Citation: 2008 TCC 532
Date: 20081001
Docket: 2007-1882(IT)G
BETWEEN:
PROPEP INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL
ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1]
This is an appeal from
the assessments made by the Minister of National Revenue (Minister)
disallowing, in whole or in part, the small business deduction (SBD) the
Appellant had claimed under subsection 125(1) of the Income Tax Act
(ITA) for the 1999 to 2003 taxation years, inclusive. The Minister
disallowed the deduction on the ground that the Appellant was associated with
the corporations Pépinière Abbotsford Inc. (Pépinière) and Centre du
Jardinage Abbotsford Inc. (Centre du Jardinage) and thus divided the
business limit among the three corporations, thereby reducing the SBD claimed
by the Appellant.
Issue
[2]
The issue may be
summarized as follows: was the Appellant associated with the two other
corporations during the years in issue, as the Minister claims, under
section 256 of the ITA?
Statutory provisions
[3]
Paragraph 256(1)(c),
subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) of the
ITA govern in this case. I will reproduce the relevant passages of those
provisions:
256.(1) Associated corporations – For the purposes of this Act, one
corporation is associated with another in a taxation year if, at any time in
the year,
...
(c) each of
the corporations was controlled, directly or indirectly in any manner whatever,
by a person and the person who so controlled one of the corporations was
related to the person who so controlled the other, and either of those persons
owned, in respect of each corporation, not less than 25% of the issued shares
of any class, other than a specified class, of the capital stock thereof;
256(1.2) Control, etc. – For the purposes of this subsection and
subsections 256(1), 256(1.1) and 256(1.3) to 256(5),
...
(f) where
shares of the capital stock of a corporation are owned, or deemed by this
subsection to be owned, at any time by a trust,
...
(ii) where a
beneficiary’s share of the accumulating income or capital therefrom depends on
the exercise by any person of, or the failure by any person to exercise, any
discretionary power, those shares shall be deemed to be owned at that time by
the beneficiary, ...
256.(1.3) Parents deemed to own shares – Where at any time shares of the capital
stock of a corporation are owned by a child who is under 18 years of age, for
the purpose of determining whether the corporation is associated at that time
with any other corporation that is controlled, directly or indirectly in any
manner whatever, by a parent of the child or by a group of persons of which the
parent is a member, the shares shall be deemed to be owned at that time by the
parent unless, having regard to all the circumstances, it can reasonably be
considered that the child manages the business and affairs of the corporation
and does so without a significant degree of influence by the parent.
Partial agreement as to the facts
[4]
The parties produced a
partial agreement as to the facts, which is set out in full below.
[TRANSLATION]
Partial
Agreement as to the Facts
The parties agree as to the following facts
for the sole purposes of this appeal and without prejudice to their right to
prove additional facts at the hearing of the appeal that are not inconsistent
with the facts set out in this agreement:
1. The
Appellant's head office is located at 605 rue Principale in St‑Paul
d'Abbotsford in the province of
Quebec.
2. On May 29,
2002, the Appellant was informed by letter that the Minister of National
Revenue (the Minister) intended to reassess for the 1999 to 2001 taxation years
and to disallow, in whole or in part, the deductions claimed by the Appellant
under section 125 of the ITA, on the basis that the Appellant was
associated with the corporations Pépinière Abbotsford inc. and Centre du
Jardinage Abbotsford inc. In that letter, the Appellant was informed of that it
could submit an agreement under which the "business limit" was
divided among the Appellant and the corporations with which it was allegedly
associated.
3. On August 8,
2003, the Appellant was informed of the Minister's decision to reassess for the
1999 to 2003 taxation years and to disallow, in whole or in part, the
deductions claimed by the Appellant under section 125 of the ITA on the basis
that it was associated with the corporations Pépinière Abbotsford inc. and
Centre du Jardinage Abbotsford inc., and having regard to the agreements
submitted by Pépinière Abbotsford inc. under which the "business
limit" was divided between that corporation and the corporations with
which it was allegedly associated.
4. On September
6, 2002, the Appellant submitted the prescribed form waiving the application of
the normal assessment period for the taxation year ending on January 31, 1999.
