Rostal Sales Agency Ltd. v. The Queen, 83 DTC 5036, [1983] CTC 5 (FCTD)

Collier, J:—The plaintiff claimed, for its 1976 and 1977 taxation years, the small business deduction permitted by subsection 125(1) of the Income Tax Act, SC 1970-71-72, c 63 as amended. The Minister of National Revenue issued reassessments, revising downwards the amount claimed by the plaintiff, on the basis the plaintiff company was associated, under section 256, with the following named companies:

Shirtmate Ltd

Clothes to You Ltd

Burton Sales Inc

Robert Simon Shirt Ltd

The parties conceded that if the plaintiff were associated with Shirtmate, its appeal fails. If not associated, the appeal succeeds. To decide that issue, it is not necessary to go into the factual interrelationship among the other named companies.

The shareholders of Shirtmate were:

The Spectors are brothers.

The sole shareholder of the plaintiff Rostal was a trust, called the Caras- talle Trust.

The trust was created by deed dated January 22, 1976. Allan Spector was the settlor. The trustee was one Stanley Cytranbaum, an attorney. He was not related to any of the shareholders, or groups of shareholders, in any of the companies. There were five named beneficiaries. There was no evidence before me as to their relationship with the settlor. They appear to be members of his family.

I shall set out what, to me and for the purposes of the tax problem, are the key portions of the trust document.

“Trustee” is defined to mean the original trustee, and any substitute or additional trustees. Clause 4 provides:

4. The term “Trustee” that is used in this instrument shall mean not only Stanley Cyntranbaum being the original Trustee but whoever may be Trustee or Trustees for the time being and whoever may be appointed as Trustee or Trustees in replacement of Stanley Cyntranbaum.

The trustee was given wide and generous powers in respect of the handling, management, investment and control of the trust estate.

Clause 19 deals with the appointment, replacement and removal of the trustee or trustees. I set it out in full.

19. (a) The Trustee may, upon thirty (30) days notice resign as Trustee hereunder and the Settlor shall appoint a replacement trustee.

(b) The Settlor may remove any successor trustee without cause by giving such trustee notice in writing to this effect and any trustee may resign as trustee by giving the Settlor or the remaining trustees notice in writing.

(c) Any two trustees, or the Settlor may appoint a successor trustee in the event that a trustee or successor trustee is removed or resigns as hereinabove provided.

(d) The Settlor may in his sole and absolute discretion at any time and from time to time appoint new or other trustees resident in any place in any part of the world and nothing herein shall be construed as to limit the number of trustees which may result from the exercise of this power to appoint new or other trustees.

(e) Any powers conferred upon the Settlor under this paragraph may, in the absence of any other provision, be exercised by the executor under the Settlor’s last Will and Testament.

The Minister relied, in his submissions, on paragraph (d) of clause 19. He said: The settlor could, under (d), dismiss the trustee or trustees and appoint himself; he would then have a right, under the trust deed, to control the voting rights of the shares in the plaintiff; by paragraph 251 (5)(b) of the Income Tax Act Allan Spector would then be deemed to be in the same position as if he owned the shares; Rostal and Shirtmate are therefore “associated” because the control and shareholdings fall within the provisions of paragraph 256(1 )(d) of the Act.

Paragraph 256(1 )(d) is as follows:

For the purposes of this Act one corporation is associated with another in a taxation year if at any time in the year,

(d) one of the corporations was controlled by one person and that person was related to each member of a group of persons that controlled the other corporation, and that person or that group of persons owned directly or indirectly, in respect of each corporation, not less than 10% of the issued shares of any class of the capital stock thereof, or

I set out, as well, paragraph 251(5)(b):

For the purposes of subsection (2) and section 256,

(b) a person who had a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares in a corporation, or to control the voting rights of shares in a corporation, shall, except where the contract provided that the right is not exercisable until the death of an individual designated therein, be deemed to have had the same position in relation to the control of the corporation as if he owned the shares;

It was submitted, on behalf of the defendant, that Allan Spector’s alleged right to control the voting rights of the Rostal shares, arose from . a contract, in equity or otherwise . .(paragraph 251(5)(b)). The trust deed here, in my view, is not, in law, a contract. I agree with the statement of my colleague, Mahoney, J, in Lusita Holdings Limited v The Queen, [1982] CTC 351; 82 DTC 6297:

It is trite law that a trust is not a contract. It is unnecessary to go beyond the text books, which enumerate the multitude of distinctions, for authority for that proposition.

But, I also concur with Mahoney, J, when he concludes in the same case, that the “right” referred to in paragraph 251(1)(b) is not confined to rights arising under a contract, but extends to rights arising in “equity or otherwise”, apart from pure contract.

The next question is whether the terms of the Carastalle trust deed gave Allan Spector a right, in equity or otherwise, to control the voting rights of the Rostal shares. The Minister’s position, as I have stated, is that clause 19(d) of the trust deed confers that right: the settlor can, in effect, appoint himself as a sole trustee.

I do not agree with that construction of the trust document. Clause 19 must be read as a whole, and in the context of the whole trust deed.

The deed clearly indicates that Cyntranbaum is the original trustee, but “trustee” includes whoever may be appointed to replace him (clause 4). He, and any new or future trustees, can resign, whereupon Spector must appoint a replacement trustee clause 19(a)).

Clause 19(b) empowers the settlor to remove any “successor trustee”. It does not, in my opinion, permit the removal, by Spector, of the original trustee. Clause 19(c) then authorizes the settlor, or any two trustees to appoint a successor trustee, where a successor trustee, or trustee, is removed or resigns, as set out in (a) and (b) of clause 19.

I turn now to clause 19(d).

This provision, in my opinion, does not deal with the removal or appointment of “successor” or “replacement” trustees. It deals with the appointment of “new or other trustees”. As I see it, the drafter of the trust deed envisaged the trust possibly having assets in various places and jurisdictions (see for example, clause 3(b), (c) and (d) ). A discretion, in this particular clause, was given to the settlor to appoint additional trustees, not just in Canada but anywhere. But this clause does not authorize the settlor to remove or replace already incumbent ones.

As I see it, the only power of removal Allan Spector has, is in respect of a “successor” trustee. He has no power to remove the original trustee. My comments are confined to the trust deed. There may be other avenues, at law, for removal of trustees.

On that construction of the trust deed, the settlor did not have the right, de jure, at relevant times, to control the voting rights of the Rostal shares. As to de jure vis-a-vis de facto control, see MNR v Dworkin Furs (Pembroke) Ltd et al, [1967] SCR 223; [1967] CTC 50; 67 DTC 5035. The original trustee had the sole right, in law, over the voting powers in respect of the Rostal shares held by the Carastalle trust.

I add this. The mere fact that, at some time the settlor might be in a position to remove trustees at will, does not necessarily mean that incumbent trustees are mere nominees for the voting rights of any shares held by the trust. The comments of Sir Raymond Evershed, M R, in CIR v Silverts Ltd (1951), 29 TC 491, are, although the factual situation was somewhat different to the present case, apt (at 507):

It does not of course follow that because the settlor ... could remove Messrs Lancashire and Lewis at will the latter can therefore be regarded as mere nominees for voting purposes of the settlor.

The plaintiff is, therefore, not associated with Shirtmate or any of the other named companies.

The reassessments are referred back to the Minister for reassessment on the basis that the plaintiff and the other named companies are not associated corporations within paragraph 256(1 )(d) of the Income Tax Act.

The plaintiff is entitled to costs.