Thibodeau Family Trust v. The Queen, 78 DTC 6376, [1978] CTC 539 (FCTD)

Gibson, J:—In the taxation year 1972, there were three trustees of the Thibodeau Family Trust. Nicholas Bayard Dill and James Appleby Pearman were the Bermuda Trustees and Leo Joseph Thibodeau was the Canadian Trustee.

What is in issue in this appeal from an assessment for income tax is whether or not the Thibodeau Family Trust was resident in Canada during the 1972 taxation year. The amount claimed in the assessment is $78,712.65 which is said to arise out of an alleged capital gain of $157,425.30 and out of certain interest earned on funds held in escrow in 1972. The capital gain is alleged to have been received on the sale by the Thibodeau Family Trust of shares in Thibodeau Express Limited. The selling price of these shares in 1972 was $125 per share. The Thibodeau Family Trust in 1972 owned a minority interest in the shares of Thibodeau Express Limited, and one Leo Joseph Thibodeau owned the majority interest. By the assessment, it was determined that the Valuation Day value of the shares owned by the Thibodeau Family Trust had a value 10% less than the value of the shares owned by Leo J Thibodeau because these shares were a minority interest; and accordingly, by the assessment, these shares were valued at $112.50 per share instead of $125. The Thibodeau Family Trust did not appeal this assessment in so far as the valuation at this discount is concerned. Therefore, the only issue for decision in this appeal is whether or not this Trust was resident in Canada in 1972.

The issue arises because residence in Canada subjects a person’s world income to Canadian income tax (see section 2 of the Income Tax Act, SC 1970-71-72, c 63). In so far as individuals and corporations are concerned, there are statutory rules in the Income Tax Act and judicial decisions whereby their residences may be determined. But there are no statutory rules or judicial decisions establishing any formula that may be employed in determining whether or not a trust is resident in Canada. The Income Tax Act however, envisages there being trusts resident in Canada and trusts non-resident, but the Act is silent as to how to determine this fact. The language of subsections 104(1) and (2) of the 1972 Income Tax Act, Division B, subdivision k touches on the matter, but these subsections whether read separately or conjunctively provide no guide as to the circumstances when a trust may be determined to be resident in Canada or when non-resident. Accordingly, it is impossible to construe and apply literally the statutory words employed in those subsections or either of them to determine the issue raised in this appeal. Some other method must be employed.* [1]

(The issue on this appeal will not arise in respect to the income of the Thibodeau Family Trust for its taxation year 1976 and subsequent taxation years because this Trust will be deemed to be resident in Canada because of section 94 of the Income Tax Act and the application of section 35.1 of the Income Tax Application Rules, 1971 (ITAR).

The Thibodeau Family Trust was created by Trust Deed dated February 15, 1968 between Margaret Schaldenbrand, as settlor, and Leo Joseph Thibodeau (see Exhibit 1). The asset of this Trust at its commencement consisted of $500. Subsequently Leo J Thibodeau sold it 5,400 common shares, 8,000 Class “B” preferred shares of Thibodeau. Express Limited and some common shares of Thibodeau Pooling Limited. After that, the Trust acquired all of the shares of Thibodeau. Pooling Limited so that it held 997 common shares of that company.

By deed dated December 10, 1970 and pursuant to the enabling powers of the said trustee (Exhibit 1) James Appleby Pearman and Nicholas Bayard Dill, both of the Parish of Pembroke, in the Islands of Bermuda, became trustees of the Trust (see Exhibit 3), replacing Peter R Pearson, the retiring trustee (who retired by Deed of Discharge dated November 5, 1970, see Exhibit 2). According also to the words of this deed, the assets and the administration of the Trust were removed to the Islands of Bermuda; and on that same day, December 10, 1970, the Bermuda trustees took delivery of the 5,400 common shares of Thibodeau Express Limited, 8,000 Class ‘‘B” preferred shares of Thibodeau Express Limited and 997 common shares of Thibodeau Pooling Limited, and they placed them in the vault of their law office, Conyers, Dill and Pearman at Hamilton, Bermuda. Pearman and Dill were partners in the law firm of Conyers, Dill and Pearman at Hamilton, Bermuda.

Then in 1972 these shares of Thibodeau Express Limited together with the majority interest shares owned by Leo Joseph Thibodeau in his own right, were sold to Algoma Central Railway for $3,053,731.53 on closing and the Thibodeau Family Trust received $1,157,392.41 on settlement. There was a certain delay in closing this transaction and because of this the purchaser advanced monies in escrow, and certain interest was earned by the Trust in Canada on the funds held in escrow.

It is arising out of this transaction that it is claimed by the assessment that the Thibodeau Family Trust realized a taxable gain on the sale of its shares in Thibodeau Express Limited and also during the period of delay in closing the sale received the investment interest income of those certain funds held in escrow.