5. By notices of
reassessment dated November 19, 2003, the Minister disallowed the
following deductions claimed by the Appellant under subsection 125(1) of
the ITA in computing its tax payable under Part I of the Act:
|
Taxation
Year
|
SBD
disallowed
|
|
1999
|
$28,088
|
|
2000
|
$27,430
|
|
2001
|
$25,087
|
|
2002
|
$25,322
|
6. By notice of
reassessment dated May 25, 2004, the Minister disallowed a deduction of
$32,340 claimed by the Appellant under subsection 125(1) of the ITA in
computing its tax payable under Part I of the Act for the 2003 taxation
year.
7. By notice of
confirmation dated January 22, 2007, the Minister confirmed the
reassessments dated November 19, 2003, and May 25, 2004, referred to in
paragraphs 5 and 6 of this agreement.
8. The
Appellant's fiscal year is from February 1 to January 31 of the
following year.
9. Throughout the
period in issue, all of the voting shares in the Appellant were owned by 9059‑3179
Québec inc.
10. Throughout the
period in issue, all of the voting shares in 9059‑3179 Québec inc. were
part of the trust patrimony of Fiducie Propep.
11. Fiducie Propep was
incorporated on January 27, 1998, by Serge M. Racine.
12. Throughout the
period in issue, the trustees of Fiducie Propep were Pierre Paquette and
Pierre Choquette.
13. Pierre Paquette
and Pierre Choquette are not related persons within the meaning of
subsection 251(2) of the ITA.
14. Clause 2.1.1
of the deed establishing Fiducie Propep provides that the expression
"beneficiary" has the following meaning for the purposes of the deed:
For capital and revenue: First-ranking beneficiary:
9059‑3179 Québec Inc., until it is wound up; Second-ranking
beneficiary: Pierre‑Marc Paquette, born 01‑07‑1986.
15. Pierre‑Marc Paquette
was born on July 1, 1986, and is the son of Pierre Paquette.
16. Clause 4.1
of the Fiducie Propep trust deed provides as follows:
The Trustees shall hold the trust capital
until such time as it is wound up. It may at any time pay to the Beneficiaries,
or to one of them, all or part of the net annual income of the trust, in such
proportions as it may in its absolute discretion establish. The Trustees shall
also have the power, in their absolute discretion and at all times, to
distribute all or part of the trust capital to the Beneficiaries. The Trustees
shall accumulate and add to the trust capital all net income from the trust
capital that has not been distributed in the year or within three months after
the end of the trust's year.
17. Throughout the
period in issue, Pierre Paquette was the owner of voting shares
(80 class A shares with one vote per share and 29 class J shares with 100
votes per share) in Pépinière Abbotsford inc., giving him 29.6% of the voting
rights in the election of the corporation's board of directors.
18. Throughout the
period in issue, 3101‑3469 Québec inc. was the owner of voting shares
(51 class J shares with 100 votes per share) in Pépinière Abbotsford inc.,
giving it 50.6% of the voting rights in the election of the corporation's board
of directors.
19. Throughout the
period in issue, all of the shares in 3101‑3469 Québec inc. were owned by
Jean‑Claude Paquette.
20. Jean‑Claude Paquette
is the father of Pierre Paquette and the grandfather of Pierre‑Marc Paquette.
21. Throughout the
period in issue, 9034‑4946 Québec inc. was the owner of voting shares (20
class J shares with 100 votes per share) in Pépinière Abbotsford inc., giving
it 19.8% of the voting rights in the election of the corporation's board of
directors.
22. Throughout the
period in issue, 9034‑4946 Québec inc. was controlled by one or more
persons who were not related to Pierre Paquette and Jean‑Claude Paquette
and to 9059‑3179 Québec inc. and 3101‑3469 Québec inc.
23. Throughout the
period in issue, all of the shares in Centre du Jardinage Abbotsford inc. were
owned by Pépinière Abbotsford inc.
24. Appendices 1
and 2 to this agreement,
which form part of this agreement, show a schematic diagram of the shareholders
in the Appellant and in Pépinière Abbotsford inc. and Centre du Jardinage
Abbotsford inc. during the period in issue.
