was argued that it could not be
assumed that the trustees would not carry out their duties as trustees in
accordance with the legal obligations imposed on trustees to formulate their
own judgments in matters affecting the trusts, but rather would follow Robson’s
instructions merely because he had the power to cause the retirement of either
or both of the other two trustees if they did not do so.
The learned Trial Judge refused to accept
this submission for the reasons set out hereafter:
In my opinion,
however, in deciding the larger issue before me. [sic] I must look at
the practical and business reality of the operation of the trust. By demanding
retirement of trustees, or even the threat of such demand, or the knowledge in
the co-trustees that the ultimate power was always in Mr. Robson, I have no
doubt that Mr. Robson, for practical and legal purposes, controlled the trust
and, therefore, controlled Robson Leather. I add the caveat here, that
share control alone, (or absence of it), is not necessarily conclusive; it is a
factor to be considered in determining questions of “arm’s length”.
With this conclusion I agree […]
[150] With respect to the contrary view expressed by the judge
in Thibodeau, it does not make sense in my view to assume that in every
case trustees will comply with their fiduciary obligations. The particular
facts and circumstances must be considered.
[151] For
these reasons, in my view the Thibodeau decision does not form a solid
foundation for rejecting the Minister’s position that residence should be
determined by a central management and control test.
[152] I now
turn to Wensleydale and Smallwood.
[153] The Minister’s argument with respect to these decisions
can be briefly dealt with. Although counsel acknowledged that the test of
residence that was relevant in these decisions was a legislative rather than
common law test, she suggests that the decisions are nevertheless relevant
because the courts were influenced by the central management and control test.
[154] I do not agree with this submission. I am unable to find
any assistance in these decisions in determining an appropriate common law test
of trust residence.
[155] Having concluded that the judicial decisions referred to
by both counsel do not provide much assistance, I would also comment that my
own canvass of the jurisprudence and literature did not reveal much more than
this.
[156] In view of this lacuna, how should the issue of trust
residence be approached?
[157] As mentioned earlier, I have concluded that the Thibodeau
decision is insufficient authority for me to reject a central management and
control test to determine trust residence. In fact, as I will explain, in my
view there are very good
reasons why the judicial test for residence that has been developed in a
corporate context should also apply to trusts.
[158] First,
the basis for applying this test to corporations is equally applicable in a
trust context. In one of the most quoted passages in Canadian tax
jurisprudence, the reasons for adopting this test were stated by Lord Loreburn
in De Beers Consolidated Mines Ltd. v. Howe, [1906] AC 455, at 458:
. . . In applying the conception of
residence to a company, we ought, I think, to proceed as nearly as we can upon
the analogy of an individual. A company cannot eat or sleep, but it can keep
house and do business. We ought, therefore, to see where it really keeps house
and does business. An individual may be of foreign nationality, and yet reside
in the United Kingdom. So may a company. Otherwise it might have its chief seat of
management and its centre of trading in England
under the protection of English law, and yet escape the appropriate taxation by
the simple expedient of being registered abroad and distributing its dividends
abroad. The decision of Kelly C.B. and Huddleston B. in the Calcutta Jute
Mills v. Nicholson and the Cesena Sulphur Co. v. Nicholson ((1876) 1
Ex. D. 428), now thirty years ago, involved the principle that a company
resides for purposes of income tax where its real business is carried on. Those
decisions have been acted upon ever since. I regard that as the true rule, and
the real business is carried on where the central management and control
actually abides.
It remains to be considered whether the
present case falls within that rule. This is a pure question of fact to be
determined, not according to the construction of this or that regulation or
by-law, but upon a scrutiny of the course of business and trading.
[Emphasis added.]
[159] Although there are
significant differences between the legal nature of a trust and corporation,
from the point of view of determining tax residence, the characteristics are
quite similar. The function of each is, at a basic level, the management of
property.
[160] Second,
adopting a similar test of residence for trusts and corporations promotes the
important principles of consistency, predictability and fairness in the
application of tax law.
[161] The
development of a test of trust residence in Canada
has been left by Parliament to the courts. If courts decide to develop a
totally different test of residence for trusts than they have for corporations,
there should be good reasons for doing so. I am not satisfied that there are
good reasons.
[162] I
conclude, then, that the judge-made test of residence that has been established
for corporations should also apply to trusts, with such modifications as are appropriate.
That test is “where the central management and control actually abides.”
[163] Before leaving this issue, I would mention that there are
a number of very early Canadian
decisions that concluded that income from a trust was taxable in Canada if the
trustee was resident in Canada. These decisions include: McLeod v.
Min. of Customs & Excise, [1917-27] CTC 290, 1 DTC 85 (SCC), MNR v.
Royal Trust Co., [1928-34] CTC 129, 1 DTC 243 (PC), and MNR v. Holden,
[1928-34] CTC 127, 1 DTC 234 (PC).
[164] Neither
counsel referred to these decisions and I think they were right in not doing
so. These decisions have outlived their usefulness because the legislative scheme
is much different today than it was when these cases were decided.
[165] The
reason that the courts focussed on the residence of the trustee in the earlier
jurisprudence was that the tax legislation at the time did not purport to
impose tax on trusts. Instead, either the trustee or the beneficiaries were
subject to tax on the trust income.
[166] The legislative scheme in respect of the taxation of trusts has evolved over time.
Under the scheme that is applicable in these appeals, a trust is the object of
the tax, albeit with the recognition that the involvement of the trustee is
necessary for certain purposes. In essence it is a hybrid. This is reflected in
subsections 104(1) and (2) of the Act, which are reproduced in an
appendix.
[167] I agree
with Gibson J.’s comment in Thibodeau that section 104 does not assist
in determining trust residence (at 6377).
[168] I would
also mention that the legislative scheme that was in effect when Thibodeau
was decided was less clear on the point than it is now.
[169] At the time of Thibodeau, section 104(1) provided that a reference in the Act to
a trust “shall be read” as a reference to the trustee. Effective in 1998, this
subsection was amended to provide that a reference in the Act to a trust
“shall, unless the context otherwise requires, be read to include a reference
to the trustee.”
[170] For these
reasons, I conclude that the central management and control test should apply
in determining the residence of trusts for purposes of the Act. It may
be argued that a phrase such as “mind and management” may be more descriptive,
but the term “central management and control” has the advantage of promoting
consistency and certainty. It is desirable that the test for corporations and
trusts be as similar as the circumstances allow.
(4) What
does management and control mean?
[171] Before
applying a management and control test to the facts of this case, it is useful
to consider how other courts have approached the issue.
[172] To my
knowledge, the management and control test has to date only been applied in a
corporate context. A review of judicial decisions in this area suggests that
management and control has usually been found to reside in a board of
directors, even though the directors may be under significant influence from
shareholders or others.
[173] This is
evident from the few Canadian decisions that are relevant. The most notable may
be the decision of the Federal Court of Appeal in Birmount Holdings Ltd. v.
The Queen, 78 DTC 6254, at para. 33.
[174] In the
United Kingdom, the issue was quite recently considered by the Court of Appeal
in Wood
v. Holden, [2006] EWCA Civ 26, [2006] STC 443.
[175] The issue in Wood v. Holden was whether a Netherlands corporation, Eulalia,
was a resident of the United Kingdom under the central management and control test. The
Court of Appeal decided that Eulalia’s residence was in the Netherlands, where its managing
director, ABN AMRO, was located.
[176] The threshold level of decision-making that the Court of
Appeal accepted from the managing director appears to be low. In particular,
the absence of information by ABN AMRO to make an informed decision does not
appear to be a significant factor.
[177] The conclusions of Lord Justice Chadwick are stated in
paragraphs 40 and 41:
40. In my view the
judge was correct to hold that the only conclusion open to the special
commissioners, on the facts which they had found, was that Eulalia was resident
in the Netherlands. The special commissioners made two
findings of fact which, as it seems to me, lead necessarily to that conclusion.
The first (at paragraph 119 of their decision) was that “the directors of
Eulalia . . . were not by-passed nor did they stand aside since their
representatives signed or executed the documents”. That finding takes this case
outside the class exemplified by the facts in Unit Construction Co Ltd v
Bullock. The second – implicit in the finding that “their representatives
signed or executed the documents”, but made explicit in the observation (at
paragraph 134 of the special commissioners’ decision) that “From the viewpoint
of Eulalia we find nothing surprising in the fact that its directors accepted
the agreement prepared by Price Waterhouse . . .” – was that ABN AMRO (the
managing director of Eulalia), through Mr Fricot and Mr Schmitz, did sign and
execute the documents (including the purchase agreement); and so must, in fact,
have decided to do so.
41. Those two facts
make it impossible to treat this case as one in which ABN AMRO, as managing
director of Eulalia, made no decision. There was no evidence that Price
Waterhouse (or anyone else) dictated the decision which ABN AMRO was to make;
although, as the special commissioners and the judge pointed out, Price
Waterhouse intended and expected that ABN AMRO would make the decisions which
it did make. There was no basis for an inference that Price Waterhouse (or
anyone else) dictated to ABN AMRO what decision it should take; and it is
inherently improbable that a major bank (or its trust company) would allow its
actions to be dictated by a client’s professional advisers (however eminent).
On a true analysis the position was that there was no reason why ABN AMRO
should not decide to accept (on behalf of Eulalia) the terms upon which the
Holdings shares were offered for sale by CIL; and ample reason why it should do
as it was expected it would.
[178] If paragraph 40 above had stood alone, without paragraph
41, the management and control test would appear to be usually satisfied by the
simple fact of signing documents.
[179] The comments in paragraph 40 are tempered, however, by
the comments that follow. In paragraph 41, the judge notes that the actions of
ABN AMRO were reasonable, and that no one had dictated those actions.
[180] It is difficult, and perhaps unwise, to express a
definitive statement of principle based on judicial decisions on management and
control, which are quite fact dependent. It is probably fair to conclude,
however, that in order to find that management and control is located with
shareholders, courts generally require something more than evidence of
shareholder influence.
[181] As far as judicial decisions in a trust context, it is
relevant to consider Smallwood.
[182] The Smallwood case involved a trust created by Mr.
Smallwood, a U.K.
resident, for the benefit of he and his family. In order to avoid U.K. tax on a
sale of shares by the trust, the trustee was changed to a Mauritius corporation for a short
period of time. The trust argued that it was entitled to an exemption in the
relevant treaty that is similar to the exemption that is at issue here.
[183] The decision of the Special Commissioners turned on the
application of a treaty tie-breaker for determining residence. That test was
the “place of effective management” (POEM).
[184] Effective management was found to have remained in the
United Kingdom, notwithstanding that low level decisions were made by the
trustee in Mauritius. At para. 140, the Special Commissioners stated that the
administration of the trust had moved to Mauritius but the “key” decisions were made
in the United
Kingdom.
[185] The decision of the Special Commissioners is useful for
its consideration of effective management of a trust where the choice of
trustee was purely a tax-driven decision.
[186] It should be noted that this decision was reversed by the
High Court of Justice on unrelated grounds. I understand that a further appeal is
pending.
(5) Application to these appeals
[187] I turn now to the application of a management and control
test to the particular facts in these appeals.
[188] The relevant time at which residence should be determined
is when the shares were disposed of by the Trusts. It is appropriate to consider the facts and circumstances at
that time, but it also useful to look at them over a longer period. I have
placed little weight, though, on facts and circumstances after the assessments
were issued.
[189] Based on the evidence as a whole, I find that St. Michael was selected by Mr.
Dunin and Mr. Garron, or advisers acting on their behalf, to provide
administrative services with respect to the Trusts. Its role was to execute
documents as required, and to provide incidental administrative services. It
was generally not expected that St. Michael would have responsibility for
decision-making beyond that.
[190] I would
note that there is no explicit evidence that establishes the limited nature of
St. Michael’s role. In the context of this tax-motivated arrangement, which
appears to have been carefully planned and implemented with considerable
assistance from lawyers, one would not expect there to be such evidence. The
conclusion is based on the evidence as a whole, including the failure of the
appellants to provide satisfactory evidence establishing otherwise.
[191] Although the arrangement with respect to St. Michael’s
role was likely unwritten, it was effectively enforceable through the ability
of the protector to replace
St. Michael as trustee through the protector mechanism. That mechanism included
the ability of Mr. Dunin and Mr. Garron, with their spouses, to replace the
protector.