The trustees of the Thibodeau Family Trust paid withholding tax of 15% on the investment income on the premise that the Trust was non-resident in Canada, and income tax on the gain on the sale of the taxable Canadian property also on the premise that there was a sale of taxable Canadian property by a non-resident of Canada.

With the monies received from the sale to Algoma Central Railway, the trustees of the Trust have made investments: for the Trust in securities in Canada, the United States, England, the Netherlands, Switzerland (an investment in gold) and Bermuda.

By paragraph 7 of the statement of defence the Minister of National Revenue admits that “the Thibodeau Family Trust has not at any relevant time carried on business in Canada’’.

Some of the beneficiaries of this Trust resided in the United States during part, or the whole of the year 1972.

To support the premise that the Thibodeau Family Trust was resident in Bermuda in 1972, the plaintiff relies on the following, among other facts, as supported by the evidence and as set out in the pleadings:

(a) Since the transfer of the assets and administration of the Trust to Bermuda on December 10, 1970, Dill and Pearman, the Bermuda trustees have been in possession or control of all of the Trust assets, all meetings of the trustees have been held in Hamilton Bermuda, and decisions relating to the assets and administration of the Trust have been taken at those meetings.

(b) Dill and Pearman, the Bermuda trustees, are residents of Pembroke Parish, Bermuda, and have been so resident since prior to 1970.

(c) Subsequent to the transfer of the assets and administration of the Trust to Bermuda, the Bermuda trustees opened bank accounts for the Trust with the N B Butterfield and Son Limited Bank and the Bank of Butterfield Executor and Trustee Company Limited, both of Hamilton, Bermuda. Since December 1970, the Trust books and records have been maintained in Hamilton, Bermuda and the Trust accounts have been prepared by a Hamilton, Bermuda accounting firm.

(d) The Bermuda trustees are paid an annual fee from the Trust funds in respect of services rendered by them as Trustees of the Trust.

(e) Subsequent to December 10, 1970, the Bank of Butterfield Executor and Trustee Company Limited acted as investment advisor to the trustees. During 1973, the Butterfield Bank was replaced as investment advisor by the Stuyvesant Asset Management Corporation of New York. On August 1, 1974, the Stuyvesant Asset Management Corporation was replaced as investment advisor by Tomlin, Zimmerman and Parmellee Incorporated of New York City.

(f) During 1972, the trustees agreed that Leo Joseph Thibodeau (then the third trustee of the Trust) be authorized to suggest investments by telephone to the Bank of Butterfield Executor and Trustee Company Limited and to the Bermuda trustees. If the Bermuda trustees approved the suggestions so made, they would confirm their decision by written direction of the Bank of Butterfield Executor and Trustee Company Limited who would then act in accordance with the written instructions of the Bermuda trustees.

(g) Since becoming trustees on December 10, 1970, the Bermuda trustees, in accordance with the provisions of the February 15, 1968 trust deed, have overruled investment proposals made by Leo Joseph Thibodeau (then the third trustee) on several occasions, including the following:

(i) Thibodeau suggested that the trustees invest in 50,000 shares of Algoma Central Railway but the Bermuda trustees overruled his decision and agreed to invest in 25,000 shares only of Algoma Central Railway.

(ii) Thibodeau presented the Bermuda trustees with a prospectus of Stuyvesant Asset Management Corporation, and suggested that the Corporation be appointed investment advisor to the trustees, but the Bermuda trustees refused to act in accordance with his suggestion without first obtaining another prospectus from a similar investment advisor. Ultimately, Thibodeau presented a sample form agreement of T J Hold and Co, Inc, to the Bermuda trustees and they decided to retain Stuyvesant Asset Management Corporation as investment advisor.

(iii) Thibodeau suggested that trust funds be invested directly in certain oil leases, but the Bermuda trustees refused to authorize such a direct investment of funds. Rather, the Bermuda trustees agreed to lend $300,000 on demand loan at 6% interest to a Canadian corporation of which the Bermuda trustees were shareholders, $250,000 of which loan was repaid within 30 days.

(iv) Thibodeau suggested placing trust funds under the care of one, Mr Craig, for investment from time to time in foreign currencies. The Bermuda trustees investigated the suggestion but refused to agree to placing funds with Mr Craig for investment in foreign currencies or to investing in foreign currencies.

(v) Thibodeau suggested an investment of substantial trust funds in gold bullion, but the Bermuda trustees refused to authorize an investment of more than 25% of trust funds in gold.

(vi) Thibodeau suggested investing 5% to 10% of the trust portfolio in options, but the Bermuda trustees refused to approve his Suggestion.