25. The Appellant
earned income from an active business carried on in Canada and the following
taxable income during the 1999 to 2003 taxation years:
|
Taxation
Year
|
ABI
|
Taxable
Income
|
|
1999
|
$198,917
|
$177,331
|
|
2000
|
$171,436
|
$173,835
|
|
2001
|
$170,265
|
$170,265
|
|
2002
|
$158,262
|
$158,262
|
|
2003
|
$228,922
|
$228,922
|
26. The Appellant
deducted the following amounts under subsection 125(1) of the ITA in
computing its tax payable under Part I of that Act for the taxation years
in issue:
|
Taxation
Year
|
SBD
Claimed
|
|
1999
|
$28,373
|
|
2000
|
$27,430
|
|
2001
|
$27,242
|
|
2002
|
$25,322
|
|
2003
|
$32,340
|
27. Pépinière
Abbotsford inc.'s fiscal year is from November 1 to October 31 of the
following year.
28. Pépinière
Abbotsford inc. earned income from an active business carried on in Canada and the following taxable income
during the 1999 to 2003 taxation years:
|
Taxation
Year
|
ABI
|
Taxable
Income
|
|
1999
|
$166,777
|
$166,777
|
|
2000
|
$292,657
|
$292,657
|
|
2001
|
$158,770
|
$158,770
|
|
2002
|
$254,293
|
$254,293
|
|
2003
|
$249,969
|
$249,969
|
29. Centre du
Jardinage Abbotsford inc.'s fiscal year is from November 1 to
October 31 of the following year.
30. Centre du
Jardinage Abbotsford inc. earned income from an active business carried on in
Canada and the following taxable income during the 1999 to 2003 taxation years:
|
Taxation
Year
|
ABI
|
Taxable
Income
|
|
1999
|
$31,442
|
$31,442
|
|
2000
|
$495
|
$495
|
|
2001
|
$27,762
|
$27,762
|
|
2002
|
$33,124
|
$33,124
|
|
2003
|
$97,577
|
$97,577
|
31. Pépinière
Abbotsford inc. submitted agreements to the Minister on the prescribed form,
under subsection 125(3) of the ITA, providing that Pépinière Abbotsford
inc. and Centre du Jardinage Abbotsford inc. would divide the "business
limit" as follows:
|
Taxation
Year
|
Pépinière
Abbotsford
inc.
|
Centre
du Jardinage
Abbotsford
inc.
|
|
1999
|
$168,558
|
$31,442
|
|
2000
|
$199,500
|
$500
|
|
2001
|
$172,200
|
$27,800
|
|
2002
|
$200,000
|
$0
|
|
2003
|
$220,822
|
$0
|
32. No revision to
the agreements or new agreement was submitted to the Minister of National
Revenue.
Opening statement
[5]
In his opening
statement, counsel for the Respondent summarized the case as involving the two
following questions:
(1)
Was Pierre-Marc
Paquette, the minor child of Pierre Paquette, a beneficiary of Fiducie Propep (trust)
during the years in issue?
(2)
If so, did his share as
beneficiary of the trust depend on the exercise of a discretionary power?
[6]
In the Respondent's
submission, Pierre-Marc Paquette was a beneficiary of the trust and met all of
the requirements set out in subparagraph 256(1.2)(f)(ii) of the ITA
in order to be deemed to be the owner of voting shares in 9059-3179 Québec Inc.
(9059), the shares in which were held by the trust. Because Pierre-Marc
Paquette is the son of Pierre Paquette, and during the period in issue he was
under the age of 18 years, the Respondent submits that Pierre Paquette was
deemed, under subsection 256(1.3) of the ITA, to be the owner of the
voting shares in 9059.
[7]
In the Respondent's
submission, Pierre Paquette is deemed to control 9059, which controls the
Appellant, and is therefore one of the group of persons who control Pépinière, which
controls Centre du Jardinage. Pépinière is 50.6% owned by 3101-3469 Quebec Inc.
(3101), which itself is 100% controlled by Jean-Claude Paquette, the
father of Pierre Paquette. Pierre Paquette is therefore related to 3101, which
controls Pépinière, and therefore holds at least 25% of the shares in Pépinière, and so Pépinière,
Centre du Jardinage, Propep Inc. (the Appellant) and 9059 are associated
corporations under paragraph 256(2)(c) of the ITA.
