REASONS
FOR JUDGMENT
Paris J.
[1]
The Appellant is one of three testamentary
trusts created by the Last Will and Testament of George Kenneth Evoy, who died
in 2007. In reassessing the Appellant for its taxation years ending December
31, 2008, December 31, 2009 and December 31, 2010, the Minister of National
Revenue (the “Minister”) treated all three of
the trusts as one individual, pursuant to subsection 104(2) of the Income
Tax Act, (the “Act”) and
included the income of all three trusts in the income of the Appellant. The
reassessments resulted in additional taxable income of $136,450, $519,499 and
$220,191 to the Appellant in those years, respectively. The Appellant is
appealing the reassessments.
[2]
Subsection 104(2) allows the Minister to
treat multiple trusts as a single trust for the purpose of the Act where
two conditions are met:
i)
substantially all of the property of each trust has
been received from the same person; and
ii)
each of the trusts is conditioned so that the
income accrues or will ultimately accrue to the same beneficiary or group or
class of beneficiaries.
[3]
The Appellant is disputing the reassessments on
the basis that the second of these conditions has not been met in this case.
The issue in this appeal is one of proper interpretation of this condition, set
out in paragraph 104(2)(b).
Legislation
[4]
Subsection 104(2) reads as follows:
(2) A trust shall, for the purposes of this
Act, and without affecting the liability of the trustee or legal representative
for that person’s own income tax, be deemed to be in respect of the trust
property an individual, but where there is more than one trust and
(a) substantially all of the property
of the various trusts has been received from one person, and
(b) the various trusts are
conditioned so that the income thereof accrues or will ultimately accrue to the
same beneficiary, or group or class of beneficiaries,
such of the trustees as the Minister may
designate shall, for the purposes of this Act, be deemed to be in respect of
all the trusts an individual whose property is the property of all the trusts
and whose income is the income of all the trusts.
Facts
[5]
The following facts are taken from the Agreed
Statement of Facts filed at the hearing:
The Establishment of the Testamentary
Trusts
1.
During his lifetime, George Kenneth Evoy (Testator) was a
shareholder of Evoy Production Control Ltd. (EPCL).
2. The Testator died on November 12,
2007.
3. The
Testator was survived by his spouse Pauline Alice Evoy (Pauline), his
three children, David G. Evoy (David), Karie Lynn Evoy (Karie),
and Wendy Anne Thaler (Wendy), and their respective children.
4. By
last Will and Testament dated January 7th, 1997, as amended by
Codicil (the Amended Will) dated April 6, 2001 (attached as Schedule A and
Schedule B respectively), the Testator created three separate testamentary
trusts, namely:
a) the Appellant (also
referred to herein as David’s Trust);
b) The Estate of George K. Evoy for Karie Lynn Evoy (Karie’s
Trust); and
c) The Estate of George K. Evoy for Wendy Anne Thaler (Wendy’s
Trust).
5. Pursuant
to subsection 6(c) of the Amended Will, the shares of EPCL owned by the
Testator at the time of his death were divided into three approximately equal
blocs of shares and one such bloc was bequeathed to each of the three
testamentary trusts. The provisions of subsection 70(6) of the Income
Tax Act, R.S.c. 1985, c. 1 (5th Supp.) (the Act) applied to each
transfer.
6. David’s
Trust and Karie’s Trust each received 947,623 Class A Shares of EPCL, 476,048
Preference Shares of EPCL, and 200 Class 1 Shares of EPCL.
7. Wendy’s
Trust received 947,622 Class A shares of EPCL, 476,049 Preference Shares of
EPCL and 200 Class 1 Shares of EPCL.
The Terms of David’s Trust
8. David’s
Trust is governed by paragraph 6(c)(A) of the Amended Will.
9. Subparagraph
6(c)(A)(i) of the Amended Will provides that Pauline is an income beneficiary
of David’s Trust during her lifetime, and is entitled to be paid all of the net
annual income derived from David’s Trust during such time.
10. Subparagraph
6(c)(A)(ii) of the Amended Will provides that David and his children are income
and capital beneficiaries of David’s Trust.
11. After
Pauline’s death, David and his children are to be paid all of the net annual
income derived from David’s Trust, divided into such portions among them as the
trustees may in their discretion determine, until the trustees decide to
terminate David’s Trust.
12. The
trustees of David’s Trust may terminate David’s Trust no earlier than the third
anniversary of Pauline’s death and no later than the twenty-first anniversary
of her death.
13. At
the termination of David’s Trust, the trustees must pay the capital to David.
14. If
David predeceases the termination of David’s Trust, the trustees are to divide
the capital upon termination among David’s issues in equal shares per
stirpes.
15. If,
at the time the capital of David’s Trust is to be distributed, none of David
and his children are alive, the capital of David’s Trust is to be divided among
the Testator’s children then living in equal shares per stirpes.