(h) Since December 10, 1970, the trustees have invested trust funds in portfolio investments in Canada and withholding tax of 15% has been paid with respect to investment income earned from Canadian sources. With the exception of the taxable capital gain realized in 1972 in respect of the sale of the Thibodeau Express Limited shares, the trustees have not realized further taxable capital gains in Canada and have not carried on business in Canada.

In support of the premise that the Trust had a residence in Canada in 1972, counsel for the defendant submitted that because there is no statutory or judicial authority in point, this Court, in deciding whether or not this Trust had a residence in Canada in 1972, should follow the reasoning of Lord Loreburn, LC, in De Beers Consolidated Mines, Limited v Howe, [1906] AC 455 and establish rules and principles for the residence of a trust as were established for income tax purposes for a corporation, namely, 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 CB 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 bye-law, but upon a scrutiny of the course of business and trading.

Counsel for the defendant also submitted that this Trust could be found to have a dual residence, so therefore in any event, even if the Court should find that this Trust had a residence in Bermuda, that it should find at the same time, that it had a residence in Canada and that is the only relevant matter. For persuasion by analogy, counsel cited, among others, the following cases: (1) Union Corporation, Ltd v Inland Revenue Commissioners, [1952] 1 All ER 646 at 660-62:

Then in 1906 the De Beers case ((1906) AC 455) . . . was decided in terms which in my opinion render it conclusive of the present issue.

Again . . .: I submit that, even technically, the De Beers case is a binding authority today.

In our judgment, therefore, Lord Loreburn’s test emerges supreme and authoritative, subject only to the rider or corollary that since a limited liability company can contemporaneously have more than one residence (a thing not contemplated by Lord Loreburn) his analogy to a natural person demands that central management and control may be divided, and that such division, being a matter of fact and degree in each case, is not denied by the circumstance that the supreme command, the power of final arbitrament, may be found to be, or to be predominantly, in one place. The Swedish Central Ry Co case (1924) 2 KB 255; affd [1925] AC 495; 94 LJKB 527; 133 LT 97; 9 Tax Cas 342, emerges as a decision justified by its peculiar facts and an authority consequently limited, but at least it renders it no longer possible to satisfy the test of residence by reference only to the country where final control abides or to assert that when for that reason residence in one country is conceded residence elsewhere cannot co-exist.

There remains the Australian case to which we have already alluded— Koitaki Para Rubber Estates, Ltd v Federal Commissioner of Taxation (1940), 64 CLR 15. In that case, Australian residence being admitted, it was claimed that the company resided also in Papua. But in that country, though substantial productive business was conducted by the company—ie, by the company’s servants in the company’s name—there existed no part of the company’s “superior or directing authority’’. Dixon, J, said 64 CLR 18:

“From the point of view of that territory (ie, Papua) (the company) is simply an absentee owner of a rubber estate managed by an attorney under power in its name . . . It may be conceded . . . that in respect of the conduct of the plantations a full measure of responsibility is placed in the attorney or manager. But his responsibility; however full, is confined to what may broadly be described as the production and shipment of rubber and does not extend to the control of the general or corporate affairs of the company, to matters of policy or of finance. All control seems to me to be centred in Sydney.”

It was held, accordingly, that the company had failed to establish residence in Papua, and we respectfully agree with that decision. We have already expressed our concurrence with the conclusion of Dixon, J, and with his formulation of the proper test, and we are content to adopt the whole of his judgment and reasoning with one slight exception. Where the learned judge has discussed the Swedish Central Ry Co case (supra) and refers to the conclusion that the Swedish Central Railway Company was resident In Sweden and in England, he is reported as saying . .

“But Viscount Cave LC, clearly stated that the reason was that there was a division between the two countries of the ‘central management and control’.’’

With all respect, we have difficulty in accepting this view. Although we think that the explanation of the case by Lord Sumner in the Egyptian Delta case [1929] AC 1 ; 98 LJKB 1; 140 LT 50; sub nom Todd v Egyptian Delta Land & Investment Co, Ltd, 14 TC 119: Digest Supp produces, in effect, that result, nevertheless, the passage which we have cited above from Lord Cave’s speech seems to us to show that, in his opinion, residence in England could be supported, though the “central control and management’’ was concentrated in Sweden. That view was not, however, essential to the decision, as Lord Sumner interpreted it. This small matter cannot be said to affect Dixon, J’s decision or the reasoning on which it was based, and that decision was affirmed by the full High Court. Sir George Rich (Acting CJ), in his short judgment, was content to accept the judgment of Dixon, J. He said, 64 CLR 244:

‘In Papua the company’s operations fall into an auxiliary or subordinate position of a purely local as opposed to a central nature.’’