[192] The general nature of the decision-making that would be
required to administer the Trusts would have been understood at the Trusts’
inception. Such decisions included the purchase and sale of the Trusts’
interests in PMPL, the investment of the cash proceeds received upon the sale, the
making of distributions to the beneficiaries, and taking appropriate action to
minimize the tax burden of the Trusts.
[193] I mention taxes in particular because the overall structure
seems to involve a large number of trusts and corporations.
[194] What was the arrangement in regard to these decisions? I
find that, more likely than not, St. Michael had agreed from the outset that it
would defer to the recommendations of Mr. Dunin and Mr. Garron. Further, I find
that Mr. Dunin and Mr. Garron had understood this to be the arrangement from
the outset.
[195] Below are some of the factors that I have taken into account
in reaching the conclusion that St. Michael’s role was limited.
[196] First, shortly after the Trusts were formed, Mr. Jesson prepared
internal memoranda setting out the intentions of the trustee. It seems clear
from these documents, which are reproduced in an appendix, that there was an
understanding that St. Michael’s role would be more limited than that
contemplated by the trust indentures.
[197] In particular, the memoranda suggest that St. Michael
would act in an administrative capacity only with respect to the sale of PMPL
and that St. Michael would not make distributions to the family members of Mr.
Dunin or Mr. Garron without their respective consents.
[198] Second, there was very little evidence as to the how the
investment of the cash proceeds was handled, but what evidence there was suggests
that it was under the direction of Mr. Dunin and Mr. Garron for Summersby and
Fundy, respectively.
[199] The evidence revealed that trusts managed by St. Michael
often used the investment advisers that the beneficiaries used. It was
suggested that this was desirable to coordinate the investment strategy.
[200] The employment of this practice not only enabled a
coordinated investment strategy, it also had the result that the beneficiaries
could choose the investment advisers for the trusts, be kept informed by the
advisers directly, and give directions to the advisers. Further, the advisers
could follow these directions without trustee approval, within the investment
parameters provided to them. In short, the beneficiaries could for all intents
and purposes direct the investment activity.
[201] It is likely that Summersby and Fundy operated in this
manner while they invested the funds directly. There is also no reason for me
to think that the investment of the funds by the BVI corporations was handled
differently.
[202] I would also comment that I was not satisfied from the
evidence that Mr. Dunin or Mr. Garron had used the initial investment advisers
(Mr. Carter and Mr. Farley, respectively) for their personal investments prior
to the sale of PMPL. It may have been that Mr. Dunin and Mr. Garron selected
them primarily for the Trusts’ investments, rather than their own.
[203] In respect of Mr. Carter, he had prior involvement with
PMPL due to his insurance expertise, and I note that a proposal to manage
investments was provided by him to Mr. Dunin and DHI in April, 2000 (Ex. R-1,
Tab 85).
[204] In respect of Mr. Farley, the following testimony in Mr.
Garron’s examination-in-chief is instructive (p. 391-392 of transcript):
Q. It is an agreed fact that you and
Berna and the Garron Family Trust received $25 million from Oak Hill, correct?
A. Yes.
Q. What did
you, Berna and the Garron Family Trust do with that $25 million?
A. We gave
some to our two boys and then we established a foundation.
Q. What sort
of foundation is that?
A. A
charitable foundation, mostly medical.
Q. Did you
keep any for yourself?
A. Yes.
Q. What have
you done with the funds you kept for yourself?
A. I
invested them, mostly in equities.
Q. Do you
use investment advisers for those personal investments?
A. No, not
to pick the investments, no.
Q. You
don’t?
A. No.
Q. Do you
any use any investment advisers at all, personally?
A. Yes. I
gave some of the funds to Guardian Capital.
[205] Third, as for the tax strategies implemented by Summersby
and Fundy, Thorsteinssons likely took a lead role in coordinating the team of
professional advisers. Thorsteinssons acted as tax advisers to the Trusts, Mr.
Dunin and Mr. Garron. There is no doubt that the tax-minimization plans
developed by the team of tax advisers, including PwC-Barbados, were under the
direction, explicit or otherwise, of Mr. Dunin for Summersby and Mr. Garron for
Fundy.
[206] Fourth, the
appellants introduced virtually no documentation that would support their view
that St. Michael took an active role in managing the Trusts. Most of the
documentation introduced by the appellants consisted of formal agreements,
trustee accounts and tax returns.
[207] Fifth, the
documentary evidence introduced by the Minister, which includes four binders of
correspondence and other documents, is generally consistent with the above
conclusion. In particular, there is very little documentary evidence that St.
Michael had any involvement in the affairs of the Trusts other than in the
execution of agreements, and in administrative, accounting and tax matters.
[208] Another relevant consideration is that St. Michael was,
from 1998 to 2002, an arm of an accounting firm. It is likely that St. Michael
was formed to provide services that were complementary to its core practice
areas, and in particular tax services. It appears that PwC-Barbados provided
significant tax advice regarding the overall offshore structure of the property
held by the Trusts, and that PwC-Barbados assisted PwC in Toronto in attempting to
provide further tax services.
[209] Although PwC-Barbados had significant expertise in accounting
and tax matters, whether they had expertise in managing trust assets is questionable
from the evidence.
[210] I would note in particular an email sent in 1999 from
Brandon Fahy of PwC-Barbados to Dean Levitt of PwC in Canada (Ex. R-1, Tab 70). It suggests
that Mr. Garron may have been viewed internally as the “client” in respect of
Fundy. The email is reproduced in full:
We have a Canadian resident client who will
likely be receiving a large amount of money in their Barbados Trust as a result
of an estate freeze (i.e.sale of Canco shares by the Barbados trust).
The client may contact you for information
on investment managers as part of your role in the Investment Advisory Group. He
basically needs some guidance for qualified offshore managers and what PwC
Toronto might be able to do. However, the Trust will remain a non-resident of Canada and depending on the proposed Canadian Tax
legislation on Trusts, will remain exempt from Canadian taxation. He currently
has Thorsteinsson’s as tax advisers to the corporate sale.
Let me know if he contacts you. His name is
Myron Garron. Peter Jesson assisted with the estate freeze along with Jim
Knott.
[211] I turn now to a consideration of the oral testimony. For
the reasons below, I find that it is not inconsistent with the conclusion about
St. Michael’s limited role.
[212] The only witnesses that were called by the appellants in
regards to management and control of the Trusts were Mr. Dunin, Mr. Garron and
Mr. Hutchinson.
[213] The main problem with this testimony is that it did not
provide a very clear picture as to how the Trusts operated. The testimony of Mr.
Dunin and Mr. Garron was self-interested and was understandably less than full
and complete in my view.
[214] As for Mr. Hutchinson, he had very little knowledge of
the Trusts during the most relevant period when St. Michael was owned by
PwC-Barbados. He was not intimately involved prior to his taking over from Mr.
Knott in July 2003.
[215] There
are many other individuals who could have shed light on this issue. The list of
possible witnesses includes:
·
Paul Gibney, tax lawyer
from Thorsteinssons in Toronto. Mr. Gibney likely would have been an
important witness because he appeared to be a main point of contact for St.
Michael and for Mr. Dunin and Mr. Garron with respect to all matters involving
the Trusts;
·
Stephen Bowman, tax
lawyer formerly of Thorsteinssons in Toronto. It appears
that Mr. Bowman played an important role in connection with the 1998
reorganization. In particular, Mr. Bowman travelled with Mr. Dunin to Barbados to interview potential trustees. One of the persons who
they met with was Mr. Jesson;
·
Peter Jesson, a former
tax partner of PwC-Barbados. Mr. Jesson was the PwC-Barbados partner in charge
on behalf of St. Michael when the Trusts were created, and he prepared the
memoranda of trustee intentions;
·
Jim Knott, the former
general manager of St. Michael who had the day to day responsibility for the
Trusts on behalf of St. Michael;
·
Tim Carroll, of Arthur
Anderson in Chicago, who was the lead adviser on the sale of
PMPL. He could have testified as to whether he had any discussions with St.
Michael during the sale process;
·
Doug Farley of Guardian
Capital in Toronto, who was the lead manager of investments
for Fundy;
·
A representative of
Mercers, who led the process to select the investment managers for Fundy;
·
Graham Carter of CAP
Advisers in Toronto, who provided investment advice regarding
Summersby’s investments from 2000 to 2003;
·
Colin Carleton, a
consultant to Summersby who worked with Mr. Dunin to develop an investment strategy
around 2003;
·
A representative of
CGOV, who became the investment manager for Summersby in 2003; and
·
Julian Gill, a friend
of Mr. Garron’s and the protector of the Trusts.
[216] I was informed that Mr. Knott currently
lives in Spain and that he did not want any involvement with
St. Michael after his retirement in 2003. If Mr. Knott’s testimony was expected
to be helpful to the appellants, I question whether further steps might have
been taken to obtain his evidence. Nevertheless, there were many other
potential witnesses who also did not testify.
[217] I am troubled that no
further witnesses were called. It leaves me to infer that none of them would
have provided evidence that was favourable to the appellants.
[218] I now turn to the oral
testimony that was presented, starting with Mr. Dunin.
[219] Mr. Dunin is an impressive businessman, whose accomplishments
with respect to PMPL speak for themselves.
[220] It is very likely that Mr. Dunin had a good conceptual
understanding of St. Michael’s limited role.
[221] Although Mr. Dunin testified that it was his
understanding that St. Michael controlled the Trusts, I find the statement to
be disingenuous. Mr. Dunin oversaw the sale of PMPL, he selected the investment
advisers for Summersby, and he co-developed the investment strategy with Mr.
Carleton. Further, Mr. Dunin and his wife were effectively able to replace St.
Michael at any time.
[222] Mr. Dunin explained his involvement in the PMPL sale
process by saying that he was negotiating a sale of PMPL and not the shares of
the holding companies held by the Trusts.
[223] This explanation does not make any sense given the large
amount of Canadian tax that would have been payable if the assets of PMPL, or
the shares of PMPL, were sold directly. Mr. Dunin would have known that he was
negotiating a sale of shares by the Trusts.
[224] As for the ability to replace St. Michael, this could be
done by asking the protector to do it, or by replacing the protector if he was
not compliant. There was no evidence to suggest that the protector believed his
role to be other than assisting Mr. Dunin and Mr. Garron in their control of
the Trusts.
[225] In his testimony, Mr. Dunin gave the impression that he
had little interest in what
St. Michael was actually doing vis a vis Summersby and in knowing the
persons at St. Michael who were involved with Summersby.
[226] I do not
find this apparent lack of interest to be helpful to the appellants. If St.
Michael truly had a substantive role to play in managing Summersby, Mr. Dunin likely
would have been very interested in what St. Michael was doing and in ensuring
that the persons involved with Summersby were competent to manage it. As mentioned earlier,
there is no evidence that PwC-Barbados’ personnel were qualified to take on a
trustee’s duties.
[227] Mr. Dunin testified that Mr. Garron dealt with St.
Michael with respect to Sarna and that Mr. Carroll dealt with St. Michael with
respect to Oak Hill. There is no evidence that these men, or anyone else, kept
St. Michael informed of anything in connection with these transactions except
when it was necessary for agreements to be signed.
[228] I would comment specifically about the bank account used
by Summersby, which was with UBS in the Bahamas. Mr. Dunin testified that he was
not aware of this bank account. It is not clear to me whether Mr. Dunin meant
that he was not aware of the name of the bank or the specific bank account
number. In any event, the evidence suggests that the contact for UBS was made
in Toronto (Ex. R-1, Tab 102).
[229] In terms of Mr. Dunin’s other testimony, the general
impression that I had was that, in key areas, Mr. Dunin’s words appeared to be
so carefully chosen that his answers were often non-responsive. I had no
confidence that the answers he gave provided a complete picture.
[230] For example, in cross-examination the following exchange
took place in reference to the Sarna negotiations which were undertaken by Mr.
Dunin (Transcript, p. 219):
Q. […] To
achieve tax efficiency and avoid paying tax, '325 and '333 had to sell the
shares of PMPL to the purchaser?
A. I do not
believe we avoided tax. This transaction did not go through but, on the next
transaction, the tax was paid. I have a difficulty in saying that we would not
pay tax if the structure took place, because it was a similar purchase that Oak
Hill took place and the tax was paid.
