Bardsley Trust v. MNR, 82 DTC 1659, [1982] CTC 2642 (T.R.B.), rev'd on consent [see 83 C.T.J. 1013]

John B Goetz:—This is an appeal by the appellant with respect to its 1979 taxation year. The issue is whether the amount of $7,500 paid to two of the trustees is deductible pursuant to the provisions of paragraph 18(1 )(a) or 20(1 )(bb) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

The appellant and the respondent filed a “Partial Agreed Statement of Facts” which was supplemented by evidence before the Board by Mr Dix and Mr Mottershead. The said Partial Agreed Statement of Facts reads as follows:

1. The Appellant is an inter vivos trust created by an irrevocable trust indenture made December 28, 1965 by Irene Raby Bardsley (now Hannahson) for the benefit of her son, Alan Duncan Bardsley (“Alan”), then aged 14 years.

2. Under the terms of the trust indenture, Alan is to receive such part of the annual net income derived from the trust property as the trustees deem advisable to pay out for his benefit and he is to receive one-quarter of the trust property upon attaining the age of 25 years, one-third of the trust property then remaining at the age of 30 years, one-half of the trust property then remaining at the age of 35 years and the balance at the age of 40 years. At the time of his 25th birthday, Alan was receiving approximately $42,000 per annum from the net income of the appellant. Alan attained the age of 25 years on June 7,1979 and received one-quarter of the trust property as provided.

3. The present trustees of the Appellant are Bernice Lynn Robinson (sister to Alan), William B Dix and George N Mottershead. Mr Dix was appointed trustee on December 28, 1971 and Mr Mottershead was appointed trustee on December 13, 1973.

4. Of the three present trustees, Mr Dix and Mr Mottershead have assumed the main burden of managing the investment portfolio of the appellant (the “trust property”). With the concurrence of Mrs Robinson and after consultation with her, Mr Dix and Mr Mottershead have made all the decisions with respect to the investment of the trust property. Their activities have included reviewing the trust property periodically during the year, analyzing the stock market, making decisions on the purchase and sale of shares and securities, collecting the revenue and distributing the revenue.

5. The net income of the appellant for the taxation years ended 1974 to 1978 as taken from the audited financial statements of the appellant for those years is as follows:

1974	$ 34,886.18
1975	28,240.04
1976	35,996.72
1977	33,793.20
1978	40,598.83
	$173,514,97

6. Clause 8 of the trust indenture provides for trustee remuneration in the following terms:

“8. The remuneration of the Trustees hereunder may be paid out of the trust property and shall, during the lifetime of the Settlor, be such amount or amounts as may from time to time be agreed upon between the Settlor and the Trustees and after the death of the Settlor shall be such amount as may be agreed by a majority of the adult beneficiaries who are eligible for the time being to receive income hereunder and in default of any such agreement as may be fixed from time to time by a Judge of the Surrogate Court of the Court of York.”

7. In 1979, it was determined that the trustees should receive remuneration for their services in managing the trust property in such manner as to produce the income derived by the appellant over the immediately preceding five-year period when both Mr Dix and Mr Mottershead had assumed active management of the trust property. In consultation with the solicitor for the appellant, it was determined that a reasonable formula for calculating the proper amount of remuneration would be that generally used by the Surrogate Courts of Ontario in awarding compensation to trustees on a passing of accounts pursuant to The Trustee Act RSO 1970, c 470, as amended. The general basis used by the Surrogate Courts in this and other Canadian jurisdictions is by the application of the following percentages applied in the manner described:

(i) five per cent of income received;

(ii) two-fifths of one per cent of the average market value of the capital of the

trust (commonly referred to as the “care and management fee”); and

(iii) two and one-half per cent of capital received and two and one-half per cent of capital disbursed (not applicable since no capital received or disbursed in the period in question).

These percentages, while not strictly adhered to in all circumstances, are generally accepted by the Surrogate Courts as reasonable guidelines for the calculation of trustee compensation.

8. In computing the amount of the trustee remuneration in this case, the five per cent factor was applied to the net income of the appellant as set out in paragraph 5 above and rounded down to $7,500. In addition, the trustees also received $12,500 as a care and management fee which was calculated by applying the two-fifths of one per cent factor to the average market value of the capital of the trust for the years ended 1974 to 1978. The total trustees’ remuneration paid in 1979 was thus $20,000. This remuneration was paid to Mr Dix and Mr Mottershead. Mrs Robinson declined to accept any portion of such remuneration since her role in the management of the trust property was minimal.