The judgment of Williams, J, as we read it, might be said to revert to a more strict interpretation of the original formulation of principle in the De Beers case (supra). But any divergence between him and Dixon, J, in this respect was immaterial for the purpose of answering the particular question there before the court. Williams, J, observed . . .:

“In order that a company may acquire a residence in two countries for the purposes of income tax . . . the central management and control. must be divided between such countries as to ‘abide’ in them both. The company through the central control is then metaphorically speaking bodily present and residing by analogy in both countries.’’

We do not, in the circumstances, read that passage as meaning that such dual residence can only be established where the final or supreme authority is found to be divided.

We have, therefore reached upon this matter the same view as that entertained by Harman, J. In such a matter as this the precise formulation of the test must be a difficult matter. According to him, it is

“essential that both features of the phrase ‘keeps house and does business’ must be present. ‘Keeping house’ will thus refer to administrative management and ‘doing business’ to trading activities. Where both are found the conditions are satisfied.’’

For our part we feel some doubt whether it is right to treat the phrase “keeping house” as referring only to administrative management, but we think that the sense of the learned judge’s test is the same as that.which we have attempted to formulate and the same as that stated by Dixon, J— in other words, that there must, in order to constitute residence, be not only some substantial business operations in any given country, but also present some part of the superior and directing authority. We prefer, accordingly, to state the matter as we have done, but we agree with Harman, J, that the question of the extent of the superior or directing authority required (as well as of the business operations being performed) is one of fact to be determined by the Special Commissioners.

(2) Unit Construction Co Ltd v Bullock (Inspector of Taxes), [1960] AC 351 at 365-70 Lord Radcliffe:

The ascertainment of a limited company’s residence for tax purposes involves several very familiar propositions. No statute hitherto has laid down any definition of this residence or prescribed any rules for determining it, except so far as subsection (7) of section 468 of the Income Tax Act, 1952, not only governs that section but also forms a statutory acceptance of an existing rule. I think that a statutory code could have been provided and on the whole I regret that it has not. On the other hand, the necessity of establishing some common standard for the treatment of different taxpayers meant that the courts of law were bound in course of time to produce and apply some general principle of their own to form an acceptable test of residence. No doubt it might have taken a variety of forms—the country of incorporation, the site of general meetings, the site of meetings of the directors’ board were all possible candidates for selection as the criterion. In fact, as we know, the principle was adopted that a company is residence where its central control and management abide: words which, according to the decision of the House of Lords that finally propounded the test De Beers Consolidated Mines Ltd v Howe (1906) AC 455 are equivalent to saying that a company’s residence is where its “real business” is carried on.

It is true that the law so declared substitutes a judicial formula for the general words of the statute, a form of limitation which one normally seeks to avoid. But, in the circumstances, I believe such a process to have been inevitable, and, in my opinion, the De Beers judgment, (supra) followed as it is by a number of other judgments of the highest authority which have accepted the same principle, must be treated today as if the test which it laid down was as precise and as unequivocal as a positive statutory injunction. That means that there is no escape from Lord Loreburn’s words

a company resides for purposes of income tax where its real business is carried on . . . I regard that as the true rule, and the real business is carried on where the central management and control actually abides.”’

I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me, at any rate, it seems impossible to read Lord Loreburn’s words without seeing that he regarded the formula he was propounding as constituting the test of residence. If the conditions he postulated were present, there was residence: if they were not, other conditions did not suffice to make up residence. And so, I think, his meaning was universally understood, not least in judgments of this House (see American Thread Co v Joyce [1913] 6 TC 163; 29 TLR 266; New Zealand Shipping Co Ltd v Thew [1922] 8 TC 208; Bradbury v English Sewing Cotton Co Ltd [1923] AC 744; 39 TLR 590, for the next twenty years.

So far as I am able to perceive, only two qualifications have since appeared which mar at all the simplicity and generality of his test. One is that the facts of individual cases have not always so arranged themselves as to make it possible to identify any one country as the seat of central management and control at all. Though such instances must be rare, the management and control may be divided or even, at any rate in theory peripatetic. Situations of this kind do not arise just to tease the minds of judges: they are the product of some peculiar necessity, political or otherwise. Union Corporation Ltd v Inland Revenue Commissioners (supra) was of this kind. The facts were not such as to allow of Lord Loreburn’s test being applied, and therefore some other basis of decision had to be selected. The solution chosen by the Court of Appeal appears to have been that residence arose in any. country in which: “to a substantial degree” acts of controlling power and authority were exercised, and in this the line of reasoning followed was avowedly adapted from the judgment of Dixon J in Koitaki Para Rubber Estates Ltd v Federal Commissioner of Taxation, [supra]. It may perhaps still be open to question whether, where the facts are such that Lord Loreburn’s test cannot be applied as a whole, the correct way of determining residence is, so to speak, to fragmentate his principle and establish a residence for tax purposes wherever the exercise of some portion of controlling power and authority can be identified. The point does not arise for our decision in this case, and I express no view at all upon it. I only note the decision in the Union Corporation case (supra) as an instance of dual or multiple residence for tax purposes which has its origin in the fact that circumstances do not always make it feasible to apply the Loreburn formula.