[8]
The Appellant submits
that it was not associated with Pépinière and Centre du Jardinage during
the years in issue, under paragraph 256(2)(c) of the ITA, because Pierre-Marc
Paquette was quite simply not a beneficiary of the trust at that time, and
accordingly his father could not be deemed to own the shares in 9059 held by
the trust. For that reason alone, paragraph 256(2)(c) does not
apply.
Additional facts
[9]
The Appellant called Pierre
Choquette, the executive vice-president of Pépinière and the Appellant and one
of the co-trustees of the trust. He explained that the Appellant had been
created to carry on a business in the field of inert materials: maintaining
green spaces and distributing mulch. Pépinière deals in everything connected
with living products: plant growing and marketing. The reason for the idea of
separating the two businesses was to split the financial risks associated with
the various products and services offered, instead of combining them within a
single corporation.
[10]
Pépinière was founded
in 1962 by Jean-Claude Paquette, the father of Pierre and Clément Paquette, who
had equal shares in the corporation. The Appellant was created in 1983.
[11]
Clément Paquette left
Pépinière in 1995 and Pierre Choquette purchased a share in that corporation
(20%) in January 1996, after negotiations with Pierre Paquette, for $500,000.
Pierre Choquette has a master's degree in business administration (MBA) and is
a chartered accountant.
[12]
Before investing in
Pépinière, Mr. Choquette was a senior manager in a hospital and had
combined financial and administrative responsibilities. Given his experience
and the Paquette family's confidence in him, he also handled the general
administration and the financial aspect, as well as marketing, and ensured that
the Appellant was properly managed. He is the person who signs most cheques for
the Appellant and is co‑trustee of the trust, with Pierre Paquette.
[13]
As noted in the partial
agreement as to the facts, the trust deed provides for two levels of
beneficiaries. The management company, 9059, is the first-ranking beneficiary,
until it is wound up, and Pierre-Marc Paquette is the second-ranking
beneficiary. Mr. Choquette explained that 9059 had initially been created
in order to insulate the businesses, to limit the financial risks. The choice
of naming 9059 as a first-ranking beneficiary of the trust was to retain
control over the Appellant.
[14]
Indeed, Clément
Paquette's withdrawal from Pépinière was not without complications.
Mr. Paquette's disposition of his voting shares had cost the corporation a
considerable amount, even though there was a shareholders' agreement in place.
[15]
I understand from Mr. Choquette's
testimony that they had not wanted to experience the same financial risks with Pierre-Marc
Paquette, who was a minor at the time the trust was created, in January 1998.
Pierre-Marc was then 12 years old, and, reading between the lines, I see that what
Pierre‑Marc would do in terms of the family business in future could not
be predicted, so he was named a second-ranking beneficiary.
Appellant's argument
[16]
As noted earlier, the Appellant
submits simply that Pierre‑Marc Paquette was not a beneficiary of the
trust during the years in issue. If that was the case, neither he nor his
father could have been deemed to be owners of the shares in 9059, and
accordingly neither 9059 nor the Appellant could be considered to be associated
with the two other corporations, Pépinière and Centre du Jardinage. The
Appellant would therefore have been entitled to the full amount claimed for the
SBD and would not have been limited by the business limit for the other two
corporations, Pépinière and Centre du Jardinage.
[17]
The issue is therefore
whether Pierre-Marc Paquette was a beneficiary of the trust during the years in
issue.
[18]
Under the trust deed,
9059 is the first-ranking beneficiary until it is wound up, and Pierre-Marc
Paquette is the second-ranking beneficiary. The Civil Code of Québec (C.C.Q.),
which is the applicable provincial legislation in this case, provides that
there may be two ranks of beneficiaries and that a legal person may not be a beneficiary
for a period exceeding 100 years. The Appellant referred to articles 1271 and
1272 of the C.C.Q. and to the comments of the Minister of Justice, as follows:
Art. 1271. A
personal trust constituted for the benefit of several persons successively may
not include more than two ranks of beneficiaries of the fruits and revenues
exclusive of the beneficiary of the capital; it is without effect in respect of
any subsequent ranks it might contemplate.
Accretions of fruits and revenues between
co-beneficiaries of the same rank are subject to the rules of substitution
relating to accretions between co-institutes of the same rank.
[TRANSLATION] Comment
This article and the following article set
out the rules relating to the duration of a personal trust constituted for the
benefit of several persons successively. These rules are consistent with the
solution adopted by the courts, which apply the rules governing substitution in
this case.