[231] The above answer responds to the suggestion that tax was
avoided. It appears that the answer was referring to the remittance of
withholding taxes pursuant to section 116. The answer, though, deflects from
what was being asked, which was that the Sarna sale had to take place at the
trust level in order to achieve tax efficiency.
[232] Further, Mr. Dunin was asked the following in respect of
the Sarna letter of intent:
Q. Was it Sarna’s idea to purchase
the four shareholders of PMPL?
A. I believe
so, yes. This is their letter.
[233] Mr. Dunin was in charge of the negotiations with Sarna.
It makes no sense that Sarna would of its own volition offer to purchase the
shares of 325 and 333 rather than shares of PMPL. I find the answer to be disingenuous.
[234] I now turn to the testimony of Mr. Garron.
[235] Mr. Garron’s testimony was quite brief and it did not
shed much light on how Fundy was managed or controlled.
[236] Like Mr. Dunin, Mr. Garron gave the impression that he
had little interest in what St. Michael was doing. He stated that his occasional lunches with Mr. Knott
when he was vacationing in Barbados were in essence social occasions. This is
inconsistent with what one would expect if St. Michael was to have a greater
role in the management of Fundy’s assets.
[237] I do not
believe that Mr. Garron expected St. Michael to have control over Fundy’s
assets. I note, for example, that the correspondence from Mr. Fahy noted above suggested
that Mr. Garron may follow up concerning “qualified offshore managers” for the
sale proceeds to be received by Fundy (Ex. R-1, Tab 70).
[238] It is perhaps worthwhile mentioning that Mr. Garron
expressed surprise that PMPL was being valued at $400,000,000 for purposes of
the Sarna negotiations. I accept this testimony because Mr. Garron was not
actively involved in PMPL in 1998 and his relationship with Mr. Dunin was strained
at the time.
[239] I now turn to the testimony of Mr. Hutchinson.
[240] In his testimony, Mr. Hutchinson purported to testify as
a representative of St. Michael. I found this to be quite confusing because it
was often difficult to determine whether Mr. Hutchinson was speaking from his
own personal knowledge or from what he had read in one of St. Michael’s files.
[241] Mr. Hutchinson would have had considerable direct
knowledge as to how St. Michael operated from the time that he took over from Mr.
Knott in July 2003. At this point, however, St. Michael was no longer owned by
PwC-Barbados. In respect to the prior period, it is not clear how much direct
knowledge he had. As for the Trusts, Mr. Hutchinson stated that he had reviewed
the files that St. Michael had with respect to the Trusts and he stated that he
had spoken to Mr. Knott in 2003 prior to taking over from him.
[242] Mr. Hutchinson testified as to how St. Michael generally
performs its duties and he stated that St. Michael was aware of its fiduciary
obligations with respect to trusts and that it generally exercised due
diligence.
[243] Aside from the problem that Mr. Hutchinson may have had
little personal knowledge during the most relevant period, I also found that Mr.
Hutchinson’s testimony lacked sufficient detail to be persuasive. For example,
Mr. Hutchinson stated that St. Michael undertook due diligence but he provided
very little detail as to what was actually done in the way of due diligence.
[244] Based on the evidence as a whole (and the lack thereof),
it is likely that the due diligence that St. Michael undertook was quite
limited.
[245] I would note in particular that Mr. Dunin testified that Summersby
did not have an investment strategy prior to his development of one with Mr.
Carleton in 2003. This suggests that proper due diligence, as one would expect from
an experienced professional trustee, was not carried out after the sale
proceeds were received from Oak Hill.
[246] Mr. Hutchinson testified that the directors of St.
Michael had to ratify actions proposed to be taken, or were taken, on behalf of
trusts. Further, he testified that the directors were spoken to in advance of
the meetings to give them the necessary information so that they could approve
the transactions. The approval process took place either before or after the
transactions were completed.
[247] Approval by a board does not, by itself, establish due
diligence. The fact that there is no evidence that St. Michael had much
information about the transactions that they were implementing suggests that
the directors were aware that St. Michael’s role with respect to the Trusts was
to be a limited one, essentially administrative in nature.
[248] Mr. Hutchinson testified that he was uncomfortable with
CAP advisers because its investments appeared to be ultra conservative. When
the evidence is looked at as a whole, it is questionable whether Mr. Hutchinson
formed this view on his own initiative, or only after he was advised by Mr.
Gibney of Thorsteinssons that Mr. Dunin was working with Mr. Carleton on developing
an investment strategy.
[249] Mr. Hutchinson testified that he believed that no
investment reports for Summersby or other Dunin trusts were given to Mr. Dunin.
I find this testimony to be disingenuous. It defies common sense that Mr. Dunin
would not be provided with the investment results of the Dunin trusts. Mr.
Dunin confirmed that he did see the reports.
[250] Further, some of Mr. Hutchinson’s testimony calls into
question how knowledgeable he was concerning trust investments. For example,
Mr. Hutchinson was not aware that the Canadian real estate property owned by
one of the Dunin trusts was adjacent to the Dunin family home in Canada. Mr. Hutchinson also
seemed to lack detailed knowledge of a difficulty that CGOV was having in implementing
the investment strategy developed by Mr. Dunin and Mr. Carleton.
[251] Mr. Hutchinson’s testimony concerning the memoranda of
trustee’s intentions that was prepared by Mr. Jesson is also of concern.
According to his testimony, the memoranda are consistent with the trustee’s
duty to act in the best interest of the beneficiaries as a whole because the
interests of Mr. Dunin and Mr. Garron are the same as the interests of the other
beneficiaries of Summersby and Fundy, respectively. This makes no sense and I
do not find the answer to be credible.
[252] Based on the evidence as a whole, I conclude that the
management and control of both Trusts was located in Canada, namely with Mr. Dunin for
Summersby and with Mr. Garron for Fundy. These are the individuals who made the
substantive decisions respecting the Trusts, either directly or indirectly
through advisers that they directed.
[253] Counsel for the appellants submitted that, as a result of
fiduciary duties imposed on St. Michael by law, it should be presumed St.
Michael did whatever was required to make sure the transactions undertaken by
the Trusts were in the best interests of beneficiaries.
[254] I do not accept this submission.
[255] If the trustee of these Trusts had been a well-recognized
trust corporation with significant experience and expertise in managing trusts,
then such a presumption may make some sense. However, there is no evidence that
PwC-Barbados, which operated St. Michael, possessed either expertise or
significant experience.
[256] I would also mention that, under the trust indentures,
the liability of the trustee was generally limited to wilful neglect or
default. There likely was no practical concern about legal liability.
[257] Counsel also suggested that it was not reasonable to expect that the Trusts would
participate in the process of selling PMPL because 325 and 333 only owned non-voting
shares in PMPL.
[258] I also disagree with this submission. 325 and 333 may
only have owned non-voting shares in PMPL but these shares represented the bulk
of the value. From any common sense point of view, Mr. Dunin was conducting the
negotiations on behalf of the Trusts.
[259] Counsel for the appellants submits that the distinction
made in Wood v. Holden between “influence” and “dictating” is applicable
in these appeals.
[260] I do not agree with this.
[261] In Wood v. Holden, it was found as a fact that no
one had dictated the decisions made by the managing director. That conclusion,
however, was based on a substantial amount of evidence as to how decisions were
made. The following passage from the decision of the lower court was referred to
by the Court of Appeal, at para. 31:
[…] They [Mr. and Mrs. Wood] showed that,
from the time when Eulalia was acquired by CIL, its managing director was [ABN
AMRO] Trust, a large Dutch company with offices in Amsterdam. They showed resolutions and consequential actions being taken in the
offices in Amsterdam. They accepted that what Eulalia was doing
was part of a tax scheme which was being superintended by Price Waterhouse in
their Manchester offices. They called evidence from the
Price Waterhouse partners who at the time were heads of the firm's departments
for corporate finance and for tax in Manchester. They
produced a witness statement from the head of the legal department at [ABN
AMRO] Trust [Mr Wirix]. They were willing for the appeal to be adjourned in
order that the witness could attend in person to be available for
cross-examination. They produced all the documents which existed (so I assume,
and no one has suggested that any documents were suppressed). The documents
showed guidance and influence coming from Price Waterhouse, but no more than
that. Mr and Mrs Wood were able to point out that the Netherlands Revenue had
stated to the United Kingdom Revenue that the actual management of Eulalia was
carried out by [ABN AMRO] Trust, 'meaning that the taxable domicile of Eulalia Holding BV is located in the Netherlands'. Surely at that point they can say: 'We have done enough to raise a
case that Eulalia was not resident in the United Kingdom. What more can the Special Commissioners expect from
us? The burden must now pass to the Revenue to produce some material to show
that, despite what appears from everything which we have produced, Eulalia was
actually resident in the United Kingdom.'
[262] In contrast, in these appeals the appellants led very little
evidence as to the formation and operation of the Trusts. In these circumstances,
there is no basis for concluding that St. Michael did not agree to assume a
limited role in the management of the Trusts.
[263] In spite of the very able arguments of counsel, I am not able to agree with these
submissions.
[264] Before
leaving this issue, I would comment briefly about the relevance of the Smallwood
decision.
[265] Smallwood was concerned with the place of effective
management, which was a term used in the tie-break provision of the relevant
treaty. The test appears to be very similar to management and control.
[266] It is
significant in my view that in Smallwood the Mauritius trustee was put
in place for a short time and only to implement a single purchase and sale of
shares. The facts in the present appeals are so different that the Smallwood
decision is of little assistance.
[267] For
these reasons, I conclude that the central management and control of the Trusts
was located in Canada and that the Trusts were resident in Canada for purposes of the Treaty.
[268] This conclusion is sufficient to
dispose of these appeals, but I will comment on some of the other issues
raised.
V. Issue 2 –
Are the Trusts resident in Canada by
virtue of section 94?
A. Overview
[269] Section
94 of the Act applies to certain non-resident trusts and their
beneficiaries. For this purpose, non-resident trusts include trusts that would
be non-resident if the Act were read without reference to section 94.
[270] The
Minister submits that section 94 applies to Summersby and Fundy with the result
that they are deemed to be persons resident in Canada.
[271] The
consequences, according to the Minister, are that: (1) the capital gains
realized by the Trusts on the sale of shares of 325 and 333 are subject to tax
in Canada under the Act, and (2) the Trusts are not eligible for the exemption
in Article XIV(4) of the Treaty.
[272] The appellants take issue with the Minister’s position on
the application of both section 94 and the Treaty exemption. The two
issues will be discussed separately.
B. Does section
94 apply?
(1)
Introduction
[273] Section 94 is an unusual provision and it is useful to understand
the background that led to its enactment.
[274] In the
1966 Report of the Royal Commission on Taxation, the Commission commented on
the difficulty that could arise in attempting to tax income earned by a
non-resident trust. Below is an excerpt from page 536 of the Report:
Non-Resident Trusts. It is quite possible that some taxpayers
would endeavour to avoid Canadian tax liabilities through the creation of
non-resident trusts which would receive income and accumulate it for Canadian
beneficiaries. This may present a particular challenge to the Canadian tax
authorities in view of the possibilities for tax deferment under such an
arrangement. If the interests of the Canadian beneficiaries were contingent or
were subject to the exercise of discretion by trustees, it may be difficult to
devise a method for taxing such income in Canada
on an accrual basis. However, to the extent that income of a non-resident trust
was payable to a Canadian beneficiary or was vested in a Canadian beneficiary,
we would recommend that it should be treated as direct investment income and
subjected to tax under the rules we have recommended for other foreign direct
investment income.
[275] The
version of section 94 that is relevant in these appeals tackles the problem identified
by the Commission by providing for a different scheme of taxation depending on
whether the interest of the beneficiary is discretionary or not.
[276] Reproduced below is a general description of how the relevant version is
intended to operate that was prepared by the Department of Finance:[4]
Section 94 uses two different methods to
impose tax, depending on the terms of the non-resident trust.
If the amount to be distributed to a
beneficiary of the trust depends upon a discretionary power, paragraph 94(1)(c)
deems the trust to be resident in Canada for the purposes of Part I of the Act
and deems its taxable income for tax purposes to be the total of its Canadian
source income and its foreign accrual property income, if any. Each beneficiary
is jointly and severally liable to pay the Canadian tax of the trust. However,
the liability can be enforced against a particular beneficiary only to the
extent that the beneficiary has received a distribution from the trust or
proceeds from the sale of an interest in the trust.
