Langer Family Trust v. MNR, 92 DTC 1055, [1992] 1 CTC 2119 (TCC)

Taylor, T.C.C.J.:—These are appeals heard in Toronto, Ontario on November 21, 1991 against income tax assessments for the years 1982, 1983, 1984 and 1985, in which the Minister of National Revenue (” respondent") had assessed to tax as income of the trust appellant the following amounts:

The basic assertion of the appellant taken from the notice of appeal was:

At all material times the Trustees of the Appellant were Dr. Howard Langer and his wife, Janice who were at all material times residents of Canada.

—The Indenture of Trust (the Indenture) whereby the Appellant was created was dated the 27th day of April, 1972 and was created for the benefit of the children of the aforesaid Trustees, Bonnie Langer, Shawn Langer and Elana Langer who at all times material to this appeal had not reached the age of majority.

—The Appellant paid the following amounts pursuant to the provisions of paragraph 3(a) of the Trust Indenture:

Taxation Year	Amounts Paid
1982	$100,616
1983	$ 54,029
1984	$200,000
1985	$125,000

—In its T-3 Trust Information Returns and Income Tax Returns for the years under appeal the Appellant and its Trustees acting in the dual capacity of Trustees of the Appellant and parents and guardians of the minor beneficiaries allocated all of the income of the Appellant to its beneficiaries.

—The respondent relies, inter alia upon Sections 104 to 108 both inclusive and Sections 150(1)(c) and 152(1) of the Income Tax Act, R.S.C. 1952 c. 148 as amended and Section 2800 of the Income Tax Regulations.

—The Appellant respectfully submits as follows:

—in each of the years under appeal the Appellant's income was allocated in its T-3 Returns to the beneficiaries and T-3 Supplementaries were issued to each of the beneficiaries and both filed with their returns and filed separately with the Respondent;

—any payments not made directly by the Appellant to its beneficiaries but made on behalf of or for the benefit of the beneficiaries pursuant to paragraph 3(a) of the Indenture constituted payment within the meaning of Section 104.

It should be noted that earlier than this trial, counsel for the appellant had raised two other points—first, that the appellant was prejudiced, allegedly because the respondent had not assessed "with all due dispatch", and second, that the filing of the T-3 Tax Returns showing the amounts allocated to each of the beneficiaries, should be regarded as constituting valid preferred beneficiary elections. It was clear at the trial that the first of these could not be supported, and at the trial, counsel for the appellant abandoned the second of the above points.

In the reply to the notice of appeal, the respondent noted:

—he does not admit that any of the amounts to which reference is made in the said paragraph were paid by the Appellant and if any of the said amounts were in fact paid, he has no knowledge as to whether they were paid pursuant to the provisions of paragraph 3(a) of the Trust Indenture. [Judge's Note—This refers to the amounts allegedly "paid" in the extracts from the notice of appeal above.]

—he admits that the Appellant purported to allocate to its beneficiaries all of the income reported by it in its income tax returns filed for the years under appeal, but does not admit that the Trustees were acting in the dual capacity that is alleged.

—in so assessing and reassessing the Appellant and confirming the assessments the respondent relied, inter alia, on the following assumptions or findings of fact:

—the income of the trust in the taxation years under appeal consisted of dividends received from a taxable Canadian corporation, as well as interest on various bank deposits;

—no amounts which would otherwise be income of the Appellant in the years under appeal were payable or paid to any of the beneficiaries in the 1982, 1983, 1984 or 1985 taxation years of the said Appellant;

—the said beneficiaries do not have and have never had an enforceable right to payment of any of the sums sought to be deducted by the Appellant herein, or to payment of any portion thereof.

—the sums sought to be deducted represented income of the Appellant trust in the taxation years under appeal which did not become payable during the respective taxation years to any of the beneficiaries of the said trust within the meaning of subsections 104(6) and 104(24) of the Act.

At the trial, the following was filed on consent of both parties:

Agreed Statement of Facts

The parties to the appeal hereto by their respective solicitors hereby agree to the following facts for the purposes of this hearing:

—The following sums were paid out of the bank account of Bonsean Ltd. to Doctor Howard Langer or to third parties on the dates or during the times listed.