9. Of the $20,000, the appellant claimed as a deduction only the amount of $7,500 which was the portion referable to the receipt of income for the years 1974 to 1978.

10. Mr Dix and Mr Mottershead duly included their respective remuneration in their individual income tax returns for the 1979 taxation year.

11. By the Notice of Assessment aforesaid, the respondent disallowed the deduction by the appellant in computing its income for the 1979 taxation year of the $7,500 paid to the trustees as aforementioned.

George Mottershead gave evidence as to his qualifications to be a trustee of the appellant. He was Executive Vice-President of Toronto Door Systems Inc of which he held a 50% interest for three years. In that capacity he handled the financial affairs of the company. Thereafter, he became President, for 15 years, of Liquifuels Limited which was involved in the distribution of fuel products. This company he sold to Shell Oil Company in 1967 and eighteen months later Mr Mottershead set up a company known as Neal Petroleum Ltd. Again he sold this company but he was retained on a five- year management contract to look for possible acquisitions in the United Kingdom and in the United States of America. In 1969 he bought 50% of Toronto Door Systems Inc. He stated that he had set up and administered a trust for his children, and also belonged to an investment club for 20 years, which trust he said he looked after completely.

Mr Mottershead said that the appellant owned 50% of the shares of Francis M & A Holdings Limited (“Holdings”), which shares were valued at approximately $82,000 at book value. He stated that he had experience in dealing with majority shareholders over the years and that “Holdings” was retained on his advice in order to obtain a better price. In 1979 the appellant received $250,000 on the sale of its interest in “Holdings”. Mr Mottershead says that the appellant owned Blue Chips stock securities which he converted to short-term deposits because of the high interest rate. The advice which he gave to the various companies in which he had an interest was given in his capacity of shareholder and employee. He stated in cross- examination: “I am not in the business of giving advice to the public, because I spent 50% of my time dealing with what I have been talking about.”

William B Dix gave evidence to the effect that he was president of McIntyre Research Foundation and that he was semi-retired and a friend of the Bardsley family. He had been approached for advice before he actually became a trustee. He had been treasurer of McIntyre Porcupine Mines Limited for a number of years until he retired at the age of 65. He says that he handled the large portfolio and was the signing officer for any security bought or sold by that company. He now is in charge of the foundation related to the suppression of mining and industrial accidents which was set up by various mining companies, and their portfolio involved approximately $350,000 to $400,000. He was trustee of his church for many years and took care of Bardsley Trust bank receipts and disbursements. He stated that he had expertise in “controlling situations”. He stated that he was asked by the president of McIntyre Porcupine Mines Limited to help his sister in her investments, but stated that he did not accept nor would he have accepted any money for so doing. In cross-examination Mr Dix stated that he gave no advice to the public as an investment adviser other than in his function as trustee of the appellant. Counsel for the appellant contended that $7,500 of the $20,000 fee paid to the trustees (Mr Dix and Mr Mottershead), after a lapse of five years of their so acting, was remuneration for their management of the appellant and that such sum did not relate to a capital asset or Capital structure or bring into existence an asset or advantage of an enduring nature for the appellant.

The said amount in respect of the trustees’ fees claimed as a deduction from income was held by the respondent as not being allowable under either paragraph 18(1 )(a) or paragraph 20(1 )(bb) of the Income Tax Act.

The following cases were cited to me:

For the appellant:

No. 579 v MNR, 21 Tax ABC 24; 58 DTC 734;

Algoma Central Railway v MNR, [1967] CTC 130; 67 DTC 5091;

MNR v Algoma Central Railway, [1968] CTC 161; 68 DTC 5096;

The Queen v F H Jones Tobacco Sales Co Ltd, [1973] CTC 784; 73 DTC 5577;

Dr Eugene Lalande v MNR, [1980] CTC 2992; 80 DTC 1862:

Harry H Wilson v MNR, [1980] CTC 2431; 80 DTC 1379;

For the respondent:

No 579 v MNR, 21 Tax ABC 24; 58 DTC 734;

Aikin v The Trustees of the Late C M MacDonald, 3 TC 306;

Harry H Wilson v MNR, [1980] CTC 2431; 80 DTC 1379;

Robert C Hume v MNR, [1980] CTC 2645; 80 DTC 1542;

Bennett and White Construction Company Limited v MNR, [1949] SCR 287; [1949] CTC 1; 4 DTC 514;

Montreal Coke and Manufacturing Company et al v MNR, [1944] AC 126;

The Construction of Statutes, E A Driedger, (1974) 95-102;

British Columbia Electric Railway Company Limited v MNR, [1958] CTC 21; 58 DTC 1022.