For other non-resident trusts to which
section 94 applies, paragraph 94(1)(d) provides that it is to be treated in
much the same manner that a non-resident corporation is treated. If a Canadian
resident beneficiary holds an interest in the trust with a fair market value
equal to 10% or more of the total fair market value of all beneficial interests
in the trust, the trust is deemed to be a controlled foreign affiliate of the
beneficiary. Consequently, the foreign accrual property income rules apply to
the trust and the beneficiary, requiring the beneficiary to include a portion
of the foreign accrual property income of the trust in income. […]
[277] The method described
above in paragraph 94(1)(c) is the one that is engaged in these appeals.
The interests of the beneficiaries of Summersby and Fundy depend on a discretionary
power.
(2) Application to facts
[278] The Minister submits
that the Trusts are subject to section 94 because they each have acquired property, directly or indirectly
in any manner whatever, from a person described in s. 94(1)(b). Summersby
has acquired property from Mr. Dunin and Fundy has acquired property from Mr.
Garron, it is suggested.
[279] The appellants disagree that the Trusts
have acquired property from Mr. Dunin and Mr. Garron. Further, they submit that
the gains realized on the sale of shares of 325 and 333 are not a type of
income that is within the scope of section 94.
[280] The first question is whether “property”
has been acquired. The Minister submits that the property acquired is “growth
rights” in PMPL. Quite simply, the appellants submit that growth rights are not
property.
[281] The Federal Court of
Appeal has considered this issue in two cases, The Queen v. Kieboom, 92 DTC 6382 and Romkey v. The Queen, 2000 DTC 6047.
[282] In Gehres v. The Queen, 2003 DTC 913
(TCC), Bowie J. describes the principle from these two
cases, at para. 5:
[…] Those cases [Kieboom and Romkey]
stand for the proposition that an individual who, through a series of
transactions, causes the value of his interest in a corporation to be reduced
and the value of a beneficial interest held by his children to increase effects
an indirect transfer of property to his children within the meaning of
subsection 74.1(2).
[283] Counsel for the Minister submits that Romkey
goes farther than this by finding that there is transfer of property even if
there is no reduction in the value of the transferor’s shares.
[284] In my view, Romkey leaves some
questions unanswered in this regard. At paragraph 20 of the decision, Stone J.A. explicitly
defers consideration of this issue:
[…] It was submitted that the
appellants had no “equity” and, therefore, no “property” to transfer to the
trusts for the benefit of the children. In view of what follows it is not
necessary to decide whether the issuance of the shares to the trusts at the
time that the Company may have been without any assets constituted, by itself,
a transfer of property to the children.
[285] On the particular
facts in these appeals, it is not necessary to consider whether Romkey
has extended the principle from Kieboom because there has been a movement
of value in this case.
[286] The common shares of PMPL immediately prior
to the 1998 reorganization were worth substantially more than $50,000,000. These
shares were then converted to preference shares that had less value, with the
difference being shifted to the new common shares issued to 325 and 333.
[287] Although the
preference shares contained a price adjustment mechanism, the appellants themselves submitted that the
sale of the preference shares to Oak Hill for $50,000,000 was reasonable
because the price adjustment mechanism had not yet resulted in a change to the
redemption amount.[5]
[288] As a result, the 1998 reorganization
resulted in a movement of share rights attributable to existing equity from the
former holders of common shares of PMPL to new common shareholders. According
to Kieboom, this is a transfer of property.
[289] The next question is whether the property was acquired by
the Trusts, directly or indirectly in any manner whatever, from Mr. Dunin and
Mr. Garron.
[290] On this issue, I would agree with the appellants.
[291] The relevant facts are different for Fundy and Summersby.
Fundy will be considered first.
[292] The question is whether property was acquired by Fundy from
Mr. Garron. I am unable to agree with the Minister that it was.
[293] In applying the principle from Kieboom, it was GHL
that transferred property by converting its common shares of PMPL to preference
shares. Mr. Garron’s participation was simply as shareholder of GHL. He did not
transfer anything, either directly or indirectly.
[294] The facts are different for Summersby, however. In this
case, Mr. Dunin directly owned shares of PMPL prior to the 1998 reorganization.
One of first steps in the reorganization was a transfer by Mr. Dunin of shares
of PMPL to DHI. In this manner, Mr. Dunin indirectly transferred a property
interest in PMPL in the course of the reorganization.
[295] A more difficult question in respect of Summersby is
whether the property, consisting of rights in PMPL, was indirectly acquired by
Summersby when such property was acquired by 325.
[296] The appellants submit that an acquisition of property by
325 is not an acquisition of property by Summersby. The phrase “directly or
indirectly in any manner whatever” is intended only to apply to the manner in
which a transfer is effected, it is submitted.
[297] The Minister submits that the language is broad enough to
apply to indirect shareholdings through holding companies.
[298] The phrase “directly or indirectly in any manner
whatever” is highly ambiguous. It is not entirely clear which of these
interpretations was intended by Parliament.
[299] The preferred interpretation in my view is the more
restrictive one.
[300] I am particularly troubled by the uncertainty that is
inherent in the Minister’s position. Determining ownership of property through
a chain of corporations is a murky exercise with unclear results. Should one
look through more than a first tier subsidiary? Should one look through a
corporation that is not wholly-owned? Should one look through if the shares are
non-voting?
[301] The question is an important one, as the phrase “directly
or indirectly” is used in other provisions of the Act. I am loath to
adopt an interpretation that is likely to lead to considerable uncertainty. The
appellants’ interpretation is the preferred one in my view.
[302] In the result, I would conclude that there has been no
acquisition of property by the Trusts from Mr. Dunin and Mr. Garron.
[303] The
Minister submits in the alternative that there has been a deemed acquisition of
property by virtue of subsection 94(6) of the Act because the shares acquired
by the Trusts represent financial assistance provided by Mr. Dunin and Mr. Garron.
[304] I do not
propose to discuss this argument in any detail. In my view, to apply the term
“financial assistance” to common shares would stretch the ordinary meaning of
that term beyond what was intended.
[305] I would also briefly comment on the
argument of the appellants that section 94 does not apply to the type of income
that was realized.
[306] It is acknowledged by
the appellants that the gains
realized by the Trusts are a type of income that is included in s. 94(1)(c)(i)(B).
It is submitted, however, that the operative provision is s. 94(1)(c)(i)(A)
which specifically excludes this type of income. The appellants submit that the exclusion in (A) should
take precedence over the inclusion in (B).
[307] I disagree with the appellants’ submission
on this point. It is likely in my view that Parliament intended that all items
of income described in clause (A) or (B) be included in the tax base. This
interpretation is in accordance with the plain meaning of the provision, and I
am not persuaded that a contextual and purposive interpretation would provide a
different result.
C. Does s. 94
affect the Treaty exemption?
[308] If paragraph 94(1)(c) applies to the Trusts, the Minister submits that they are not
entitled to the Treaty exemption because the Trusts are deemed to be
resident in Canada.
[309] The
issue turns on the meaning of the phrase “resident of Canada” for purposes of
the exemption in Article XIV(4) of the Treaty.
[310] Residence is
defined in Article IV(1) of the Treaty. It provides:
1. For the purposes of this
Agreement, the term “resident of a Contracting State” means any person who,
under the law of that State, is liable to taxation therein by reason of his
domicile, residence, place of management or any other criterion of a similar
nature. The terms “resident of Canada” and “resident of Barbados” shall be construed accordingly.
[311] The Minister
submits that, for purposes of the above definition, trusts that are subject to
taxation by virtue of s. 94(1)(c) are liable to taxation under the Act
by reason of their “residence.”
[312] The appellants submit that a person is not a resident of
Canada for purposes of the Treaty unless the person is liable to
taxation in Canada on world-wide income. The argument is based on the appellants’
interpretation of The Queen
v. Crown Forest Industries Ltd., 95 DTC 5389 (SCC).
[313] The interpretation
suggested by the Minister is a possible interpretation of Article IV(1), but it
is not in harmony with the scheme of the Treaty in my view.
[314] The concept
of residence is central to the Treaty because it defines who the Treaty
applies to (Article I). In Article IV(1), the drafters of the Treaty
contemplate that residence is generally determined by reference to the domestic
tax legislation.
[315] The
essential difficulty that I have with the Minister’s position is that Summersby
and Fundy are not liable to taxation by virtue of s. 94(1)(c) in the
same way as trusts resident in Canada under general principles.
[316] The
scope of taxation under s. 94(1)(c) is more limited. Basically, it is a
scheme that is source-based. In essence, the deemed resident provision in s.
94(1)(c) is part of a formula used in determining the tax base. In only
a limited sense could it be said that trusts that are liable to taxation under
s. 94(1)(c) are taxed by reason of their residence. It would be more
accurate to say that trusts are liable to tax under s. 94(1)(c) because
they satisfy the requirements set out in s. 94(1)(a) and (b),
namely a beneficiary and contribution test.
[317] The appellants rely on Crown Forest. This decision is not
dispositive of the issue, in my view, because Crown Forest dealt with a different
question. Nevertheless, I would agree with the appellants that the Minister’s
interpretation is not consistent with the approach taken in Crown Forest.
[318] The following excerpt from the decision suggests that provisions
such as Article IV(1) of the Treaty are intended to extend the benefits
of a treaty only where the relevant country “asserts an unlimited right to tax
income.” Iacobucci J. states:
64 The commentaries to the OECD
Model Convention as well as academic sources indicate that generally the
domestic laws of the contracting states employ residence to apply on
"full-tax liability": paragraphs 3 and 8 to the commentary to Article
IV; Nathan Boidman, L. Frank Chopin and Alan W. Granwell, "Tax Effects for
Canadians of the New U.S. Code and Treaty Residency Rules (Part Two)"
(1985), 14 Tax Mgmt. Intl. J. 183, at pages 184-85. So, too, does the
American Law Institute, Federal Income Tax Project -- International Aspects
of U.S. Income Taxation II -- Proposals on U.S. Income Tax Treaties, at
pages 127-28:
Under prevailing practice, a country
entering into an income tax treaty extends the benefits of the treaty to a
person or entity that is a "resident of (the other) contracting
state". "Residence", in turn, is defined in terms of taxing
jurisdiction. A person or entity is considered resident in a country if that
country asserts an unlimited right to tax his or its income -- that is, a right
based upon the taxpayer’s personal connection with the country (as opposed to
the source of the income or other income- or asset- related factors). The test
of residence requires that the person or entity claiming treaty benefits be
"fully taxable" in the residence country, in the sense of being fully
subject to its plenary taxing jurisdiction.
65
Full tax liability is
not satisfied in a case where an entity is liable to tax in a jurisdiction only
on a part of its income.
[Emphasis added]
[319] It is
unlikely that the drafters of the Treaty had in mind including as
“residents of a contracting state” persons that are subject to a more limited
scope of taxation than persons who are resident under general principles. For
this reason, I reject the submission of the Minister.
[320] In light of this
conclusion, it is not necessary that I consider whether the reference to
“residence” in Article IV(1) can ever include residence determined by factors
other than physical factors.
[321] I mention this because
Simpson J. of the Federal Court recently focussed on this issue in RCI Trust,
which is currently under appeal. It was also discussed in obiter in the decision of the
Special Commissioners in Smallwood, at para. 101.
VI. Issue 3 –
Does s. 75(2) apply to the Other Appellants?
[322] Subsection
75(2) of the Act is an attribution provision that is applicable to
reversionary trusts.
[323] The
Minister has applied this provision in assessing the Other Appellants (Mr.
Dunin, Mr. Garron, Mrs. Garron and the Garron Family Trust) in respect of the
gains realized by the Trusts.
[324] Subsection
75(2) includes an “acquisition of property” provision that is similar to the
one in section 94. As a result, both counsel made the same arguments in respect
of this provision that they made in respect of the acquisition of property
requirement in section 94.
[325] The
relevant part of s. 75(2) provides:
75(2) Trusts — Where, by a trust created in any manner whatever
since 1934, property is held on condition
(a) that it or property
substituted therefor may
(i) revert to the person from whom the
property or property for which it was substituted was directly or indirectly
received (in this subsection referred to as “the person”), […]
[326] Although the relevant language above is slightly
different from section 94, the differences are not significant, in my view. I
conclude, therefore, that subsection
75(2) does not apply to the facts in these appeals.
