The King v. Fiducie Historia, 2025 CAF 177

A discretionary family trust received dividend income, which it allocated and distributed to one of its beneficiaries (the "father"). At around the same time, members of the family (the father and two sons) ceased to be shareholders of the corporation which was held by the trust. In order that such change did not result in an acquisition of control for ITA purposes of the corporation by the non-family trustees, the trustees entered into an agreement with two sons under which the trustees:

• undertook to exercise their powers according to the instructions given by the sons;
• agreed not to make any decisions without their prior consent; and
• agreed to resign in the event of disagreement with the sons' instructions.

On this basis, CRA concluded that the trustees had abdicated the exercise of their powers to the sons, so that the sons had become de facto trustees of the trust, contrary to Article 1275 of the Civil Code, which effectively prohibited beneficiaries from being the sole trustees of a trust. In CRA’s view, this meant that the trust distributions were void, so that no amount was deductible under s. 104(6).

However, the Tax Court found that, notwithstanding this agreement, the trustees continued to exercise their powers as trustees in accordance with the Civil Code and that the sons did not, in fact, act as trustees. Thus, there was no violation of Art. 1275.

Before dismissing the Crown’s appeal, Goyette JA first noted that the terms of the agreement with the sons were ambiguous, and stated (at para. 7, TaxInterpretations translation):

When issuing assessments, the Minister of National Revenue must take into account the actual facts. The same applies to the Tax Court of Canada when it is called upon to rule on the validity of assessments: Victuni …. [1980] 1 S.C.R. 580 … . Thus, we cannot fault the Tax Court of Canada for having taken the facts into account. This is all the more true as we cannot identify a palpable and overriding error in its assessment of these facts.

The Tax Court had found that, notwithstanding an agreement of the trustees of a discretionary trust to the contrary, the trustees continued to exercise their powers as trustees in accordance with the Civil Code and two family beneficiaries (the sons) did not, in fact, act as trustees. In confirming this finding, Goyette JA stated (at para. 7, TaxInterpretations translation):

When issuing assessments, the Minister of National Revenue must take into account the actual facts. The same applies to the Tax Court of Canada when it is called upon to rule on the validity of assessments: Victuni v. Minister of Revenue of Quebec, [1980] 1 S.C.R. 580 … . Thus, we cannot fault the Tax Court of Canada for having taken the facts into account. This is all the more true as we cannot identify a palpable and overriding error in its assessment of these facts.

The tax-planning steps of the taxpayer (a family inter vivos trust) entailed an attempt to cause the corporation whose shares were held by the trust to continue to be controlled for ITA purposes by members of the family upon the repurchase, out of asset-sale proceeds, by the corporation of all the shares of the corporation held directly by the relevant members of that family (the father and his two sons), notwithstanding that the trust had non-family trustees. To this end, the trustees entered into an agreement with two beneficiaries, who were sons of the father, under which the trustees undertook to exercise their powers according to the instructions given by the sons and to not make decisions without their prior consent – and to resign in the event of disagreement with the sons' instructions.

The trust was successful in establishing that these steps were ineffective, i.e., the trustees continued to exercise control of the trust and, thus, of the corporation (so that a deduction under s. 104(6) for a dividend distributed and allocated under s. 104(19) to the father qua beneficiary was not denied on the basis that the distribution was not valid under the Quebec trust law). The decision of Goyette JA however did not refer to the above change-of-control tax-planning, which is only referred to in the TCC decision.