Paragraph 18(1 )(a) reads as follows:

18. (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of

(a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property;

Paragraph 20(1 )(bb) reads as follows:

20. (1) Notwithstanding paragraphs 18(1 )(a), (b) and (h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(bb) an amount other than a commission paid by the taxpayer in the year to a person

(i) for advice as to the advisability of purchasing or selling a specific share or security of the taxpayer, or

(ii) for services in respect of the administration or management of shares or securities of the taxpayer,

if that person’s principal business

(iii) is advising others as to the advisability of purchasing or selling specific shares or securities, or

(iv) includes the provision of services in respect of the administration or management of shares or securities; (Italics mine.)

Findings

I quote directly from The Construction of Statutes (supra) at 99:

Where there are overlapping provisions it is usually a situation where one provision is general and the other provision is a special one within the general. If they can stand together, the question is whether the legislature intended the special provision to be additional or exclusive⁵⁰ and the answer of course depends on the context. It would seem that where powers are granted to some authority, as in Bawtinheimer v Niagara Falls Bridge Commission and Thames (River) Conservators v Smeed, Dean & Co., the courts are likely to hold that the special provision is additional. But where a special procedure or modus operandi is prescribed for a special case, as in Blackburn v Flavelle, the courts are likely to regard it as exclusive, on the same principle that a codifying statute is regarded as exhaustive,⁵¹ namely, that the legislature has manifested an intention to create a complete legislative code governing the subject-matter.

⁵⁰See R v Eastern Archipelago Co (1853), 1E & B 310; 2 E & B 856.

⁵¹Bank of England v Vagliano Bros, [1891] AC 107.

The principle to be used in the determination of whether the $7,500 was an expenditure which could be allowable under paragraph 18(1)(a) of the Act is of a capital nature, was established in the decision of British Columbia Electric Railway Company Limited v MNR (supra) at 1028 wherein the Supreme Court of Canada quoted the said principle as enunciated by Viscount Cave in British Insulated and Helsby Cables Limited v Atherton, [1926] AC 205 at 214:

. . . the usual test of whether an expenditure is one made on account of capital is, was it made “with a view of bringing into existence an advantage for the enduring benefit of the appellant’s business”.

In the instant case the trustees sought to deduct from income the said sum of $7,500 under paragraph 20(1)((bb) of the Act, which section would only apply if Mr. Dix’s and Mr Mottershead’s principal business was that of giving advice with respect to the advisability of purchasing or selling specific shares or securities. As can be seen, neither Mr Dix nor Mr Mottershead were engaged in this type of business, but rather had developed, obviously, extensive expertise in the financial field as shareholders or employees of private companies.

In that this is a deduction from income, it is urged by the appellant to be an expense with respect to the earning of income, it obviously then comes under the strict rules relating to deductions allowable as a business expense. Counsel for the appellant argues that private trustees and executors should be treated the same as trust companies and that the basis of remuneration as set out above under The Trustee Act (supra) should permit Mr Dix and Mr Mottershead on behalf of the appellant, to claim as an expense, the said sum of $17,500. Though I have the highest respect for the financial expertise of both these gentlemen, their principal business was not to advise “as to the advisability of purchasing or selling specific shares or securities” and consequently, their activity is not encompassed by paragraph 18(1 )(a) or paragraph 20(1 )(bb) of the Act. Their handling of the appellant’s trust funds is certainly commendable. I quote directly from No 579 v MNR, (supra) at 736 and 27 respectively:

There is much to be said for the appellant’s submission that the manner in which the trustees’ fees were calculated does not settle the purpose for which the fees were paid. However, the agreement must be taken as it actually reads, and not as it might have read, and consequently no fault can be found with the respondent’s treatment of the amounts still claimed by the appellant to be deductible from income. The settlor may allow to the trustees whatever fees he pleases, of course, but their deductibility, or otherwise, from the income of the trust is quite another matter.

The appellant in the present case was indeed fortunate to have two such capable men acting as trustees but in that the appellant is claiming a deduction on account of income, the rule with respect to deductions from income must be stringently interpreted. I find that the appellant did not come within the ambit of paragraphs 18(1 )(a) or 20(1 )(bb) of the Act and, on that ground, I dismiss the appeal.

Appeal dismissed.