The other difficulty that has appeared is the decision of this House in 1925 in the Swedish Central Railway Co case [supra]. To all appearances that laid down the proposition that, although there was. a residence in Sweden by virtue of central control and management being exercised there, there was at the same time residence in England by virtue of incorporation here and the performance here of administrative duties such as exercising the custody of the company’s seal and registration of transfers. The novel idea thus appeared that there were some circumstances that could establish residence for a company, even though its central management and control were being concurrently exercised elsewhere. Unfortunately it is impossible to discover from the decision what exactly those circumstances are, because as so often arises under income tax procedure when judgment is given on cases stated by commissioners, the conclusion of the House involved nothing more positive than that the commissioners who had heard the case had facts before them upon which it was open to them in law to find that there was English residence. Conversely, when the case of Egyptian Delta Land Investment Co Ltd v Todd [supra] reached this House in 1928, it was held that upon facts not markedly dissimilar from those of the earlier case the commissioners were entitled to find that there was no residence in England. With these two decisions of equal authority to be reckoned with, I think that it is impossible for anyone today to declare with any conviction what are the circumstances, or what is the combination of circumstances, that constitute residence for a company in one taxing jurisdiction at a time when the central management and control of its affairs are being actively conducted in another.

My Lord, I cannot avoid the opinion that the Swedish Central Railway Co decision (Supra) was an unfortunate one, having regard to the course. of authority both before and after its date. Few people can feel that there is any close analogy between the residence imputed to a company and the residence imputed to an individual. While it is not difficult to see that the circumstances that make an individual “resident” may reproduce themselves for him at one and the same time in more than one country, it is much harder, when a company is concerned, to feel satisfied that two quite different tests, depending upon different sets of circumstances, can each be applied concurrently for the purpose of determining residence. For any one taxing authority the relevant question is whether the company is resident within the area of its jurisdiction or non resident: it is not required to ascertain positively whether or not the company is also resident within another jurisdiction. If the accepted test is that a company is resident in that country where its central management and control abide, and the facts are that at the material date that central management and control do not abide in England, it seems that in such cases the nature of the test itself precludes the conclusion that the company is nevertheless resident here.

I am myself of the opinion that the best way of treating the matter is to regard the Swedish Central Railway Co (supra) and the Egyptian Delta Land and Investment Co (supra) decisions as if they were in effect one decision of the House and the speech of Viscount Sumner in the later case as affording an authoritative commentary on the significance of the earlier. He was party to both of them. If this is done, much of the difficulty disappears, for it is clear that Lord Sumner wished it to be understood that the Swedish Central Railway Company’s business and administration were of such a nature that what managing and controlling had to be done were in fact done as much on English as on Swedish soil. He regarded the key of the earlier decision as being contained in the words of Lord Cave (supra): “The central management and control of a company may be divided, and it may ‘keep house and do business’ in more than one place; and, if so, it may have more than one residence.” On this basis the 1925 decision of the House is no more than a decision on that special class of case, such as I have already noticed with reference to the Union Corporation, (supra) where the facts themselves are genuinely such as not to admit of a finding that central management and control are exercised, in or from any one country. There will then be only one category of exception from the principle of the De Beers case (Supra) and not an undefined second class.

My Lords, what I have been saying about this question of double residence has no direct relevance to what has to be decided in the present appeal. I thought it necessary, however, to make some attempt to deal with the background because, owing to the admission that has been made asserting an African residence for the three subsidiaries, we are put in the position, if we allow the appeal, of accepting that each of them has residence in two different countries without passing upon the validity of the alleged residence in Africa or indeed knowing what are supposed to be the determining circumstances that bring it about. I do not think that satisfactory. This case ought not to be regarded as in any sense an authority on the problems of double residence for companies. It deals only with what is a different point, whether, assuming that all the acts which constitute central management and control of the subsidiaries’ affairs take place in England, an English residence arises despite the fact that the persons who performed those acts had no authority under the companies’ regulations to do so, nor could the meetings, if any, at which the decisions to act were taken validly be held in England. It is that point which has been argued before us.

