I..I.U.N.A. Local 527 Members’ Training Trust Fund v. Her Majesty the Queen, [1992] 2 CTC 2410

Bowman, J.T.C.C.:—These appeals, from reassessments for the 1985, 1986 and 1987 taxation years, were heard under the General Procedure of this Court. They raise the question whether the interest earned on a fund created to provide training of members of a trade union is exempt from tax. The appellant claims exemption on the basis that it is an entity described in paragraph 149(1)(k) or 149(1)(l) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act').

The Labourers International Union of North America, Local 527 ("L.I.U.N.A.") is a trade union. The appellant, L.I.U.N.A. Local 527 Members’ Training Trust Fund (the "fund"), describes itself as a trust. It was created by a deed of trust to which L.I.U.N.A. and the Ottawa Construction Association (the “O.C.A.”), an employers' association, were parties with a grant of $45,000 from the union's existing training and recreation fund.

The objects of the fund were to provide training to the members of the L.I.U.N.A. for the purpose of retraining those members and of upgrading and improving their skills. Under a collective agreement between L.I.U.N.A. and the O.C.A., members of the O.C.A. contributed to the fund at a fixed rate per employee hour worked. The collective agreement was not put in evidence. The trustees of the fund were four representatives from L.I.U.N.A. and four from the O.C.A.

Prior to, during and subsequent to the years in question, substantial amounts were paid into the fund by the members of the O.C.A. The government of Canada evidently saw the objectives of the fund as meritorious and it as well made substantial contributions to it. A portion of the amounts received were used for the purpose of training members in a variety of skills relating to the construction industry, including safety, cement pouring, and drywall construction. The theory was that during boom times very little training would be done because more of the members would be working with the result that larger amounts would be paid into the fund. During slack times, such as were experienced in 1981 and 1982, it was expected that the fund would receive less money but would spend more on training because more members would be out of work. The evidence did not establish that in practice this theory was correct.

Substantially less training was done than the appellant had anticipated. This was attributed to a number of factors: (1) apparently the appellant had difficulty in recruiting a suitable training director; (2) there was no acceptable place for the training to take place until the present premises were purchased in 1988; prior to that acquisition the training was done in rented premises; (3) the trustees believed that they would have to spend more on the building than in fact was the case and they were holding sufficient in reserve for this purpose; and (4) their consultants advised them to put money aside in the event that income tax would have to be paid.

Over the years the appellant held money not used for training purposes in the form of cash, term deposits or treasury bills in the following amounts:

In 1985, the fund had investment income of $42,291; in 1986, $51,897; in 1987, $58,506. The Minister of National Revenue assessed tax on these amounts and it is from these assessments that the fund appeals. [1]

The trust agreement provided that the trustees would use the monies available in the fund to pay all reasonable expenses and to provide for establishing and maintaining the "training program". Clauses 2.01 to 2.05 of the trust agreement are as follows:

2.01 There is hereby established a Trust fund which shall be known as “LIUNA Local 527 Training fund” consisting of all contributions paid to the said fund and all such monies or property and all investments made therefrom and all earnings and profits therefrom.

2.02 The general purposes of the fund are:

(a) to provide funds for the establishment of a training program in order to retrain, upgrade and improve the skills of employees; and

(b) to pay the cost of the administration of the fund properly incurred by the fund pursuant to the provisions of this agreement.

2.03 The fund is created, established and maintained and the trustees agree to receive, hold and administer funds for the purpose of establishing and maintain* ing the training program in accordance with the terms and conditions of this agreement.

2.04 For the purposes of the Wages Act, R.S.O. 1990 W. 1, and/or the Mechanics Lien Act, R.S.O. 1980 c. 261, payments to the fund made or owing by an employer shall be deemed to be payment of wages due to employees which have been irrevocably assigned by the employees to the fund. No moneys, property, or equity, of any nature whatsoever, in the fund, shall be subject in any manner by an employee, or person claiming through such employee, or otherwise, to anticipa* tion, alienation, sale, transfer, assignment, pledge, encumbrance, garnishment, mortgage, lien or charge, and any attempt to cause the same to be subject thereto shall be null and void.

2.05 Neither the Union, the O.C.A., any employer, any employee, nor any other person, association, firm, corporation or entity shall have any right, title or interest (whether reversionary or otherwise) in the fund other than as may be provided in this agreement, provided, however, that nothing in this agreement shall prevent a contribution which is made by an employer by a mistake of fact to be returned by the trustees to such employer within one (1) year after the payment of such contribution; provided further that nothing in this agreement shall prevent a reversion to the employer in the event of termination of the fund to the extent that excess funds are available after all liabilities required by law have been satisfied.

