Muzich Family Trust v. MNR, 93 DTC 314, [1993] 1 CTC 2330 (TCC)

Mogan, T.C.C.J.:—The Muzich Family Trust, the appellant herein, was established as an inter vivos trust under the laws of the Province of Ontario by a trust agreement dated March 1,1983. The trustees of the trust were John Smith and Grace Muzich and the beneficiaries were Grace Muzich and her natural children. Almost all of the property which constitutes the corpus of the trust was contributed by Dinko Muzich, the husband of Grace Muzich. The T3- Trust Income Tax Return for the first fiscal period of the Trust (March 1 to December 31, 1983) was mailed to the respondent on April 9, 1984. Enclosed with the T3-Return was a document which purported to be a "preferred beneficiary election” within the meaning of subsection 104(14) of the Income Tax Act. The preferred beneficiary election was not signed by either trustee or by any of the beneficiaries. Also, a copy of the trust agreement dated March 1, 1983 was not filed with the respondent until May 22,1985. The only issue in this appeal is whether preferred beneficiary election with respect to the 1983 taxation year is valid. The relevant provisions of the Income Tax Act and the Income Tax Regulations are as follows:

104(14) Where a trust and a preferred beneficiary thereunder jointly so elect in respect of a taxation year in prescribed manner and within prescribed time, such part of the accumulating income of the trust for the year as is designated in the election, not exceeding the preferred beneficiary's share therein, shall be included in computing the income of the preferred beneficiary for the year, and shall not be included in computing the income of any beneficiary of the trust for a subsequent year in which it was paid.

2800(1) Any election under subsection 104(14) of the Act in respect of a taxation year shall be made by filing with the Minister the following documents:

(a) a statement

(i) making the election in respect of the year,

(ii) designating the part of the accumulating income in respect of which the election is being made, and

(iii) signed by the preferred beneficiary and a trustee having the authority to make the election; and

(b) a statement signed by the trustee showing the computation of the amount of the preferred beneficiary's share in the accumulating income of the trust for the year in accordance with paragraph 104(15)(a), (b) or (c) of the Act, as the case may be, together with such information concerning the provisions of the trust and its administration as is necessary for this purpose.

2800(2) The documents referred to in subsection (1) shall be filed within 90 days from the end of the trust's taxation year in respect of which the election referred to in subsection (1) is made.

It would appear that Regulation 2800(1) describes the prescribed manner and Regulation 2800(2) describes the prescribed time in which a joint election is to be made. The appellant admits that the T3- Return and the election were nine days late because the 1983 taxation year of the Trust ended on December 31, 1983; 90 days after that date would be March 31, 1984 (or perhaps March 30 if the leap year day is to be counted); and the T3-Return and election were not mailed until April 9, 1984. The form of election disclosed trust income of $15,029.01 which was allocated among Diane Muzich, Francis Muzich and Robert Muzich. The respondent admits that each of the three designated beneficiaries was a "preferred beneficiary” within the meaning of paragraph 108(1)(g) of the Act but the form of election was not signed by either trustee or any one of the three designated beneficiaries.

The appellant commences this appeal with a significant burden because of the undisputed facts that the purported election was not filed in the prescribed manner or within the prescribed time.

I shall consider first the question of prescribed time. Counsel for the appellant cited the decisions of Stanley Drug Products Ltd. v. M.N.R., [1990] 2 C.T.C. 2646, 90 D.T.C. 1664 and Taylor v. M.N.R., [1990] 2 C.T.C. 2466, 90 D.T.C. 1917 as situations in which an election permitted under subsection 39(4) of the Act was filed egregiously late and each election was held to be invalid. Counsel argued that the election herein (being only nine days late) was not egregiously late and may therefore be valid.