Art. 1272. The right
of beneficiaries of the first rank opens not later than one hundred years after
the trust is constituted, even if a longer term is stipulated. The right of
beneficiaries of subsequent ranks may open later but solely for the benefit of
those beneficiaries who have the required quality to receive at the expiry of
one hundred years after creation of the trust.
In no case may a legal person be a
beneficiary for a period exceeding one hundred years, even if a longer term is
stipulated.
[TRANSLATION] Comment
This new article supplements the previous
article, by providing for other rules governing the duration of a personal
trust constituted for the benefit of several persons successively.
The first paragraph sets out rules that have
the combined effect of limiting the maximum duration of a personal trust to
about 200 years. That time allows for sufficient flexibility that, in ordinary
circumstances (trust in favour of a spouse, then children and then
grandchildren), the beneficiaries can be determined without difficulty.
The second paragraph sets out a rule that
seems to be needed because the normal operation of the lifetime of a person,
which the rules in the first paragraph are based on, is ruled out where there
is a legal person, the existence of which may be perpetual. The rule means that
in this case extending the duration of the trust beyond what seemed desirable
in this case can be avoided.
[19]
In addition, articles
1279 and 1280 of the C.C.Q. provide as follows:
Art. 1279. Only a
person having the qualities to receive by gift or by will at the time his right
opens may be the beneficiary of a trust constituted gratuitously.
Where there are several beneficiaries of the
same rank, it is sufficient that one of them have such qualities to preserve
the right of the others if they avail themselves of it.
Art. 1280. To
receive, the beneficiary of a trust shall meet the conditions required by the
constituting act.
[TRANSLATION] Comment
This article makes the beneficiary's right to
receive conditional on compliance with the conditions required by the constituting
act, in addition to the qualities to receive by donation or will.
These conditions may vary in nature, but they
must not be contrary to public order.
…
[20]
The Appellant then
asked what the nature of Pierre-Marc Paquette's right is, given that 9059 is the
first-ranking beneficiary until it is wound up. In the Appellant's submission, Pierre-Marc's
right to the trust's income and capital will arise only when 9059 is wound up,
and not before. It is a right conditional on the occurrence of a future
uncertain event. It is not a right that will certainly arise upon the expiry of
a period of time. The Appellant distinguishes between a conditional obligation
that causes the right to arise only when the condition is met and an obligation
that arises when a period of time expires and causes the right to arise at the
time the obligation is created – in this case, the creation of the trust deed –
but suspends performance until the expiry of the time.
[21]
The Appellant referred
to articles 1497, 1506, 1507 and 1508 of the C.C.Q., which read as follows:
Art. 1497. An
obligation is conditional where it is made to depend upon a future and
uncertain event, either by suspending it until the event occurs or is certain
not to occur, or by making its extinction dependent on whether or not the event
occurs.
Art. 1506. The
fulfillment of a condition has a retroactive effect, between the parties and
with respect to third persons, to the day on which the debtor obligated himself
conditionally.
Art. 1507. The
fulfillment of a suspensive condition obliges the debtor to perform the
obligation, as though it had existed from the day on which he obligated himself
under that condition.
…
Art. 1508. An
obligation with a suspensive term is an existing obligation that does not
become exigible until the occurrence of a future and certain event.
[22]
In the Appellant's
submission, Pierre-Marc Paquette's right to become a beneficiary of the trust
is conditional on 9059 being wound up, that being an event that is uncertain in
his lifetime. A legal person has perpetual life, and the C.C.Q. limits its time
as beneficiary to 100 years. Under the trust deed, 9059 is the first-ranking
beneficiary, and may thus exercise its right before Pierre-Marc Paquette's
right, since he will have to wait for 9059 to be wound up before he becomes a
beneficiary himself. The first-ranking right of 9059 may, in theory, exist for
100 years, and in that event Pierre-Marc would never become a beneficiary,
because he would have to reach the age of 112, a highly improbable event. It is
therefore an event that is uncertain in Pierre-Marc's lifetime, and thus not a
future and certain event that causes his right as beneficiary to arise when the
trust was created; rather, it is a potential right that will arise at the point
when the condition is met, if it is ever met.
