Lee – Tax Court of Canada rejects reassessments treating a Quebec discretionary trust as a sham
The taxpayer, Mr. Lee, a resident of B.C., engaged in a tax avoidance plan involving a spousal trust (intended to be resident in Quebec) which avoided provincial tax on a deemed dividend received on the redemption of shares in the trust’s hands. The Trust’s trustee (Mr. Paris) was a retired KPMG accountant. The Trust elected to be taxed federally on a deemed dividend from a share redemption it had distributed to its beneficiary (Mrs. Lee) but did not elect to be taxed on this same income in Québec. Since the beneficiary was not a resident in Québec, no provincial tax was paid on the distributed income. Nevertheless, the Trust received the federal abatement. The Province of Québec subsequently enacted retroactive tax legislation that deemed the Trust to have elected to be taxed on the distributed income in Québec. However, CRA reassessed Mr. Lee on the basis that the Trust that he purportedly settled did not exist either because the trust or the transfer of property to it was a sham.
In the course of rejecting the CRA position, Owen J stated:
Creating legal (or equitable) relationships to give effect to a tax plan is not the perpetration of a sham. In this case, there was no deceit on the part of the Appellant or Mr. Paris regarding the legal relationships created under Québec law. …
[E]ven if the Appellant’s sole reason (motive) for creating the Trust and transferring the … Shares to the Trust was to save tax, that is not in and of itself evidence of a sham.
Neal Armstrong. Summary of Lee v. The Queen, 2018 TCC 230 under General Concepts – Sham.