The view which has hitherto prevailed both in the High Court and the Court of Appeal is expressed in the words which appear in the unanimous judgment of the latter court ((1959) Ch 315, 338): . . only constitutional, and therefore authorised, management and control are relevant to an inquiry as to the residence of a company.” This conclusion, at any rate at first sight, is not attractive to me, since it appears to reduce to a mere formal reading of regulations an inquiry that has generally been regarded as one of ‘‘actual fact.” It has been built out of two propositions, both of which were accepted before us by the respondent’s counsel as containing the essence of his argument.

The first proposition lays stress on the consideration that none of the many judicial pronouncements which have asserted control and management to be the test of residence was directed to such circumstances as the present in which the company’s own regulations conflict with what has been done. This, no doubt, is true, but I think it a very large step to deduce from that that such pronouncements, despite the unvarnished plainness of their language, can have no bearing on the issue now before us. After all, the purport of all of them is to repeat that the question where control and management abide must be treated as one of fact or ‘‘actuality,” and here control and management in London remain a fact, despite the failure to adapt the companies’ articles to the occasion. The articles prescribe what ought to be done, but they cannot create an actual state of control and management in Africa which does not exist in fact. In litigation inter partes this sort of situation may perhaps be brought about by the operation of the law of estoppel, but here I see no ground for saying, nor has it been argued, that there is any estoppel either by words or conduct which blinds the appellants in the face of the Revenue.

Ought we, then, to adopt this principle that evidence of what has happened in fact must be excluded by a rule of law if what has been done is inconsistent with the regulations of a company? In my opinion, it would be wrong to do so. I cannot see how the corollary of such a principle could fail to be that, if you cannot look beyond what the regulations of the company provide for, it is only those regulations which need to be or indeed can be referred to when a question of residence arises. Companies could be equipped with the most comprehensive sets of constitutions providing for management to be located in this or that selected taxing jurisdiction, and, however much the written requirements were in fact departed from for reasons of convenience or otherwise, all efforts to establish the true facts relating to the actual seat of management would founder on the ground that what had been done was merely “unconstitutional.” Certainly limited companies ought to keep their internal regulations up to date and to reform them in accordance with the facts. But I cannot think that such considerations are sufficient to introduce an important qualification upon this accepted test by which you try to ascertain what are the real facts about the seat of management and control and to put in its place what seems to be the merely formal device of studying a set of written regulations. I do not believe that this would conduce to the health of revenue administration. I think it much better to adhere to the approach laid down. by Lord Loreburn in the De Beers case . . .

and Lord Cohen at pages 372 and 3/74:

Both parties accepted the test of residence laid down by Lord Loreburn LC in De Beers Consolidated Mines Ltd v Howe [supra] where he said: “The decision of Kelly CB and Huddleston B in the Calcutta Jute Mills v Nicholson and the Cesena Sulphur Co v Nicholson [supra], 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 bye-law, but upon a scrutiny of the course of business and trading.”

Relying on this citation, Mr Heyworth Talbot, for the appellant company, said that the question where the central management and control actually abide must be a question of fact, and that the finding of the Special Commissioners (see paragraph 10 of the case stated) that the real control and management was being exercised by the board of directors of the parent company in London is conclusive in his favour.

My Lord, I do not think that adherence to the test laid down by Lord Loreburn and to the application thereof which, as I think, has hitherto been adopted—namely, that the question where the central control actually abides is a question of fact for the decision of the commissioners—will lead to any disastrous consequences. The facts of the case before your Lordships are most unusual. It is surely exceptional for a parent company to usurp the control; it usually operates through the boards of the subsidiary companies, and, had the commissioners found in the present case that that was what had in substance happened, it may well be that your Lordships could not have disturbed that finding. But they have found to the contrary, and, as I have already said, it seems to me that there was evidence justifying their conclusion.

Employing the principles in these cases, counsel for the defendant submitted that as a pure question of fact, the Court should find that part at least of the paramount or supreme authority of the Thibodeau Family Trust in relation to the management of the Trust was carried on in Canada and that in making such a finding, the Court should take into consideration these factors: (1) that one of the trustees, namely, Leo J Thibodeau in 1972 was a resident in Canada (he still is to-day);

(2) that the trustee, Leo J Thibodeau, was the person who had sole power under the Trust Deed to appoint other trustees; (3) that Leo J Thibodeau as a trustee took a very active interest in the affairs of the Trust and he was the principal initiator of the investment program;

(4) that the authority of the Bermuda trustees was circumscribed in the handling of certain bank accounts (see Exhibit 284, Volume 3, page 213 and Exhibit 60, Volume 1, page 116); (5) that Leo J Thibodeau was also the chief executive officer of the Canadian corporation, Thibodeau Pooling Limited, which corporation was fully owned by the Trust; and this corporation was used as a vehicle for the payment of certain expenses of the Trust, and therefore, in a way this corporation’s bank account was the bank account of the Trust (see Exhibit 261, Volume 2, page 400); (6) that in 1972 the principal activity of the Trust was in fact undertaken by Leo Joseph Thibodeau, the Canadian trustee and Canadian agents in negotiating the sale to Algoma Central Railway of the shares of Thibodeau Express Limited; and (7) that Leo Joseph Thibodeau ‘took certain decisions on behalf of the Trust without advising the Bermuda trustees until afterwards, as for example, a payment of $20,000 to one McCloskey at a time when it was thought that a trust investment was being made, and the giving of instructions to the Windsor solicitor Mr McWilliams to negotiate the Canadian tax problem with the Department of National Revenue.