[23]
Accordingly, in the
Appellant's submission, Pierre-Marc Paquette's right to be a beneficiary of the
trust did not arise at the point when the trust was created, and had not yet
arisen during the periods in issue, because 9059 was still the first-ranking
beneficiary of the trust. As a result, the discretion assigned to the trustees
regarding the distribution of the income and capital under the trust deed could
not have been exercised in favour of Pierre-Marc Paquette. Because he was not a
beneficiary of the trust within the meaning of the C.C.Q., the Appellant submits
that subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) of
the ITA could not have applied to deem Pierre-Marc Paquette, and thus his
father Pierre Paquette, to be owners of the shares in 9059.
Respondent's argument
[24]
Counsel for the
Respondent referred first to the ordinary meaning of the expression
"beneficiary". In his book of authorities, he referred to several
definitions found in various dictionaries:
"beneficiary": … A person entitled
to benefit from a trust or will
Dukelow, Daphne A., The Dictionary
of Canadian Law, Third Edition, Thomson Carswell, 2004;
"beneficiary": 1. A person for
whose benefit property is held in trust; … 2. A person to whom another is in a
fiduciary relation, whether the relation is one of agency, guardianship, or
trust.
Garner, Bryan A., Black’s Law Dictionary,
Eighth Edition, Thomson West, 2004;
[TRANSLATION] "beneficiary" 3. In
relation to a trust, person whom the settlor wishes to benefit, in the
constituting act representing the settlor's intention, by the distribution of
the property held and administered in trust by the trustee.
Reid, Hubert, Dictionnaire de droit
québécois et canadien, 3rd edition, Wilson & Lafleur Ltée, 2004;
"beneficiary": … one for whose
benefit a trust is created; one for whose benefit a trustee, an executor, etc.,
holds the property.
The Canadian
Law Dictionary, Toronto, Law and Business Publication (Canada) Inc., 1980;
"beneficiary": 1. The person having
the beneficial enjoyment of property rather than the legal possession – for
example, the person for the benefit of whom a trust is created, or, in
other words, the CESTUI QUE TRUST [see trust] in a trust
relationship.
Yogis, John A., Canadian Law Dictionary,
Barron’s Educational Series, Inc., 1983.
[25]
The Respondent thus
submits that a beneficiary of a trust is, by definition, a person whom the
settlor wishes to benefit in the trust deed.
[26]
In the submission of
counsel for the Respondent, it is apparent from the trust deed that even though
Pierre-Marc Paquette is a second-ranking beneficiary, he is clearly a person
whom the settlor wished to benefit. Indeed, if we read paragraph 4.1 of
the trust deed, reproduced in paragraph 16 of the partial agreement as to
the facts, it can be seen that the trustee is given the power to pay the
beneficiaries or one of them, at any time, all or part of the net
annual income of the trust in such proportions as it may in its absolute
discretion establish. As well, the trustees have the power to distribute, in
their absolute discretion and at any time, all or part of the capital of the
trust to the beneficiaries. Accordingly, the trust deed gives the
trustee or trustees discretion to distribute income or capital, not to one
beneficiary, but to the beneficiaries of the trust. Counsel for the Respondent
submits from this that the trustee has discretion as to the distribution of the
income and capital, at all times, to both the first-ranking beneficiary and
that second-ranking beneficiary, that is, Pierre‑Marc Paquette.
[27]
Counsel for the
Respondent also referred to articles 1265 and 1267 of the C.C.Q.
Art. 1265. Acceptance
of the trust divests the settlor of the property, charges the trustee with
seeing to the appropriation of the property and the administration of the trust
patrimony and is sufficient to establish the right of the beneficiary with
certainty.
[TRANSLATION] Comment
The irrevocability of the beneficiary's right
to the benefits assigned by the trust, created by the trustee's acceptance, is
obviously still dependent on the beneficiary existing at the time the right
arises. As well, it does not prevent the beneficiary from subsequently waiving
exercise of that right.
Art. 1267. A
personal trust is constituted gratuitously for the purpose of securing a
benefit for a determinate or determinable person.
[28]
Counsel for the
Respondent noted that the beneficiary is the person who wanted to give a
benefit to the settlor, and the person who makes the transfer provides for the
time when the right will arise. Although the right may arise subsequently, it
will be irrevocable if, at the time it arises, the person intended to benefit
meets all the conditions. In addition, articles 1271 and 1272 of the C.C.Q.,
cited by the Appellant, provide that successive beneficiaries may be named.