[327] Before leaving
this issue, I would comment that the appellants did not rely on the Treaty
exemption in reference to s. 75(2). It appears that both counsel had concluded that
the Treaty did not apply to exempt a Canadian resident from taxation
under the Act, even if the gains were realized by a resident of Barbados.
[328] In light
of the broad wording of Article XIV(4) of the Treaty, I requested
submissions from the parties on whether the Other Appellants could rely on the exemption
in Article XIV(4) in reference to gains realized by the Trusts. I appreciated these
submissions, as well as others that I had requested.
[329] The
submissions did not refer to any judicial authorities specifically on this issue.
It appears that the matter has not previously been considered by a court in Canada.
[330] It is useful to reproduce again the relevant Treaty
provision. Article XIV(4)
provides:
4. Gains from the alienation of any
property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only
in the Contracting State of which the alienator is a resident.
[331] Under the plain
language of this provision, gains realized from the alienation of property by trusts
resident only in Barbados may not be taxed in Canada. The provision is not
ambiguous, and it is clearly broad enough to apply to an attribution provision
such as s. 75(2).
[332] Accordingly, unless
the plain meaning of Article XIV(4) does not reflect its object and spirit, the
exemption applies.
[333] The
Minister submits that the Treaty was not intended to have this result
because it would result in Canada ceding its right to tax its own residents.
[334] The question could be rephrased in the following manner.
Did the Treaty’s
contracting states intend to reserve to themselves under Article XIV(4) a residual
right to tax gains arising in the other contracting state?
[335] I would
have thought that the answer to this is no.
[336] The interpretation suggested by the Minister is not
compatible with one of the
primary objectives of the Treaty which is to minimize the potential for
double taxation.
[337] The
position of the Minister potentially frustrates this objective, and contravenes
the plain meaning of Article XIV(4).
[338] I would
also comment that the Treaty contains a specific override provision in
reference to another attribution rule. Article XXX(2) provides an override in
reference to the Canadian taxation of foreign accrual property income earned by
non-resident corporations. If the drafters of the Treaty had intended an
override for other attribution rules, they could have been specifically
provided for it.
[339] For
these reasons, I conclude that the exemption in Article XIV(4) takes precedence
over the application of subsection 75(2) to the Other Appellants.
[340] Finally,
I would comment that the issue of the interplay between attribution rules in
foreign affiliate legislation and treaties was discussed by Robert Couzin, a respected
Canadian tax lawyer, in Corporate Residence and International Taxation (Amsterdam:
IBFD, 2002), at 235-238. In the discussion, judicial decisions in the United Kingdom and France are mentioned. It appears that the above
conclusion is not inconsistent with that jurisprudence.
VII. Issue 4 –
Does the GAAR apply?
A. General
[341] The Minister has invoked section 245 of the Act
(the GAAR) as an alternative argument in support of all of the assessments. The
section is reproduced in an appendix.
[342] The GAAR requires a three-step analysis: (1) the
identification of a “tax
benefit,” as defined, (2) the identification of an “avoidance transaction,” as
defined, and (3) a finding of a misuse or abuse of legislative provisions.
[343] The appellants
acknowledge that there is a tax benefit and an avoidance transaction.[6] Implicitly
therefore, the appellants admit that a transaction or series of transactions was
undertaken primarily to obtain a reduction, avoidance or deferral of tax under
the Act or the Treaty. They submit, though, that the GAAR does
not apply because there has been no misuse or abuse of the Treaty.
[344] The Minister
submits that the steps involved in the 1998 reorganization were each undertaken
primarily to avoid Canadian tax on the gains realized by the Trusts. Tax
benefits were obtained by the Trusts and the Other Appellants, it is submitted.
[345] More
specifically, the following transactions were assumed by the Minister to be
avoidance transactions: the settlement of the Trusts, the incorporation of 325
and 333, the reorganization of the share structure of PMPL, and the
subscription by the Trusts for shares of 325 and 333.
[346] As the appellants did not dispute these assumptions, I
will focus the discussion on the misuse
or abuse element of the GAAR in s. 245(4).
[347] I would briefly mention as a preliminary matter that the appellants
did not dispute that the GAAR could apply to the Treaty. It is useful in
this respect to refer to section 4.1 of the Income Tax Conventions
Interpretation Act which specifically provides for this result. This
provision is also reproduced in the appendix.
B. Positions of
parties on abuse or misuse
[348] In terms of identifying legislative provisions that
allegedly have been abused, the replies of the Minister for all the appellants are
identical. The provisions identified are s. 39, 94, 110(1)(f)(i),
115(1)(b)(i) of the Act and Article XIV(4) of the Treaty.
Also mentioned was an abuse of the provisions of the Act and the Treaty
read as a whole.
[349] The Minister’s position was more selective in argument. For
one thing, separate arguments were made in reference to the Trusts and the
Other Appellants.
[350] As for the Trusts, counsel for the Minister repeated in
argument the reference to the legislative provisions above. As for the Other
Appellants, however, the Minister submitted only that there had been an abuse of
sections 39 and 75(2) of the Act.
[351] I would first comment regarding section 39 of the Act.
This is a provision of general application that provides for the computation of
capital gains and losses.
[352] Counsel for the Minister provided only a fleeting mention
of this provision in argument. The comments were so brief that I could not
really determine what the nature of the abuse argument concerning section 39
was. I do not propose to discuss this provision further.
[353] Although the Minister asserts that the sole reason for the 1998 reorganization was
to minimize Canadian tax on the sale of PMPL, counsel did not argue that the
tax consequences should be determined under the GAAR as if 1998 reorganization
did not take place.
[354] If I understand the Minister’s position correctly, it is
that the 1998 reorganization was undertaken solely to minimize Canadian tax on
the sale of PMPL. The Minister suggests that the avoidance provisions in
sections 94 and 75(2) are intended to apply when trusts are used in this
manner. Accordingly, it is submitted that the tax consequences should be determined as if section 94 or
subsection 75(2) applies. In effect, the Minister is suggesting that the tax
consequences be determined as if the reorganization had not been implemented in
a manner that avoided these provisions.
[355] Central
to that argument, I think, is the submission that the holding companies, 325
and 333, were inserted into the structure so that the Trusts did not acquire
shares of PMPL.
[356] The Minister also submits that there was an abuse of the Treaty,
but only in reference to the appeals of the Trusts.
[357] In
reference to the Treaty, the Minister submits that there was an abuse of
Article XIV(4). The following arguments were made:
(a) it is an abuse of
the Treaty to avoid an anti-avoidance rule such as s. 94;
(b) Article XIV(4) of
the Treaty is designed to exempt only true non-residents of Canada;
(c) the Treaty
was not intended to exempt foreign accrual property income (FAPI);
(d) Article XIV(4) is
only intended to prevent double taxation; and
(e) the Treaty
was not intended to permit such an erosion of the Canadian tax base that could
occur with the widespread use of this type of planning.
[358] The
appellants chose to limit their submissions under the GAAR to one point only.
They submitted that the GAAR does not apply because there is no abuse of the Treaty.
[359] During oral argument, I asked counsel for the appellants
to also address whether there had been an abuse of s. 75(2). Counsel submitted in response that it should not be
necessary to address this issue because it was not raised by the Minister in
any of the replies.
[360] In reference to the Trusts’ use of the Treaty
exemption, the appellants submit that this is in accord with both the plain
meaning and a purposive interpretation of Article XIV(4).
[361] Particular reference was made by counsel to the following
comments of Pelletier J. in The Queen v. MIL (Investments) S.A., 2007
FCA 236, 2007 DTC 5437:
[1] In order to succeed in this
appeal, the appellant Her Majesty the Queen must persuade us … that the tax
benefit achieved by the Respondent MIL (Investments) S.A.
is an abuse or misuse of the object and purpose of article 13(4) of the
[Canada-Luxembourg Treaty].
[6] […] The appellant urged us to
look behind this textual compliance with the relevant provisions to find an
object or purpose whose abuse would justify our departure from the plain words
of the disposition. We are unable to find such an object or purpose.
C. Analysis
[362] I will first comment on the procedural point raised by
the appellants in reference to whether there was an abuse of s. 75(2).
[363] I agree with counsel for the appellants on this issue. It
would be unfair for the appellants to have to respond to an argument that was
not raised before argument. Since an abuse of s. 75(2) was not mentioned either
in the pleadings or in the Minister’s opening statement, I would conclude that
it has been raised too late.
[364] I also note that the appellants sought confirmation from
the Minister during the discovery process as to the abuse argument. The
question and answer, identified as undertaking 54, is reproduced below from the
portion of the discovery transcript read in by the appellants:
Q. With reference to
paragraph 17(xxx) of the Summersby Settlement Reply, is this paragraph a
complete statement of what the Respondent says is the misuse or abuse for
purposes of section 245 of the ITA.
A. Please see the
Reply for Summersby Settlement. The Reply sets out the complete statement of
what the Respondent says is the misuse or abuse of section 245 of the ITA.
In the event that the Respondent intends to
add to that statement the Respondent will so advise.
This answer also applies with respect to A.
Dunin, Fundy Settlement, M. Garron, B. Garron and the Garron Family Trust.
[365] The above answer refers
to the reply for Summersby. Neither it, nor any of the other replies, mentions
s. 75(2) in reference to the GAAR.
[366] The appellants were entitled to rely on the replies and
on this answer in formulating their argument in reference to the GAAR.
[367] The appellants chose to limit their arguments respecting the
GAAR to whether there was an abuse of the Treaty. The arguments likely
would have been different if the Minister had submitted earlier that there had
been an abuse of s. 75(2).
[368] It is only necessary, then, to consider whether the Treaty
has been abused.
[369] It is well established that the Minister must identify an
object, spirit or purpose of provisions that are claimed to have been abused.
In Canada Trustco Mortgage
Co. v. The Queen, 2005 SCC
54, 2005 DTC 5523, McLachlin C.J. and Major J. stated:
[65] […] The taxpayer, once he or she has
shown compliance with the wording of a provision, should not be required to
disprove that he or she has thereby violated the object, spirit or purpose of
the provision. It is for the Minister who seeks to rely on the GAAR to identify
the object, spirit or purpose of the provisions that are claimed to have been
frustrated or defeated, when the provisions of the Act are interpreted in a
textual, contextual and purposive manner. The Minister is in a better position
than the taxpayer to make submissions on legislative intent with a view to interpreting
the provisions harmoniously within the broader statutory scheme that is
relevant to the transaction at issue.
[370] As mentioned above, the Minister has raised several
arguments.
[371] First, the
Minister submits that it is an abuse of the Treaty to use the exemption
in Article XIV(4) to avoid an anti-avoidance rule such as s. 94. Counsel relies
on the following comment of Bowman J. in RMM Canadian Enterprises Ltd. v.
The Queen, 97 DTC 302 (TCC), at 313-314:
[…] It would be a surprising conclusion
that Canada, or indeed any of the other countries with which it has tax
treaties, including the United
States, had intentionally or
inadvertently bargained away its right to deal with tax avoidance or tax
evasion by residents of treaty countries in its own domestic tax laws. It would
be equally surprising if tax avoidance schemes that are susceptible of attack
under either general anti-avoidance provisions or specific anti-avoidance
rules, if carried out by Canadian residents, could be perpetrated with impunity
by non-residents under the protection of a treaty. That is not what treaties
are for.
[372] I am not persuaded by this reasoning.
[373] First, it is contrary to the approach suggested by the
Federal Court of Appeal in MIL, above. It does not make sense that a
transaction that is subject to tax under the Act by virtue of an anti-avoidance
provision necessarily constitutes a misuse or abuse of the Treaty. I
would note in particular that the term “anti-avoidance provision” is commonly
used in reference to a broad range of provisions in the Act.
[374] Further, I agree with the argument of counsel for the
appellants that the Minister’s position is contrary to commentary published by
the OECD in 1977 in reference to the organization’s Model Double Taxation Convention.
[375] The relevant commentary relates to Article I of the model
convention. It corresponds with Article I of the Treaty. Paragraph 7 of
that commentary confirms that treaties are not intended to help tax avoidance,
but it suggests that treaties should be amended to take into account domestic
tax avoidance legislation. The relevant paragraph is reproduced below.