Date	Particulars of Payment	Amounts
	1982
April 30	cheque to Receiver General in
	respect of income tax payable for:
	(1) Shawn Langer	($ 1,425.97)
	(2) Elana Langer	( 1,425.97)	$4,278.38
	(3) Bonnie Langer	( 1,426.44)
	(4) Howard Langer	9,805.60
July 2	Advanced to Banana Co.	$ 2,500.00
December 31	Advanced to 336176 Ontario Ltd.	75,000.00
		$91,583.98

	1983
January 27	Advanced to Howard Langer	$ 3,500.00
May 9	Advanced to Howard Langer	1,500.00
June 26	Advanced to D. Dibernardo	25,000.00
August 1	Advanced to Howard Langer	7,500.00
August 23	Advanced to Howard Langer	7,500.00
June 4	Advanced to D. Sacks	4,000.00
July 18	Advanced to Howard Langer	49,200.65
		$98,200.65
	1985
March 15	Advanced to Howard Langer	$60,000.00
June 5	Advanced to Howard Langer	50,000.00
January-May	Miscellaneous advances to How-
	ard Langer	2,000.00
April 1	Advanced to caterer	14,564.00
1985	Advanced to Howard Langer (Per-
	sonal Draws)	4,328.39
	sonal Draws)
		$130,892.39

—The 1982 T-3 return of the Appellant was filed on April 27, 1983, and the 1983, 1984, and 1985 T-3 returns of the Appellant were filed on or before March 31, 1984, March 31, 1985, and March 31, 1986, respectively.

Missing from the above statement was any reference to the assessments in dispute for the year 1984. Counsel for the respondent conceded that the amount of $135,000, shown as “ taxable dividends after gross-up” for that year should be allowed to the appellant, since this represented the purchase of three $30,000 bonds (a total of $90,000) one in the name of each of the beneficiaries, Bonnie, Shawn and Elana, which when grossed-up" amounted to $135,000. Counsel noted that the amount of $2,886.17 (interest) in 1984 remained in dispute. Counsel also agreed that for the year 1982 the amounts of $1,425.97, $1,425.97 and $1,426.44 shown as income tax payments for the beneficiaries should be allowed. The Court makes no specific adverse comment on these concessions by the respondent, but does note that they were paid from“ Bonsean Ltd.” ("Bonsean") (see agreed statement of facts—above), a corporation which will be referenced later. That concession does lead to the basic question underlying these appeals regarding the proprietorship, control, and authority for payment for the funds allegedly expended for the beneficiaries. Simply put, it is not entirely clear to me that without the above noted concessions by the respondent, the purchase of the bonds and the payment of personal income tax, as these payments were made, places these payments in a category distinctly different from the alleged payments which remain in dispute. I make that point since counsel for the appellant, referred to it as at least providing some support for his client's position. I do not agree that it provides any stable base from which counsel can attack the balance of the amounts in dispute, and I do not wish the concessions of the respondent in this regard to assume any larger role, or appear to have the imprimatur of the Court.

Turning back to the point at issue, in my view it comes down to whether the amounts deducted from the income of the trust and allocated as income of the beneficiaries, fit that role as income according to the terms of subsection 104(6) and subsection 104(24) of the Income Tax Act (the "Act") which read in the parts relevant to these appeals:

(6) Deduction in computing income of trust.—For the purposes of this Part, there may be deducted in computing the income of a trust for a taxation year

(b) . . . such part of the amount that would, . . . be its income for the year as was payable in the year to a beneficiary

(24) Amount payable.—For the purposes of subsections (6) . . . an amount shall not be considered to be payable in a taxation year unless it was paid in the year to the person to whom it was payable or he was entitled in that year to enforce payment thereof.

The amounts at issue—allegedly the income of the beneficiaries—must be "paid (or payable) in the year to the person" to qualify and in my view they do not meet this three-part test.

The essential elements of the financial structure representing Dr. Langer's affairs in the matter were that—as a medical practitioner with a substantial professional income he, or his wife, with money he supplied, paid for the maintenance and well-being of his three children, the beneficiaries of this trust appellant. The amounts expended in this fashion may well have been in the interests of—even for the benefit of—certainly for the well-being, upkeep and maintenance of the children. Dr. Langer described the lifestyle which he Provided to the children, and while it might appear somewhat extravagant, at