Nonetheless, in the Respondent's submission, second-ranking beneficiaries are
beneficiaries within the meaning of the C.C.Q., the difference being that their
right will arise later. In the case before us, even though 9059 has perpetual
life in theory, it cannot, under the civil law, be a beneficiary for more than
100 years. That is a fixed duration and not a future uncertain event, as
submitted by the Appellant.
[29]
Counsel for the
Respondent also referred to articles 1275 and 1287, first paragraph, of
the C.C.Q.:
Art. 1275. The
settlor or the beneficiary may be a trustee but he shall act jointly with a
trustee who is neither the settlor nor a beneficiary.
Art. 1287. The
administration of a trust is subject to the supervision of the settlor or of
his heirs, if he has died, and of the beneficiary, even a future beneficiary.
...
Those provisions give future beneficiaries
the right to oversee the administration of the trust.
[30]
In conclusion, counsel
for the Respondent submits that Pierre-Marc Paquette is a beneficiary within
the meaning of the C.C.Q. and subparagraph 256(1.2)(f)(ii) of the
ITA, even though it is argued that his right will not arise until 9059 is wound
up.
[31]
It is also clear from
the trust deed that its share of the income is at all times conditional on the
exercise of the trustee's discretion. If the trustee decides to pay out nothing
to the first-ranking beneficiary, the income will accumulate for the benefit of
the second-ranking beneficiary, Pierre-Marc Paquette. As a result, all of the
conditions in subparagraph 256(1.2)(f)(ii) have been met, and subsection 256(1.3)
therefore applies. Accordingly, the Appellant is associated with the other
corporations within the meaning of paragraph 256(2)(c) of the ITA.
Analysis
[32]
Articles 1271 and
1272 of the C.C.Q. cover trusts that may be constituted for the benefit of
several persons successively, who may not include more than two ranks of
beneficiaries of the fruits and revenues, in addition to the beneficiary of the
capital. Article 1279 of the C.C.Q. is referring to a situation where there are
several beneficiaries of the same rank.
[33]
Here, the trust deed
refers to the first-ranking beneficiary and second-ranking beneficiary. Given
the circumstances in which the trust was created, which I will address after
this, it seems logical to me to say that the intention was to create two successive
classes of beneficiaries. Thus, the second-ranking beneficiary must wait until
the first-ranking beneficiary is wound up before his right opens.
[34]
In my view, Mr. Choquette's
testimony was very enlightening as regards the precise choice of the trust's
beneficiaries. He explained that when Clément Paquette left Pépinière in
1995, it resulted in major costs for the corporation. The trust was created in
1998 to control the Appellant, whose directing mind is Pierre Paquette,
Clément Paquette's brother, indirectly through 9059. Even though
Pierre Paquette wanted to benefit his son Pierre‑Marc, ultimately,
it was implicit in what Mr. Choquette said that any family business can
experience disagreements in spite of every good intention of trying to keep the
patrimony in the family.
[35]
Pierre Paquette must
have learned a lesson when his brother Clément left. For his own business, the
Appellant, Pierre Paquette chose to transfer all the controlling shares to
9059, keeping the preferred shares for himself, which entitled him to
preferential dividends (the class B shares in the Appellant). (See Appendix 2
to the partial agreement as to the facts and Exhibit A‑1, Volume 3,
Tab 31.) For 9059, he chose the trust to hold all controlling Class A
shares. The authorized share capital of 9059 further provides for the
possibility of issuing a number of other classes of preferred shares that
entitle the holder to dividends, as well as shares that provide a plurality of
voting rights (Exhibit A‑1, Volume 3, Tab 32).
[36]
When the trust was
created, care was taken to name 9059 as the first-ranking beneficiary until it
was wound up. That approach is not contrary to the general law or the corporate
law.
[37]
Mr. Choquette testified
that this was done in order to retain control. That is readily understandable.
If Pierre-Marc Paquette, who was then 12 years old, showed no interest in the
business in the future, or acted in a way that would jeopardize the proper
administration or finances of the Appellant, which neither Pierre Paquette nor
Pierre Choquette could predict at the point when the trust was created, the
possibility of retaining the trust patrimony in 9059, with Pierre‑Marc
Paquette having no right to any of the trust's income or capital, was retained.