Counsel for the defendant also submitted certain legal arguments that the Thibodeau Family Trust resided in Canada in 1972; (1) the two Bermuda trustees derived their appointment by virtue of section 3 of the Ontario Trustee Act; (2) that the purported retirement of Pearson as trustee was legally ineffectual and as a consequence, Pearson was a trustee during 1972; and therefore there were two trustees resident in Canada; (3) that as a matter of law, the administration of the Trust has not been transferred to Bermuda because of defective wording in the deed of appointment of the Bermuda trustees and transfer, see Exhibit 3, Clause 3 where it is provided: “hereby transfer and deliver the said assets of the trust to the new trustees”, without mention of the transfer of the administration of the Trust to Bermuda; (but in Clause 4, it is provided that “the beneficiaries of the trust hereby approve, ratify and’ confirm the appointment of new trustees and the removal and transfer of the assets and administration of the trust as herein mentioned”); (4) that the only proper legal way to transfer the administration of this Trust was under the Ontario Variation of Trusts Act by Court Order which should have first terminated the Trust in Canada, and second, transferred the Trust to Bermuda (see In re Seale’s Marriage Settlement, [1961] Ch 574 and /n re Weston’s Settlements [1969] 1 Ch 223; (5) that as a matter of law, most of the investments of the Trust were not made in Bermuda and were not transferable in Bermuda except the shares in Thibodeau Pooling Limited and Thibodeau Express Limited, the other investments being in US, Dutch and UK securities which were transferable only in. those respective jurisdictions, and in gold bullion in Switzerland; (6) that the resignation of Leo J Thibodeau, as trustee in 1974, was only valid if the proper law applicable to the Trust in 1974 was Ontario law; see Exhibit 4, the deed of discharge as trustee of Leo Joseph Thibodeau which appears to follow the provisions of section 2 of The Trustee Act; and there is no corresponding provision under the Bermuda Act; and (7) that the real settlor of the Trust was not Margaret Schaldenbrand by Exhibit 1, but instead was Leo J Thibodeau when he sold the shares to the Trust as part of his estate planning scheme; and the acts and conduct at that time created the Trust without formal legal documents of a kind such as Exhibit 1 (see Exhibits 281 and 282). In other words the real Trust was established when the shares in Thibodeau Express Limited were transferred to the Trustees in exchange for promissory notes without interest payable to Leo J Thibodeau, and was not created at the time and by the execution of Exhibit 1, so that there then is and was no express power as there is in the trust deed, Exhibit 1, to transfer the Trust to Bermuda.

So much for the facts and submission.

As to the issue of whether or not the two Bermuda trustees were appointed validly and whether or not the Deed of Discharge executed by Pearson discharged him as one of the Canadian trustees, in my view the answer to both is in the affirmative. In respect to the deed of appointment of two Bermuda trustees, Dill and Pearman and the deed of discharge of Pearson (see Exhibits 3 and 4) dated respectively November 5, 1970 and December 10, 1970, Ontario law applies. The Canadian trustee Pearson was validly discharged and the Bermuda trustees Dill and Pearman were validly appointed. (See McLachlin et al v Usborne et al (1884), OR 297; Re National Trust Co v McLaughlin, (1975) OLR 319; and Re Thompson and Jenkins, [1928] OLR 33.)

As to the issue of when and how the Thibodeau Family Trust came into being, such occurred when Exhibit 1 was executed and $500 was received. Exhibit 1 spells out its terms. By such terms, power was given to Leo Joseph Thibodeau as Trustee to appoint the Bermuda trustees and there was power to enable Pearson to retire as trustee (in respect to the latter under The Trustee Act of Ontario) both without Court intervention.