The purpose of double tax conventions is to
promote by, eliminating international double taxation… they should not,
however, help tax avoidance or evasion. True, taxpayers have the possibility,
double taxation conventions being left aside, to exploit the differences in tax
levels as between States and the tax advantages provided by various countries’
taxation laws, but it is for the States concerned to adopt provisions in their
domestic law, to counter possible manoeuvres. Such states will then wish, in
their bilateral double taxation conventions, to preserve the application of a
provision of this kind contained in their domestic laws.
[Emphasis added]
[376] Although this commentary is not binding for purposes of
the Treaty, I would note that it had been adopted by OECD members (including
Canada) at the time that the Treaty was agreed to, which was in 1980,
and the commentary would have been available as a guide to both Canada and
Barbados at the time that the Treaty was negotiated.
[377] Second, I would mention that the judge who decided RMM,
former Chief Justice Bowman, later distanced himself from the abuse
analysis in that decision.
[378] In Evans
v. The Queen, 2005 TCC 684, 2005 DTC 1762, the former Chief Justice commented
as follows:
[34] Counsel argues that this case is
similar to Justice Bonner’s decision in McNichol v. The Queen, 97 DTC
111 and mine in RMM Canadian Enterprises Inc. et al., v. The Queen, 97
DTC 302. These cases were early general anti-avoidance rule cases and we did
not have the benefit of the Supreme Court of Canada’s guidance that we have
today. If we had had the benefit of the Supreme Court of Canada’s views, our
analysis might have been quite different. The principal basis of my decision in
RMM Canadian Enterprises Inc. was subsection 84(2) of the Income Tax
Act. One must bear in mind that what the appellants were attempting to
circumvent in RMM and McNichol was subsection 84(2). That is not
the situation here. 117679 continued to carry on business and it in fact paid
dividends. The situation here is not analogous to the RMM and McNichol
cases. In any event, reference to these two early cases does not in my view
satisfy the onus that the Supreme Court of Canada has placed on the Crown.
[Emphasis added.]
[379] I am not satisfied that an abuse of the Treaty has
been established merely because section 94 is found to be applicable, either
standing alone or under the GAAR as a result of a transaction that is abusive
of section 94.
[380] The Minister also submits that the Treaty exemption
was not intended to apply to the
Trusts because they had very little connection with Barbados. It was noted that the assets, contributors and beneficiaries are all
Canadian. To apply the Treaty exemption in these circumstances would
facilitate the avoidance of tax by Canadians.
[381] The problem that I have with this argument is that, if accepted, it would result in a selective
application of the Treaty to residents of Barbados, depending on criteria other than residence. It seems to me that this
is contrary to the object and spirit of the Treaty, which is apparent in
Article I and Article IV(1). Residents of Barbados, as defined for purposes of the Treaty, are entitled to the
benefits of Article XIV(4) as long as they are not also residents of Canada.
[382] I would
also mention that there is no special rule for trusts in the Treaty.
They are defined as persons in Article III(1)(c) of the Treaty.
[383] If the
Trusts are resident only in Barbados under these principles, then the Treaty
contemplates that Article XIV(4) will apply to them. It does not matter that
the Trusts have few connections with Barbados.
[384] The
Minister submits, further, that the Treaty was not intended to exempt
foreign accrual property income.
[385] The
basis for this argument is found in Article XXX(2) of the Treaty which
provides:
2. Nothing in this Agreement
shall be construed so as to prevent Canada from imposing its tax on amounts
included in the income of a resident of Canada
according to section 91 of the Canadian Income Tax Act.
[386] The
problem with this position is that Article XXX(2) does not encompass all income
that may be described as “foreign accrual property income.”
[387] By its plain meaning, Article XXX(2) applies only to amounts that are
included in the income of Canadian residents by virtue of section 91 of the Act.
It does not apply to the gains realized by the Trusts that are at issue here. I
am not persuaded that the object and spirit of this provision extends beyond
the plain meaning.
[388] The Minister also submits that Article XIV(4) should be restricted
to situations in which there is double taxation.
[389] The appellants referred me to the following comment from
the Federal Court of Australia in FC of T. v. Lamesa Holdings BV, 97 ATV
4752, at page 4755:
The allocation [in a
treaty] is of the right to tax. There is nothing in the Agreement that compels
a jurisdiction to exercise that right.
[390] They also referred me to the decision of the High Court
of Justice in
Smallwood, at para. 40.
[391] I agree with the appellants’ argument on this issue. I do
not believe that further discussion is necessary.
[392] Finally, counsel for the Minister submits that one cannot
look at the Treaty as if section 94 and FAPI were not there because
there would be no tax base left. All Canadians would transfer their assets
offshore, it is suggested.
[393] Even if the Minister is correct that the tax base would
be severely eroded if Article XIV(4) of the Treaty were considered to
override section 94, this is not a sufficient basis to find that the Treaty
has been abused.
[394] The question is what the drafters of the Treaty
from both countries intended. I would have thought that if Canada had intended that
section 94 should override the Treaty, this would have been specifically
mentioned in the Treaty.
[395] For these reasons, the Minister has not established that
the avoidance transactions in these appeals result in an abuse of the Treaty.
VIII. Issue 5 – Should sale proceeds be reallocated by virtue of
section 68?
[396] The Minister submits that the Trusts received an
unreasonable portion of the proceeds from the sale of PMPL. A portion should be
reallocated to the Other Appellants, it is submitted. The Minister’s written submission
regarding section 68 is reproduced below:
Section 68
160. The fair market
value of the Preference Shares as at April 6, 1998 was substantially greater
than the value of $50,000,000, concluded by KMPG as the fair market value of
the 50 Class A shares and 50 Class B shares as at February 28, 1998.
161. As a consequence of
the implementation of the tax plan, GHL and DHI were allocated $50 million of
proceeds on the sale to Oak Hill. The amount allocated to GHL and DHI is less
than the amount that can reasonably be regarded as the consideration for the
disposition of the shares they held in the capital of PMPL.
162. The amount of
proceeds of disposition allocated to the shareholder of 325 being Summersby,
from the sale of the shares of 325 being the holder of the Class B and Class C shares
of PMPL, was correspondingly more that the amount that can reasonably be
regarded as the consideration for the disposition of the shares indirectly held
in PMPL.
163. The amount of
proceeds of disposition allocated to the shareholder of 333 being Fundy, from
the sale of the shares of 333 being the holder of the Class C shares of PMPL,
was correspondingly more that the amount that can reasonably be regarded as the
consideration for the disposition of the shares indirectly held in PMPL.
[397] The appellants submit that the allocation of the proceeds
on the sale to Oak Hill was reasonable. Even if the value of PMPL at the time
of the 1998 reorganization was greater than $50,000,000, the preference shares
were redeemable for only $50,000,000 at the time of the sale because the
adjustment mechanism had not been triggered at that point.
[398] The appellants also suggest that section 68 can only be
used to adjust amounts between properties, not between taxpayers. They rely in
support on the reasons of C. Miller J. in Robert Glegg Investment Ltd. v.
The Queen, 2008 TCC 20, 2008 DTC 2466. The decision was affirmed on other
grounds by the Federal Court of Appeal (2008 FCA 332, 2009 DTC 5009).
[399] The Minister’s written submission does not fully address these
issues. I have concluded that in all the circumstances it would be preferable
to defer a consideration of section 68 for another day.
IX. Conclusion
[400] As a result of the conclusions above,
(a) the appeals of
Summersby Settlement and Fundy Settlement will be dismissed, and
(b) the appeals of
Andrew Dunin, Myron Garron, Berna Garron, and the Garron Family Trust will be
allowed, and their assessments will be referred back to the Minister of
National Revenue for reconsideration and reassessment on the basis that no part
of the proceeds received by Summersby Settlement and Fundy Settlement on the sale of 325
and 333 should be included in their income.
[401] The respondent is entitled to costs, with one set of
counsel fees for all appeals.
Signed at Ottawa, Canada this
10th day of September 2009
Woods
J.
Appendix I
Relevant Statutory Provisions
Canada-Barbados
Income Tax Agreement
Article I — Personal Scope
This Agreement shall apply to persons who are residents of one or both
of the Contracting States.
Article III — General Definitions
1. (c) the term
“person” includes an individual, an estate, a trust, a company, a partnership
and any other body of persons;
Article IV — Fiscal Domicile
1. For the purposes of this Agreement, the
term "resident of a Contracting State" means any person who, under
the law of that State, is liable to taxation therein by reason of his domicile,
residence, place of management or any other criterion of a similar nature. The
terms "resident of Canada" and "resident of Barbados" shall be construed accordingly.
Article XIV — Gains from the Alienation of Property
4. Gains from the alienation of any
property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only
in the Contracting State of which the
alienator is a resident.
Article XXX — Miscellaneous Rules
2. Nothing in this Agreement shall be
construed so as to prevent Canada from imposing its tax on amounts included in
the income of a resident of Canada according to section 91 of the Canadian Income
Tax Act.
Income Tax
Conventions Interpretation Act
4.1 Notwithstanding the provisions of a
convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that section 245 of the Income Tax Act applies to
any benefit provided under the convention.
Income Tax
Act
68. Allocation of amounts in consideration for disposition of
property. Where an amount
received or receivable from a person can reasonably be regarded as being in
part the consideration for the disposition of a particular property of a
taxpayer or as being in part consideration for the provision of particular
services by a taxpayer,
(a) the part of the
amount that can reasonably be regarded as being the consideration for the
disposition shall be deemed to be proceeds of disposition of the particular
property irrespective of the form or legal effect of the contract or agreement,
and the person to whom the property was disposed of shall be deemed to have acquired
it for an amount equal to that part; and
(b) the part of the amount that can reasonably be regarded as
being consideration for the provision of particular services shall be deemed to
be an amount received or receivable by the taxpayer in respect of those
services irrespective of the form or legal effect of the contract or agreement,
and that part shall be deemed to be an amount paid or payable to the taxpayer
by the person to whom the services were rendered in respect of those services.
***
75(2) Trusts — Where, by a trust created in any manner whatever
since 1934, property is held on condition
(a) that it or property
substituted therefor may
(i) revert to the person from whom the
property or property for which it was substituted was directly or indirectly
received (in this subsection referred to as “the person”), or
(ii) pass to persons to be determined by
the person at a time subsequent to the creation of the trust, or
(b) that, during the lifetime of the
person, the property shall not be disposed of except with the person’s consent
or in accordance with the person’s direction,
any income or loss from the property or
from property substituted therefor, any taxable capital gain or allowable
capital loss from the disposition of the property or of property substituted
therefor, shall, during the lifetime of the person while the person is resident
in Canada be deemed to be income or a loss, as the case may be, or a taxable
capital gain or allowable capital loss, as the case may be, of the person.