Indeed, discretionary trusts are often created to hold the ordinary shares of a
corporation after an estate is frozen. If the shares have potential added
value, the settlor may hesitate to transfer property directly to his or her
children or other beneficiaries of the freeze where the value might increase.
[38]
Counsel for the
Respondent submits that after 100 years, 9059 will no longer be able to be a
beneficiary. Perhaps so, but in 100 years, Pierre‑Marc will very probably
be dead, and in the event that in the interim, Pierre Paquette and Pierre Choquette
no longer wanted to benefit Pierre-Marc, the trust deed would allow them to
liquidate the trust and thus deliver the capital to 9059, the only first-ranking
beneficiary.
[39]
For that reason, like
the Appellant, I think that the very structure of the trust deed meant that Pierre-Marc
Paquette had only a potential right to the trust income and capital, that right
being conditional on the winding-up of 9059.
[40]
Pierre‑Marc Paquette's
right to be a beneficiary of the trust, which is conditional on the winding-up of
9059, does not depend on a certain event, because no one could have predicted,
at the point when the trust was created, whether it would materialize. The only
certain thing is that 9059 will no longer be able to be a beneficiary in 100
years, but it is entirely uncertain that 9059 will be wound up in Pierre-Marc
Paquette's lifetime. Accordingly, I agree with counsel for the Appellant that
we are dealing with a conditional obligation and not an obligation with a term,
and Pierre‑Marc's right will open only when 9059 is wound up, and not
before.
[41]
Counsel for the
Respondent submits that the trustee's acceptance of the trust property operated
to establish the right of any named beneficiary with certainty, under article
1265 of the C.C.Q. A caveat to that assertion is required. If a beneficiary's
right is subject to a condition, the condition must be realized in order for
the beneficiary to be able to exercise the right. The certainty referred to in article 1265
of the C.C.Q. therefore does not mean that the beneficiary's right may not be
voided under the terms of the constituting act.
[42]
Moreover, the fact that
article 1287 of the C.C.Q. makes the administration of a trust subject to the
supervision of a beneficiary, even a future beneficiary, does not give the
beneficiary a right to receive trust income or capital. It is a limited right
that enables the beneficiary to bring action against the trustee if the trustee
refuses to exercise its discretion or exercises it improperly. That right of
supervision does not make the future beneficiary a beneficiary within the
meaning of the ITA provisions that define associated corporations. If the
intention had been to cover future beneficiaries, the expression "beneficial
interest", which is used elsewhere in the ITA (sections 104 to 108) and
which is in fact defined in subsection 248(25) of the ITA, would have been
used.
[43]
Counsel for the
Respondent argued that the trust deed refers to the discretion of the trustee
or trustees to distribute income or capital to the beneficiaries or to one of
them, but I do not think that that wording changes anything as regards the intention
to designate successive beneficiaries. As counsel for the Appellant noted, the trust
deed also provides for the descendants of the beneficiaries. Thus if 9059 is
ever wound up, Pierre-Marc will become a beneficiary at that time and could in
turn have descendants who could also be beneficiaries. In that case, the
trustees will be able to distribute the income and capital, in their
discretion, to one or all of the beneficiaries who exist at that time.
[44]
For the period in
issue, the discretion given to the trustees applied only in respect of the sole
beneficiary of the trust, 9059.
[45]
I therefore find that
during this period Pierre‑Marc Paquette was not a beneficiary of the
trust under subparagraph 256(1.2)(f)(ii) of the ITA, and
accordingly his father, Pierre Paquette, was also not a beneficiary, by
operation of subsection 256(1.3) of the ITA.
[46]
For these reasons, I
would allow the appeals and refer the assessments back to the Minister for
reconsideration and reassessment on the basis that the Appellant may claim the
amount of the SBD to which it is entitled under the ITA without regard to the
business limit for Pépinière and Centre du Jardinage during the years in issue.
[47]
Costs to the Appellant.
Signed at Montréal, Quebec, this 1st day of October, 2008.
"Lucie Lamarre"
Translation
certified true
on this 12th day
of May 2009.
François Brunet, Reviser
Email this Content