16. The
portion of the capital of David’s Trust accruing to either Wendy or Karie, if
any, is to be added to the capital of Wendy’s Trust or Karie’s Trust, as the
case may be.
The Terms of Wendy’s Trust
17. Wendy’s
Trust is governed by paragraph 6(c)(B) of the Amended Will.
18. Paragraph 6(c)(B)
of the Amended Will contains identical provisions to paragraph 6(c)(A),
but substitutes Wendy and her children for David and his children.
The terms of Karie’s Trust
19. Karie’s
Trust is governed by paragraph 6(c)(C) of the Amended Will.
20. Paragraph 6(c)(C)
of the Amended Will contains identical provisions to paragraph 6(c)(A),
but substitutes Karie and her children for David and his children.
The
Distribution of Income Earned by the Three Trusts following the Death of the
Testator
21. Pauline was alive during the Appellant’s taxation years
ended December 31, 2008, December 31, 2009, and December 31, 2010 and so were
David, Karie and Wendy. Pauline is still alive.
22. Pauline was therefore the sole beneficiary entitled to
receive the net annual income earned by each of David’s Trust, Wendy’s Trust,
and Karie’s Trust in respect of each of those taxation years.
23. Pauline has been paid the net annual income of each of
David’s Trust, Wendy’s Trust and Karie’s Trust in respect of each taxation year
of those trusts since the death of the Testator.
The Appellant’s Position
[6]
The Appellant maintains that the condition in
paragraph 104(2)(b) is satisfied only if, during the entire existence
of the three trusts, the income accrues or will ultimately accrue to the same
beneficiary, or group or class of beneficiaries. The Appellant says that while
the income of the three trusts in issue accrued to Pauline during the years in
issue (and will continue to do so during her lifetime), the income will accrue
to different beneficiaries after her death. Since the three trusts will not
have common income beneficiaries after Pauline’s death, the Appellant submits
that they cannot be treated as a single trust pursuant to
subsection 104(2) during Pauline’s lifetime.
The Respondent’s Position
[7]
The Respondent submits that the test in
paragraph 104(2)(b) must be applied on an annual basis to determine
whether, in the particular taxation year, the income of the trusts accrues
to the same beneficiary or will ultimately accrue to the same beneficiary, or
group or class of beneficiaries. This is because liability for income tax is
determined on an annual basis for a taxation year.
[8]
The Respondent also submits that in any taxation
year should the income from the trusts no longer accrue to the same beneficiary
or group or class of beneficiaries, the Minister would have the power to
re-designate under subsection 104(2). Counsel maintains that the power to
designate is discretionary and the Minister may re-exercise that discretion if
the conditions in that provision are no longer met.
[9]
In this case the Respondent says that it is
clear that during the years under appeal, the income from each of the three
trusts accrues only to Pauline, and therefore the condition in
paragraph 104(2)(b) is met for the years under appeal.
Analysis
[10]
The issue before the Court is the meaning to be
given to the words “conditioned
so that the income thereof accrues or will ultimately accrue to the same beneficiary
or group or class of beneficiaries,” in paragraph 104(2)(b) and in particular whether the determination required by that
wording is to be made on an annual basis or for the entire life of the trusts
in question.
[11]
The approach to be taken in interpreting tax
statutes was set out by the Supreme Court of Canada in Canada Trustco
Mortgage Co. Ltd. v. Canada, 2005 SCC 54 at paragraph 10:
It has been long established as a matter of
statutory interpretation that “the words of an Act are
to be read in their entire context ad in their grammatical and ordinary sense
harmoniously with the scheme of the Act, the object of the Act, and the
intention of Parliament”: see 65302 British Columbia Ltd. v. Canada,
[1999] / S.C.R. 804, at para. 50. The interpretation of a statutory provision
must be made according to a textual, contextual and purposive analysis to find
a meaning that is harmonious with the Act as a whole. When the words of a
provision are precise and unequivocal, the ordinary meaning of the words play a
dominant role in the interpretive process. On the other hand, where the words
can support more than one reasonable meaning, the ordinary meaning of the words
plays a lesser role. The relative effects of ordinary meaning, context and
purpose on the interpretive process may vary, but in all cases the court must
seek to read the provision of an Act as a harmonious whole.
[12]
The Supreme Court in Canada Trustco also
stated at paragraph 13 that the Act is “an instrument dominated by explicit provisions dictating specific
consequences, inviting a largely textual interpretation.”
[13]
In applying this approach in Canada v. Quinco
Financial Inc., 2014 FCA 108, the Federal Court of Appeal said at paragraph
8:
Overall, the Act consists of clear, precise
rules to facilitate ease of application, consistency and predictability. This
underscores the dominance of the plain meaning of the text of the Act in the
process of interpreting provisions of the Act.