As to the submission that the only legal and effective way to transfer the administration of this Trust out of Canada to Bermuda was by way of order of the Court made under The Variation of Trusts Act of Ontario, in my view, it also is not valid. The trust deed, Exhibit 1, expressly provided the authority to transfer. The cases cited by counsel in support of this submission, of which /n re Weston’s Settlements [supra] is one, are not in point. It was not necessary in the case of the Thibodeau Family Trust to terminate the Trust as was necessary, for example, in the Weston’s Settlements case. As Lord Harmon said in that case at p 247-48:

Now, the linchpin of the scheme is not to be carried out under the Variation of Trusts Act at all. It is essential that the court should exercise its powers under the Trustee Act, 1925, either by appointing new trustees out of the jurisdiction or giving leave to the existing trustees to make the appointment. . . . The scheme is entirely conditioned by the wish to avoid the incidence of capital gains tax. . . . It is proposed that these trustees should then be empowered while still trustees of the English settlements to revoke the whole of the trusts of those instruments and to transfer the assets to themselves as trustees of the two settlements framed, it is said, so as to conform with the Jersey Jaw.

... I am of opinion, therefore, that the judge was entitled in the exercise of his discretion to say that to use the powers of the Trustee Act in this way was not justified and I would dismiss the appeal.

As to the submission that the Court in this case, even if it also finds that the Trust has a residence in Bermuda, it should find that it has a residence in Canada in that part of the paramount or supreme authority in relation to the management of this Trust was carried on in Canada applying by analogy the principles in the cited cases of determining residence for income tax purposes of corporations, in my view, such submission is also not valid. 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. Therefore, it is not possible for a trust to have a dual residence for income tax purposes, and therefore it is not possible to find that part of the paramount of “superior and directing authority” of a Trust is and was in two places. In any event, a finding of dual residence of this Trust is not made in this case.

In this case, therefore, in the absence of a statutory formula to determine the residence of the Thibodeau Family Trust for Canadian income tax purposes, a judicial formula applicable to the facts of this case alone must be employed, a course of action which normally should be avoided Nothman v London Borough of Barnet, [1978] 1 All ER 1243.

The facts of this case for selecting as the criteria to propound such a formula are: (1) that the majority of the trustees of the Trust are and were at all material times resident in Bermuda; (2) that the trust document of constitution permitted a majority decision on all matters of trustees’ discretion; (3) that the Department of National Revenue by the assessment discounting the value of the said shares in Thibodeau Express Limited held by the Trust by 10% as being a minority interest have admitted that Leo J Thibodeau, the Canadian trustee of the Trust and the majority shareholder of the shares of Thibodeau Express Limited at the material time did not control the shares held by the Trust and was not, as pleaded, “the guiding mind and will of the Thibodeau Family Trust” at the material time; if it were otherwise, all the shares in Thibodeau Express Limited would be controlled by Leo J Thibodeau and there would be no basis to discount as was done by the assessment, the value of the shares held by the Trust; (4) that the res of the Trust in the main was in Bermuda at all material times; (5) that some of the beneficiaries resided the whole or part of the year, 1972, in the United States; (Canada was their residence during the other times); and (6) that the Thibodeau Family Trust did not in 1972 or at any other relevant time carry on business in Canada.

Selecting these two of the said criteria so as to found such a judicial formula to decide the said issue of residence in this case, namely

(1) that the majority of the trustees were resident in Bermuda in 1972 at all material times, and (2) that the trust document permitted a majority decision on all matters of Trustees’ discretion, the finding of fact is that the Thibodeau Family Trust in the year 1972 had a sole residence in Bermuda for the purpose of Canadian income tax.

This conclusion corresponds with the basis for the assessment, which basis forms the subject dollar matter of this appeal (except for the interest income earned by the funds in escrow pending closing of the sale of the shares of Thibodeau Express Limited to Algoma). In making this assessment, the Department of National Revenue adopted the above quoted criteria, namely, that the shares in Thibodeau Express Limited held by the Trust should be discounted by 10% as being a minority interest, the majority interest being owned by Leo J- Thibodeau, the Canadian trustee, in his personal capacity. This position and basis for the assessment, however, is inconsistent with the submission: made for the Department of National Revenue by counsel at this trial, who, as stated, submitted that the Court should find that this Trust had a residence also in Canada because by and through Leo J Thibodeau, the Canadian trustee, part of the paramount or supreme authority in relation to the management of this Trust was carried on by and through him in Canada, or even further, as pleaded, that he was “the guiding mind and will of the Thibodeau Family Trust” at the material times. If that were so, there would be no minority interest in these shares, and the shares held by the Trust would have the same value as the shares of the majority interest held by Leo J Thibodeau in his personal capacity. If the Department of National Revenue at the time of assessment had taken the position counsel took at this trial, there would have been no assessment at all, except for the amount of interest that was earned by the Trust on the funds in escrow. (The sale of these shares was made at a time so close to Valuation Day that the value on that day and on the day of sale were considered to be the same in so far as the majority interest in the shares was concerned.)

Accordingly, the appeal is allowed with costs.

Frank M Covert, QC, John S Jodrey and Executors under the Will of the late Roy A Jodrey, Plaintiffs,