The appellant also relies on the decisions in Fishery. M.N.R., [1988] 1 C.T.C. 2054, 88 D.T.C. 1027 and Trynor v. M.N.R., [1988] 1 C.T.C. 2425, 88 D.T.C. 1294 to support his proposition that an election not egregiously late may be regarded as valid. The Fisher and Trynor cases were both concerned with an election under ITAR 26(7) to designate the fair market value on December 31, 1971 as the deemed cost of all capital property owned on that date. The election under ITAR 26(7) had to be made not later than the day on or before which a particular taxpayer was required by the Act to file a return of income for the first taxation year after 1971 when he disposed of capital property actually owned on December 31, 1971. Under subsection 150(1) of the Act, an individual is not ordinarily required to file a return of income for a particular taxation year unless tax is payable for that year. The problem in Fisher and Trynor was the situation in which a taxpayer had no tax payable for the taxation year when he first sold capital property that was owned on December 31, 1971. In Fisher and Trynor, this Court was required to construe ITAR 26(7) to determine the extent to which subsection 150(1) of the Act was incorporated by reference to determine when the election was required to be filed.

In my opinion, the appellant herein is not assisted by the decision of this Court in either Fisher or Trynor. When the taxpayer in each of those cases did not have tax payable for the taxation year when he first sold capital property that was owned on December 31, 1971, the Court had to construe the timing requirement for the filing of an election under ITAR 26(7). No such problem of statutory construction arises in this appeal because the obligation to file a preferred beneficiary election is clearly stated in Regulation 2800(2). It is within 90 days from the end of the trust's taxation year.

I shall consider secondly the prescribed manner of filing the preferred beneficiary election. On this issue, appellant's counsel relied on the decision of Judge Kempo in Trynor holding (i) that the required manner of filing was only directory and not mandatory; and (ii) that the form used by Mr. Trynor was in substantive compliance because only a clear written declaration of intent to use the V-Day value was needed. Judge Kempo also held that because the manner of filing was procedural, substantive compliance was adequate unless it would cause surprise, uncertainty or prejudice to the Minister of National Revenue. The simplistic nature of the election in ITAR 26(7) — Form 12076 (i.e. a simple declaration of intent to use V-Day value as the cost base for capital property owned on December 31, 1971) may very well support the decision in Trynor but, in my view, the nature of the preferred beneficiary election is not so simplistic and I hesitate to apply the decision in Trynor to the facts in this appeal for the following reasons.

Regulation 2800(1) requires that the preferred beneficiary and a trustee sign a statement designating the part of the accumulating income to be allocated to the beneficiary, and making the election with respect to a particular taxation year. This statement is important because it signifies the consent of the beneficiary to include in the computation of his or her income the designated part of the accumulating income of the trust without regard to whether such designated part was in fact received by the beneficiary during the particular taxation year. Regulation 2800(1) also requires that the trustee(s) sign a statement showing the computation of the preferred beneficiary's share in the accumulating income of the trust, and disclosing "such information concerning the provisions of the trust and its administration as is necessary” for the purpose of the election. This second statement is also important, particularly if there is to be a preferred beneficiary election in the first taxation year of an inter vivos trust (as in this appeal!), because the Minister of National Revenue may not otherwise have certain information concerning the trust: who is the settlor within the meaning of paragraph 108(1)(h) of the Act; who is a preferred beneficiary; what is the accumulating income of the trust for the year; how is such income allocated between the trust and one or more beneficiaries; is one trustee authorized to sign on behalf of a trust with more than one trustee.

On the question of making an election in prescribed manner, the appeal herein is easily distinguished from the decision in Trynor. In my opinion, the manner of filing an election under subsection 104(14) of the Act is substantive and not merely procedural. In the circumstances of this case, it is significant that the purported election did not disclose any information concerning the provisions of the trust and its administration” within the meaning of Regulation 2800(1)(b), and a copy of the trust agreement was not sent to the Minister of National Revenue until May 22, 1985, more than one year after the filing of the purported election. The very limited information contained in the purported election was not substantive compliance with the prescribed manner of filing a preferred beneficiary election in Regulation 2800(1), quite apart from the fact that the purported election was not signed by a trustee or a beneficiary.

In conclusion, I find that the purported preferred beneficiary election was not valid because it was not filed within the prescribed time (it was nine days late); and it was not filed in the prescribed manner (necessary signatures and important information were omitted). The appeal is dismissed.

Appeal dismissed.