[14]
In the case before me, the text of
paragraph 104(2)(b) appears to contemplate a consideration of the
right to receive the income of the trust over the entire lifetime of the trust
rather than for each taxation year. The inclusion of the wording “or will ultimately accrue” supports this conclusion. It is difficult to see how the use of the
phrase “or will ultimately
accrue” can be reconciled to a test that would
only apply for one particular taxation year at a time.
[15]
Furthermore, there is nothing in that provision
that would suggest that the test is applied annually, as the Respondent
contends, and would require the reading in of an annual test that does not
appear on the face of paragraph 102(4)(b).
[16]
Another flaw in the Respondent’s argument is
that there is no power given to the Minister to re-designate a consolidated
trust as multiple trusts in the event that the conditions set out in
paragraph 104(2)(b) are no longer met in a subsequent taxation
year, nor is any process for applying for a re-designation provided. The
Respondent’s counsel says simply that since the Minister has the discretion to
designate multiple trusts to be a single trust, it should be inferred that a
discretion to re-designate also exists. Again, on a plain reading of
subsection 104(2), no such discretion is given.
[17]
I would also note that subsection 104(2) sets
out the general provision deeming a trust to be an individual for the purposes
of the Act. That deeming provision is not concerned with any annual
process or review of the trust, and so I find it less likely than not that the
tests set out in paragraphs 104(2)(a) and (b) would be
premised on an annual determination either.
[18]
With respect to context, I agree with counsel
for the Appellant that subsection 104(2) provides for an exception to the
general rule that each trust is treated as a separate individual for the
purposes of the Act, entailing the filing of separate tax returns. If,
however, multiple trusts were designated as a single trust under
subsection 104(2) in one taxation year, but subsequently did not meet the
condition in paragraph 104(2)(b), it would be impossible for the
trustees to know if a return for each of the original unconsolidated trusts
was required to be filed. The Respondent’s interpretation of
paragraph 104(2)(b) would lead to unpredictable results for the
taxpayer, something that the Supreme Court has cautioned against in Canada
Trustco.
[19]
The parties agree that the purpose of
subsection 104(2), as it relates to multiple trusts, is to prevent income
splitting among a number of trusts each with the same beneficiary or group or
class of beneficiaries, in order to take advantage of lower marginal rates in
respect of the income of each of the trusts.
[20]
In Canadian Income Taxation of Trusts, 3rd
ed. (CCH 1993), author L. Raphael says at page 267:
The apparent purpose of this provision is to
prevent a settlor from splitting potential income of a trust for a beneficiary
by the creation of several trusts, each with smaller incomes, for the same
beneficiary.
[21]
I agree with the Appellant that the purpose of
the provision in issue is to prevent income splitting between trusts that are
identical over the entire period the trusts are in existence. This purpose
accords more closely with the nature of a trust as a legal relationship that
endures in the great majority of cases for longer than a taxation year. It also
accords more closely with the means chosen to prevent the mischief of income
splitting among multiple trusts – a one time designation by the Minister that
the trusts be treated as a single trust. Had the purpose of the provision been
to create an annual test, one would expect to find some indication that the
designation would be done annually, or that it could be revoked at some future
point.
[22]
The Respondent submits, in the alternative that,
should I find that I must consider all beneficiaries of the trusts throughout
the entire existence of the trusts for the purposes of subsection 104(2),
the three trusts were still conditioned so that the income accrued or would
ultimately accrue to the same beneficiary or group or class of beneficiaries,
because the children of George Kenneth Evoy and their children were part of the
same group or class of beneficiaries.
[23]
With respect to the alternative argument, the
Respondent submits that the children of George Kenneth Evoy and their children
are part of the same class of beneficiaries because they are all members of the
same family. Although the term “class
of beneficiaries” is not defined in the Act,
the Respondent submits that according to ordinary dictionary definition of “class” means
a group that shares common attributes or characteristics, and that members of
the same family would form a class.
[24]
However, even accepting that the children and
grandchildren of the testator form a class for the purposes of
subsection 104(2), the difficulty faced by the Respondent here is that
none of the trusts have the same children and grandchildren of the settlor as
residual income beneficiaries. In other words, the entire class of children and
grandchildren are not income beneficiaries of each trust. Rather, a different
part of the class is named in each of the trusts. There are no “cross-over”
beneficiaries amongst the children and grandchildren of the testator in any of
the three trusts. Therefore the trusts are not conditioned so that the income
will ultimately accrue to the same group or class of beneficiaries.
[25]
Insofar as the Respondent suggests that it is
not necessary that each trust have the same beneficiaries in each trust and
that it is sufficient that the beneficiaries of each trust are members of the
same group or class, I do not believe that this can be supported on the
language of paragraph 104(2)(b) which refers to “the same group or class” and not to “members
of the same group or class.”
[26]
For all of these reasons, the appeal is allowed with
costs to the Appellant.
Signed at Ottawa,
Canada this 17th day of November 2016.
“B.Paris”
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