Laplante – Federal Court of Appeal finds that a purported distribution of QSBCS gains to family trust beneficiaries was a sham

The taxpayer (Laplante) was the dominant trustee of a family trust (DL Trust) that had realized a capital gain of around $6M on the sale of qualified small business corporation shares. He passed a trust resolution for the distribution of the taxable capital gain to the family members in amounts sufficient to use up their capital gains exemption. However, immediately upon their receipt of their distribution cheques, they endorsed them over to Laplante and executed deeds of gift in his favour. He paid all their alternative minimum tax liabilities for that year.

In the Tax Court, Ouimet J had found that the purported distribution of the taxable capital gain to the trust beneficiaries was a sham (or, to be more precise, a “simulation” under Art. 1451 of the Quebec Civil Code), stating that the beneficiaries

had each accepted a mandate [i.e., agency] from Mr. Laplante whose essential features consisted in receiving from the DL Trust a distribution in the amount of $375,000 and thereupon paying that amount to Mr. Laplante. In so doing, they were required to use their capital gains exemption, which was essential. In consideration, they were permitted to keep the recoveries of alternative minimum tax made by them in the subsequent taxation years.

In affirming this decision, Boivin JA stated that Ouimet J:

did not err in finding a simulation in this case, i.e., that the appellant was the true beneficiary of the amounts distributed by DL Trust to the seeming beneficiaries.

The Rulings Directorate took a similar approach in 2011-0424341I7 F (see also 2013-0475501I7 F).

Neal Armstrong. Summary of Laplante v. Canada, 2018 CAF 193 under General Concepts – Sham.