***
94. (1) Application of certain provisions
to trusts not resident in Canada — Where,
(a) at any time in a taxation year of a
trust that is not resident in Canada or that, but for paragraph (c), would not
be so resident, a person beneficially interested in the trust (in this section
referred to as a “beneficiary”) was
(i) a person resident in Canada,
(ii) a
corporation or trust with which a person resident in Canada
was not dealing at arm’s length, or
(iii) a
controlled foreign affiliate of a person resident in Canada,
and
(b) at any time in or before the taxation
year of the trust,
(i) the trust, or a non-resident
corporation that would, if the trust were resident in Canada, be a controlled
foreign affiliate of the trust, has, other than in prescribed circumstances,
acquired property, directly or indirectly in any manner whatever, from
(A) a particular person who
(I) was the beneficiary referred to in
paragraph (a), was related to that beneficiary or was the uncle, aunt, nephew
or niece of that beneficiary,
(II) was resident in Canada at any time in
the 18 month period before the end of that year or, in the case of a person who
has ceased to exist, was resident in Canada at any time in the 18 month period
before the person ceased to exist, and
(III) in the case of an individual, had
before the end of that year been resident in Canada for a period of, or periods
the total of which is, more than 60 months, or
(B) a trust or corporation that acquired
the property, directly or indirectly in any manner whatever, from a particular
person described in clause (A) with whom it was not dealing at arm’s length
and the trust was not
(C)
an inter vivos trust created at any time before 1960 by a person who at
that time was a non-resident person,
(D)
a testamentary trust that arose as a consequence of the death of an individual
before 1976, or
(E)
governed by a foreign retirement arrangement, or
(ii) all or any part of the interest of the
beneficiary in the trust was acquired directly or indirectly by the beneficiary
by way of
(A) purchase,
(B) gift, bequest or inheritance from a
person referred to in clause (i)(A) or (B), or
(C) the exercise of a power of appointment
by a person referred to in clause (i)(A) or (B),
the following rules apply for that taxation
year of the trust:
(c) where the amount of the income or
capital of the trust to be distributed at any time to any beneficiary of the
trust depends on the exercise by any person of, or the failure by any person to
exercise, any discretionary power,
(i) the trust is
deemed for the purposes of this Part and sections 233.3 and 233.4 to be a
person resident in Canada no part of whose taxable income is exempt because of
section 149 from tax under this Part and whose taxable income for the year is
the amount, if any, by which the total of
(A)
the amount, if any, that would but for this subparagraph be its taxable income
earned in Canada for the year,
(B)
the amount that would be its foreign accrual property income for the year if
(I)
except for the purpose of applying subsections 104(4) to (5.2) to days after
1998 that are determined under subsection 104(4), the trust were a non-resident
corporation all the shares of which were owned by a person who was resident in
Canada,
(II)
the description of A in the definition “foreign accrual property income” in
subsection 95(1) were, in respect of dividends received after 1998, read
without reference to paragraph (b) of that description,
(III)
the descriptions of B and E in that definition were, in respect of dispositions
that occur after 1998, read without reference to “other than dispositions of
excluded property to which none of paragraphs (2)(c), (d) and (e) apply”,
(IV)
the value of C in that definition were nil, and
(V)
for the purposes of computing the trust’s foreign accrual property income, the
consequences of the application of subsections 104(4) to (5.2) applied in
respect of days after 1998 that are determined under subsection 104(4),
(C) the amount, if any, by which the total
of all amounts each of which is an amount required by subsection 91(1) or (3)
to be included in computing its income for the year exceeds the total of all
amounts each of which is an amount deducted by it for that year under
subsection 91(2), (4) or (5), and
(D)
the amount, if any, required by section 94.1 to be included in computing its
income for the year
exceeds
(E) the amount,
if any, by which the total of all amounts each of which is an amount deducted
by it under subsection 91(2), (4) or (5) in computing its income for the year
exceeds the total of all amounts each of which is an amount included in
computing its income for the year because of subsection 91(1) or (3), and
(ii) for the purposes of
section 126,
(A) the amount
that would be determined under subparagraph (i) in respect of the trust for the
year, if that subparagraph were read without reference to clause (i)(A), is
deemed to be income of the trust for the year from sources in the country other
than Canada in which the trust would, but for subparagraph (i), be resident,
and
(B) any income
or profits tax paid by the trust for the year (other than any tax paid because
of this section), to the extent that it can reasonably be regarded as having
been paid in respect of that income, is deemed to be non-business income tax
paid by the trust to the government of that country, and
(d) in any other case, for the purposes of
subsections 91(1) to (4) and sections 95 and 233.4,
(i) the trust shall, with respect to any
beneficiary under the trust the fair market value of whose beneficial interest
in the trust is not less than 10% of the aggregate fair market value of all
beneficial interests in the trust, be deemed to be a non-resident corporation
that is controlled by the beneficiary,
(ii) the trust shall be deemed to be a
non-resident corporation having a capital stock of a single class divided into
100 issued shares, and
(iii) each
beneficiary under the trust shall be deemed to own at any time the number of
the issued shares that is equal to the proportion of 100 that
(A)
the fair market value at that time of the beneficiary’s beneficial interest in
the trust
is of
(B)
the fair market value at that time of all beneficial interests in the trust.
[…]
(6) Where financial assistance given — For the purposes of paragraph (1)(b), a
trust or a non-resident corporation shall be deemed to have acquired property
from any person who has given a guarantee on its behalf or from whom it has
received any other financial assistance whatever.
***
104(1) Reference to trust or estate. In this Act, a reference to a trust or
estate (in this subdivision referred to as a “trust”) shall, unless the context
otherwise requires, be read to include a reference to the trustee, executor,
administrator, liquidator of a succession, heir or other legal representative
having ownership or control of the trust property, but, except for the purposes
of this subsection, subsection (1.1), subparagraph (b)(v) of the
definition “disposition” in subsection 248(1) and paragraph (k) of that
definition, a trust is deemed not to include an arrangement under which the
trust can reasonably be considered to act as agent for all the beneficiaries
under the trust with respect to all dealings with all of the trust’s property
unless the trust is described in any of paragraphs (a) to (e.1)
of the definition “trust” in subsection 108(1).
[Note: The proviso in the last seven lines does not
apply in connection with transfers of property before December 24, 1998.]
(2) Taxed as individual. A trust shall, for the purposes of this
Act, and without affecting the liability of the trustee or legal representative
for that person’s own income tax, be deemed to be in respect of the trust
property an individual, but where there is more than one trust and
(a) substantially all of
the property of the various trusts has been
received from one person,
and
(b) the various trusts
are conditioned so that the income thereof
accrues or will ultimately accrue to the
same beneficiary, or
group or class of beneficiaries,
such of the trustees as the Minister may
designate shall, for the purposes of this Act, be deemed to be in respect of
all the trusts an individual whose property is the property of all the trusts
and whose income is the income of all the trusts.
***
110. (1) Deductions permitted — For the purpose of computing the taxable
income of a taxpayer for a taxation year, there may be deducted such of the
following amounts as are applicable:
[…]
(f) deductions for
payments — […] any amount that is
(i) an amount
exempt from income tax in Canada because of a provision contained in a tax
convention or agreement with another country that has the force of law in
Canada,
[…]
to the extent that it is included in
computing the taxpayer’s income for the year;
***
245. General anti-avoidance rule.
(1) Definitions. In this section,
“tax benefit” — “tax
benefit” means a reduction, avoidance or deferral of tax or other amount
payable under this Act or an increase in a refund of tax or other amount under
this Act, and includes a reduction, avoidance or deferral of tax or other
amount that would be payable under this Act but for a tax treaty or an increase
in a refund of tax or other amount under this Act as a result of a tax treaty;
“tax consequences” —
“tax consequences” to a person means the amount of income, taxable income, or
taxable income earned in Canada of, tax or other amount payable by or
refundable to the person under this Act, or any other amount that is relevant
for the purposes of computing that amount;
“transaction” — “transaction”
includes an arrangement or event.
(2) General anti-avoidance
provision. Where a
transaction is an avoidance transaction, the tax consequences to a person shall
be determined as is reasonable in the circumstances in order to deny a tax
benefit that, but for this section, would result, directly or indirectly, from
that transaction or from a series of transactions that includes that
transaction.
(3) Avoidance transaction. An avoidance transaction means any
transaction
(a) that, but for this
section, would result, directly or indirectly, in a tax benefit, unless the
transaction may reasonably be considered to have been undertaken or arranged
primarily for bona fide purposes other than to obtain the tax benefit;
or
(b) that is part of a
series of transactions, which series, but for this section, would result,
directly or indirectly, in a tax benefit, unless the transaction may reasonably
be considered to have been undertaken or arranged primarily for bona fide
purposes other than to obtain the tax benefit.
(4) Application of
subsection (2). Subsection
(2) applies to a transaction only if it
may reasonably be considered that the transaction
(a) would, if this Act
were read without reference to this section, result directly or indirectly in a
misuse of the provisions of any one or more of
(i)
this Act,
(ii)
the Income Tax
Regulations,
(iii)
the Income Tax
Application Rules,
(iv) a tax treaty, or
(v) any other enactment that
is relevant in computing tax or any other amount payable by or refundable to a
person under this Act or in determining any amount that is relevant for the
purposes of that computation; or
(b) would result
directly or indirectly in an abuse having regard to those provisions, other than
this section, read as a whole.
(5) Determination of tax
consequences. Without
restricting the generality of subsection (2), and notwithstanding any other
enactment,
(a) any deduction,
exemption or exclusion in computing income, taxable income, taxable income
earned in Canada or tax payable or any part thereof may be allowed or
disallowed in whole or in part,
(b) any such
deduction, exemption or exclusion, any income, loss or other amount or part
thereof may be allocated to any person,
(c) the nature of any
payment or other amount may be recharacterized, and
(d) the tax effects
that would otherwise result from the application of other provisions of this
Act may be ignored,
in determining the tax consequences to a
person as is reasonable in the circumstances
in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an
avoidance transaction.
(6) Request for
adjustments. Where with
respect to a transaction
(a) a notice of
assessment, reassessment or additional assessment involving the application of
subsection (2) with respect to the transaction has been sent to a person, or
(b) a notice of
determination pursuant to subsection 152(1.11) has been sent to a person with
respect to the transaction,
any person (other than a person referred to
in paragraph (a) or (b)) shall be entitled, within 180 days after the day of mailing
of the notice, to request in writing that
the Minister make an assessment, reassessment or additional assessment applying subsection (2) or make
a determination applying subsection
152(1.11) with respect to that transaction.
(7) Exception. Notwithstanding any other provision of
this Act, the tax consequences to any person, following the application of this
section, shall only be determined through a notice of assessment, reassessment,
additional assessment or determination pursuant to subsection 152(1.11)
involving the application of this section.
(8) Duties of Minister. On receipt of a request by a person under
subsection (6), the Minister shall, with all due dispatch, consider the request
and, notwithstanding subsection 152(4), assess, reassess or make an additional
assessment or determination pursuant to subsection 152(1.11) with respect to
that person, except that an assessment, reassessment, additional assessment or
determination may be made under this subsection only to the extent that it may
reasonably be regarded as relating to the transaction referred to in subsection
(6).
Appendix II
Statement of Agreed Facts
1. The Appellant
Andrew T. Dunin (“Dunin”) is an individual resident in Aurora, Ontario.
2. The Appellant
Myron A. Garron (“Garron”) is an individual resident in Unionville, Ontario.
3. The Appellant
Berna V. Garron (“Berna”) is an individual resident in Unionville, Ontario.
4. The Appellant
Garron Family Trust (“GF Trust”) was a trust established pursuant to a trust
indenture dated April 26, 1993.
5.
Garron and Berna were
the trustees of the GF Trust.
6.
The beneficiaries of
the GF Trust included the children and grandchildren of Garron and Berna.
7.
Prior to 1992, Garron
and his wife, Berna, owned all the shares of Progressive Moulded Products
Limited (“Products”) and Progressive Tools Limited (“Tools”) through a family
holding company, Garron Holdings Limited (“GHL”).
8.
Products and Tools
carried on the business of manufacturing injection moulds and plastic parts
used in a variety of businesses under the name of “Progressive”.
9.
In November, 1990,
Dunin was hired by Garron as the general manager of Progressive.
10.
Under Dunin’s
supervision, Progressive’s business began to concentrate on producing plastic
parts used in the assembly of automobiles.
11.
In 1992, PMPL Holdings
Ltd. (“PMPL”) was incorporated. GHL transferred the shares it held in the
capital of Products and Tools to PMPL in exchange for shares of PMPL. Beginning
in 1992, Dunin began to acquire shares of PMPL.
12.
Garron, GHL, Garron
Trust, Dunin, PMPL, Products and Tools entered into a shareholders agreement
dated November 20, 1992 (the “1992 Shareholders Agreement”).
13.
By 1996, Dunin had
acquired a 50% interest in PMPL with the result that the only issued and
outstanding shares in PMPL were as follows:
(a)
50 Class A common
shares owned by GHL; and
(b)
50 Class B common
shares owned by Dunin.
14.
Once Dunin had acquired
the 50 Class B common shares, the Class A common shares and Class B common
shares of PMPL had the same rights and restrictions and the shares held by GHL
and Dunin were of equal value.
15.
The corporate structure
at this point is graphically depicted at Appendix “A”.
16.
1287325 Ontario Limited
(“325”) was incorporated on March 19, 1998.
17.
1287333 Ontario Inc.
(“333”) was incorporated on March 19, 1998.
18.
On March 24, 1998,
Dunin caused Dunin Holdings Inc. (“DHI”) to be incorporated under the Business
Corporations Act (Ontario) and Dunin subscribed for one common share
on March 27, 1998.