east varied and expensive, it was nevertheless within the framework of what he could afford and wanted to do. Special education, special rooms and accommodations, medical and dental work, modern clothes and equipment, sports and recreational requirements, vacations, travel, etc. in addition to the normal food and shelter expenses were included. But that is not our problem—Dr. Langer took the responsibility for deciding the format and level of the children’s lifestyle and he is clearly entitled to do so. The bottom line of this case is that in providing all of the above primarily from his own funds or from Bonsean Ltd. in the first instance, Dr. Langer regarded his conduct as well within the framework of the latitude available to him under the terms of the trust agreement quoted above. I would agree that there is little if any limit or restraint inherent in the critical words of that trust agreement, supra, in such manner and in such amounts and in such shares or proportions as the Trustees shall, in their discretion from time to time determine necessary or advisable for any reason, including without limiting the generality of the foregoing for the maintenance, education, advancement, welfare, support, comfort, benefit or well-being of such person or persons. . .” [emphasis added]. However while there is no clear reason to doubt that the sincerity and the reasonableness of the recollections of Dr. Langer regarding the gross and estimated amounts which he believes he expended for the children, there is no way of being satisfied that the total amounts were” paid (or payable)”, or"in the year" as required under the relevant sections of the Act. Even if I assume that his recounting of the costs involved was accurate within acceptable limits, there is no way for me to know for sure, since there is no way for Dr. Langer to prove the above. No records were kept, and no regular reconciliations made. I understand that such are requirements of the Province of Ontario concerning trustees' obligations. When that element of doubt is further compounded by the fact that there is no evidence any of the amounts, in of the years was made “to the person" (subsection 104(24))—[emphasis added] since that person by virtue of subsection 104(6) of the Act must be a beneficiary, the entire case collapses.

It is my opinion that merely providing the authority or the mechanism in the trust agreement (above) for the trustees to act in any way they see fit "to or for the benefit of any one or more of the children”, does not obviate the requirements under the Act for the proper administration of the trust. As I see it, the Trustees cannot avoid the direct involvement of the beneficiaries thereby reducing the funds in the trust without clear and unambiguous direction from the beneficiaries so to do. I again point out that this case is not based on the use of subsection 104(14) of the Act which provides for an "election" between the parties for such a purpose—that avenue was abandoned by counsel for the appellant at the trial, and in my opinion rightly so. Short of that route, in my view the most rigid adherence to the requirements of the Act by the Trustees is needed to shift the income of the trust to that of the beneficiaries. Effectively that which Dr. Langer did was to shift some of his own income to the income of the children, and then retroactively treat that as if the children, as beneficiaries, had been supported by the income of the trust. I do not think he saw it that way nor that he intended anything untoward to result from that procedure. But a "trust" is a person, as is an individual or a corporation under the Act, and its income for income tax purposes may only be allocated to other persons specifically beneficiaries, under certain given conditions—just as it is restricted for individuals and corporations.

As noted earlier this situation is complicated by the fact that no bank accounts or dedicated records were maintained for the trust itself. Amounts not provided directly for support of the children by Dr. Langer, were provided through the solely owned (by Dr. Langer) corporation “Bonsean Ltd.". The minimum accounting requirements for the trust resulted from the yearly analysis of the accounts of Bonsean by a firm of accountants, and then effectively a charge against Bonsean for dividends to the three children, and then a redirection of these Bonsean dividends to the beneficiaries which covered the advances and other payments made by Dr. Langer. While this method of keeping track of and reconciling the affairs of the trust (effectively reconstructed from the accounts of Bonsean and Dr. Langer), may be rather primitive and unusual, the appeals do not fail only on that account. Certainly that which the trust wished to show and report—that all the income it (the trust) earned should be considered as allocated—{i.e., paid or payable) to the beneficiaries—was shown in that way. The trust effectively showed “nil” or nearly "nil" income each year in its own return thereby eliminating its tax burden. The problem is that while the trustees' handling of the beneficiaries' funds may well have met the terms of the trust agreement—and to that degree there can be no criticism of Dr. Langer's efforts—it did not meet the requirements of the Income Tax Act for purposes of shifting the burden from the trust to the beneficiaries—and the accounting and reporting procedures used by the accountants, Dr. Langer and the trust did not suffice to fulfil those requirements. Some useful reference points may be found in the case of Cole Trust v. M.N.R., [1980] C.T.C. 3027, 81 D.T.C. 8 although the question there was somewhat different.

In summary, the flexibility, and authority accorded to a trustee under a trust agreement, as these can affect the rights of beneficiaries thereunder, are not sufficient themselves to reclassify trust income to beneficiary income for income tax purposes. Compliance with the provisions of the Income Tax Act must also be taken into account. In these appeals the procedures upon which Dr. Langer relied to support his children did not meet the requirements of the Act.

The appeals are allowed in order that the assessments for the years 1982 and 1984 shall oe reduced by the amounts of $4,278.38 and $135,000 respectively. In all other aspects the appeals are dismissed. There will be no award as to costs.

Appeals allowed in part.