19.
As at March 31, 1998,
PMPL was held 50% by GHL and 50% by Dunin. GHL held 50 Class A common shares
and Dunin held 50 Class B common shares.
20.
On April 1, 1998, Dunin
transferred his 50 Class B common shares of PMPL to DHI pursuant to section 85
of the Income Tax Act (Canada) (the “Act”) in exchange for 499 common
shares of DHI.
21.
Paul Ambrose
(“Ambrose”) is a long-time friend of Garron who resides in Kingstown, St. Vincent.
22.
Ambrose is not, and has
never been, a resident of Canada.
23.
Prior to April 2, 1998,
Garron asked Ambrose if Ambrose would be willing to do a favour for Garron and
settle a trust for the benefit of Garron and Garron’s family and a trust for
the benefit of Dunin and Dunin’s family. Ambrose agreed to accommodate Garron’s
request.
24.
Ambrose executed a
document entitled “Fundy Settlement Trust Indenture” on April 2, 1998.
25.
During the process of
drafting the Fundy Settlement Trust Indenture, Ambrose provided no input into
the particulars and no instructions as to the content or terms of the Fundy
Settlement Trust Indenture.
26.
Ambrose’s signature on
the Fundy Settlement Trust Indenture was witnessed by Agnes E. Cato, a
barrister and solicitor in St.
Vincent and the Grenadines
(“Cato”).
27.
Prior to Ambrose
signing the Fundy Settlement Trust Indenture, Cato reviewed the contents of the
Fundy Settlement Trust Indenture with Ambrose.
28.
Ambrose signed the
Fundy Settlement Trust Indenture and forwarded it to St. Michael Trust
Corporation together with a bank draft in the amount of US$100 as the
settlement amount referred to at Article 1.2 of the Fundy Settlement Trust
Indenture.
29.
The US$100 amount
provided to St. Michael Trust Corporation as the settlement amount referred to
at Article 1.2 of the Fundy Settlement Trust Indenture came from Ambrose’s own
funds.
30.
Ambrose executed a
document entitled “Summersby Settlement Trust Indenture” on April 2, 1998.
31.
During the process of
drafting the Summersby Settlement Trust Indenture, Ambrose provided no input
into the particulars and no instructions as to the content or terms of the
Summersby Settlement Trust Indenture.
32.
Ambrose’s signature on
the Summersby Settlement Trust Indenture was witnessed by Cato.
33.
Prior to Ambrose
signing the Summersby Settlement Trust Indenture, Cato reviewed the contents of
the Summersby Settlement Trust Indenture with Ambrose.
34.
Ambrose signed the
Summersby Settlement Trust Indenture and forwarded it to St. Michael Trust
Corporation together with a bank draft in the amount of US$100 as the settlement
amount referred to at Article 1.2 of the Summersby Settlement Trust Indenture.
35.
The US$100 amount
provided to St. Michael Trust Corporation as the settlement amount referred to
at Article 1.2 of the Summersby Settlement Trust Indenture came from Ambrose’s
own funds.
36.
On April 2, 1998,
Julian Gill (“Gill”), a relative of Ambrose’s and a friend of Garron’s, lent
US$7,190 to the Summersby Settlement (“Summersby”).
37.
The terms of the loan
from Gill to Summersby were that the loan carried interest at 10% and the loan
was repayable either on the sale by Summersby of its shares in 325 or payment
of a dividend from 325.
38.
On April 2, 1998, Gill
lent US$7,190 to the Fundy Settlement (“Fundy”).
39.
The terms of the loan
from Gill to Fundy were that the loan carried interest at 10% and the loan was
repayable either on the sale by Fundy of its shares in 333 or payment of a
dividend from 333.
40.
On April 3, 1998, 1,000
Class A and 1,000 Class B shares of 325 were issued to Summersby.
41.
On April 3, 1998, 1,000
Class A and 1,000 Class B shares of 333 were issued to Fundy.
42.
PMPL, Dunin and Garron
requested KPMG to provide a valuation of PMPL. The value KPMG arrived at for
all the issued and outstanding common shares of PMPL as at February 28, 1998
was $50 million.
43.
On April 6, 1998, the
share capital of PMPL was reorganized such that:
(a) each existing
Class A common share and each existing Class B common share was converted into
10 Class A shares (the “Preference Shares”) such that there were, in aggregate,
1,000 Preference Shares;
(b) 100 Class B
shares were created (the “Special Value Shares”); and
(c)
an unlimited number of
Class C shares were created (“New Common Shares”).
44.
As at April 6, 1998,
DHI and GHL each owned an equal number of Preference Shares.
45.
On April 6, 1998, 325
subscribed for 100 Special Value Shares of PMPL for an aggregate subscription
price of $10.00 and subscribed for 800 New Common Shares for an aggregate
subscription price of $80.00.
46.
On April 6, 1998, 333
subscribed for 800 New Common Shares for an aggregate subscription price of
$80.00.
47. The Preference Shares:
(a)
were voting fixed-value
preference shares; and
(b)
were not participating
unless and until they were redeemed at which time dividends would be cumulative
and payable between the date of a request to redeem the Preference Shares and
the redemption of those Preference Shares.
48. The Special Value Shares:
(a) were non-voting;
(b) carried no dividend entitlement;
(c)
were retractable at a
redemption amount equal to 10% of the amount by which the fair market value of
all the shares of PMPL and Progressive Marketing, Inc. (as defined in the PMPL
Articles of Amendment) at the time of the Event of Retraction exceeds
$50,000,000 divided by 100;
49. The New Common
Shares were fully participating but non-voting common shares.
50. The corporate
structure at April 6, 1998 is graphically depicted at Appendix “B”.
51. The 1992
Shareholders Agreement was amended and restated on April 6, 1998 (the “1998
Shareholders Agreement”) among PMPL, the shareholders of PMPL (GHL, DHI, 333
and 325) and Dunin and Garron.
52. Subsequent to
April 6, 1998, PMPL continued to operate.
53. An offer to
purchase was made in March 2000 by Oak Hill Capital Partners LP, a large third
party United States-based private equity capital fund, through 1424666 Ontario
Ltd.
54. The offer from
1424666 Ontario Ltd. was accepted and was the subject of a share purchase
agreement made as of June 21, 2000 (the “Share Purchase Agreement”).
55. Pursuant to the
Share Purchase Agreement, on August 10, 2000:
(a) Fundy sold all
1,000 Class A shares and 1,000 Class B shares in 333 to 1424666 Ontario Ltd.
for $217,118,436 cash;
(b) the shareholders
of GHL (Garron, Berna and GF Trust) sold all of the shares of GHL to 1424666
Ontario Ltd. for $25,000,000;
(c) Summersby sold
907 Class A shares and 907 Class B shares in 325 to 1424666 Ontario Ltd. for
$240,366,978 cash; and
(d)
DHI transferred the
Preference Shares held by it to 3045036 Nova Scotia Limited, the parent company
of 1424666 Ontario Ltd., in exchange for an interest in 3045036 Nova Scotia
Limited valued at $25,000,000.
56. On August 29, 2000, after the
sale of the shares of 325, the loan from Gill to Summersby of US$7,190 was
repaid in full with interest.
57. On August 29, 2000, after the
sale of the shares of 333, the loan from Gill to Fundy of US$7,190 was repaid
in full with interest.
58. In accordance with the Share
Purchase Agreement, Dunin continued to be employed by the new purchaser of
PMPL.
59. The relationship between PMPL and
each of Garron, Berna and Anne Dunin (the spouse of Dunin) terminated on August
10, 2000.
60. 1424666 Ontario Limited withheld
$80,122,326 from the purchase price for the 907 Class A shares and 907 Class B
shares of 325 and remitted that amount to the Receiver General for Canada.
61. 1424666 Ontario Limited withheld
$72,372,812 from the purchase price for the shares of 333 and remitted that
amount to the Receiver General for Canada.
62. In computing income for the 2000
taxation year, Summersby did not report any capital gain from the disposition
of the 907 Class A shares and the 907 Class B shares of 325 to 1424666 Ontario
Limited as subject to tax in Canada based on its view that the gain was subject
to tax only in Barbados by virtue of Article XIV(4) of the Agreement Between
Canada and Barbados for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and Capital (the “Treaty”).
63. In computing income for the 2000
taxation year, Fundy did not report any capital gain from the disposition of
the shares of 333 to 1424666 Ontario Limited as subject to tax in Canada based
on its view that the gain was subject to tax only in Barbados by virtue of
Article XIV(4) of the Treaty.
64. In respect of the 2000 taxation
year of each of the Appellants, the Minister of National Revenue (the
“Minister”) assessed each of the Appellants as follows (the “Assessments”):
(a) Summersby was assessed taxable
income of $160,244,591 by a Notice of Assessment dated September 1, 2004;
(b) Fundy was assessed taxable
income of $144,745,557 by a Notice of Assessment dated September 1, 2004;
(c) Dunin was assessed taxable
income of $162,298,420 by a Notice of Assessment dated June 17, 2004;
(d) Garron was assessed taxable
income of $14,147,031 by a Notice of Assessment dated June 30, 2004;
(e)
Berna was assessed
taxable income of $938,441 by a Notice of Assessment dated June 16, 2004; and
(f) GF Trust was assessed taxable
income of $133,514,811 by a Notice of Assessment dated June 18, 2004.
65. A reconciliation of the amounts
reported by each Appellant and assessed by the Minister is attached as Appendix
“C”.
66. Each Appellant filed a Notice of
Objection with the Minister, and the Minister confirmed each of the Assessments
by a Notice of Confirmation dated February 21, 2006 and each such Notice of
Confirmation has now been appealed to this Court.
CORPORATE STRUCTURE PRIOR TO APRIL 6, 1998
______________________________________________
Appendix III
Trustee’s Memoranda of Intention
Re Fundy
It is the Trustee’s intention, with respect
to the Fundy Settlement (Trust), as follows:
1. Investment Policy
(a) that the shares of 1287333 Ontario Limited
(“1287333”) be
held until such time as the other
shareholders of PMPL Holdings Inc., decide to sell their shares. At that time
we will facilitate the sale of the shares of 1287333;
(b) any sale proceeds which arise from the sale
of the shares of
1287333 (and any other amounts received by
the Trust as a consequence of the realisation of any assets of 1287333 or of
any entity in which it has a direct or indirect interest) will be invested
prudently with a view to the long term preservation of the capital of the
Trust; and
(c) we will seek the investment advice of Myron
Garron from
time to time.
2. Distribution Policy
(a) that during the lifetime of Myron Garron
the primary
consideration in making distributions of
income and capital should be the best interests of Myron Garron subject only to
his wishes with respect to distributions to other beneficiaries;
(b) if Myron Garron should die at a time we
continue to hold
assets under the terms of the Trust,
distribution shall be made in view of the best interests of Myron Garron’s
widow during her lifetime, and thereafter the best interests of his issue, as
defined in the Trust deed.
Re Summersby
1. Investment Policy
(a) the shares of 1287325
Ontario Limited (“1287325”) should be
held until such time as the
other shareholders of PMPL Holdings
Inc. decide to sell their
shares. At that time, we, as the
trustee, will facilitate the
sale of our shares of 1287325;
(b) any sale proceeds which
arise from the sale of our shares of the
[sic] 1287325 (and any other amounts
received by the Trust as a consequence of the realisation of any assets of
1287325 or of any entity in which it has a direct or indirect interest) will be
invested prudently with a view to the long term preservation of the capital of
the Trust; and
(c) we, as trustee, may
seek the investment advice of Andrew Dunin, from time to time.
2. Distribution Policy
During the lifetime of Andrew Dunin, the
primary consideration in making distributions of income and capital should be
the best interests of Andrew Dunin, subject only to his wishes with respect to
distributions to other beneficiaries. If Andrew Dunin should die at a time when
we, as trustee, continue to hold assets under the terms of the Trust,
distributions shall be made in view of the best interests of Andrew Dunin’s
widow during her lifetime, and thereafter the best interests of his issue (as
defined in the Settlement Deed).
3. Power to Amend Trust
We, as trustee, will consult with Andrew
Dunin each April (*) to determine whether the provision of clauses 3.1(e)(iv)
or 3.1(f) of the Settlement Deed should be amended to reflect any amendments
which might have been made to the will of Andrew Dunin.
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