Clause 8.03 provides in part as follows:

This agreement may be terminated only by an agreement in writing under seal, signed by the O.C.A. and the Union. In the event of termination, the trustees shall:

(c) distribute and apply any remaining surplus in such manner as the trustees see fit.

In 1990, clause 8.03(c) was amended to provide that upon termination, the trustees were required to “distribute and apply any remaining surplus to an entity as described in section 149 of the Income Tax Act or such successor legislation as may be in effect at that date”.

After the conclusion of argument I recalled counsel and requested argument on the question whether the fund was a valid trust that was a person susceptible of being assessed and of appealing to this Court and, if its validity depended on section 16 of the Perpetuities Act of Ontario, R.S.O. 1990, c. P. 9, what effect this conclusion had on the fund's claim to be an "association" of the type described in paragraph 149(1 )(l).

The letter which I directed the Registrar to send to all counsel was as follows:

Judge Bowman has asked that I write to you and request counsel for both parties to appear to argue a point which was not raised at trial.

The issue is whether L.I.U.N.A. Local 527 Members Training Trust fund ("L.I.U.N.A.") falls within paragraph 149(1)(k) or 149(1)(1) of the Income Tax Act. The assessment, the claim for exemption and the appeal are all predicated upon the assumption that L.I.U.N.A. is a person susceptible of being assessed for tax. Since L.I.U.N.A. is neither an individual nor a corporation, it is necessary that it be a trust for the purpose of being taxed, for the purpose of seeking the exemption and for the purpose of appealing to this Court.

The treatment of trusts under the Income Tax Act is premised upon such trusts being valid. Since the object of L.I.U.N.A. which the agreement of May 1, 1979 purported to create is a purpose, its validity depends upon that purpose being charitable. See, generally, Waters, Law of Trust in Canada, 2nd Ed. page 127-28. Counsel may wish to consider such cases as Oppenheim v. Tobacco Securities Trust Company Ltd., [1951] A.C. 297, Baker v. National Trust Co., [1953] 1 S.C.R. 94, affirmed [1955] A.C. 627; Dingle v. Turner, [1972] A.C. 601; Powell v. Compton, [1945] 1 ch. 123; In re Hobourn [1946] 1 Ch. 194; Re Massey [1959] O.R. 608; Canada Trust Co. v. Ontario Human Rights Commission, (1990) 74 O.R. (2nd) 481.

Assuming, without deciding, that on the basis of such cases L.I.U.N.A. is not a valid trust, a second question is whether section 16 of the Perpetuities Act, RSO 1980 c. 374 prevents the trust from being void and, if so, what is the effect for the purposes of paragraphs 149(1)(k) or (I) of the Income Tax Act of construing an otherwise invalid trust as a" power to appoint the income or the capital”? Counsel may wish to consider the case Wood and Whitehead v. the Queen et al [1977], 6 W.W.R. 273.

The specific questions which it is believed should be addressed are the following:

(1) Is L.I.U.N.A. a valid charitable trust apart from section 16 of the Ontario Perpetuities Act!

(2) If the answer to (1) is yes, it is nonetheless the Minister's opinion that it was

“not a charity within the meaning assigned by subsection 149.1(1)"?

(3) If the answer to (1) is no, is it a valid trust solely by reason of section 16 of the Perpetuities Act (Ontario)?

(4) If its validity depends on section 16 of the Perpetuities Act, what is the effect on its claim to exemption under paragraph 149(1)(k) or (I) of the words in section 16 ". . .shall be construed as a power to appoint the income or the capital, as the case may be . . ."?

(5) If L.I.U.N.A. is not a valid trust what disposition should be made of the appeal?

Judge Bowman believes that in fairness to all parties this matter should be argued fully. It would be appreciated if you would communicate with the undersigned as soon as possible to discuss an appropriate time at which counsel may appear to argue these matters. If counsel wish, a preliminary appearance could be arranged to settle the manner of proceeding and any other questions arising out of the above.

Counsel for the respondent advanced the startling proposition that I should not have recalled counsel and that I should not even consider the validity of the trust or raise the possible effect of section 16 of the Perpetuities Act of Ontario because it had been admitted in the pleadings that the appellant was a trust. He also argued that the validity of the trust was a question of fact or a mixed question of fact and law. The propositions are wholly without merit. Counsel for the appellant did not associate themselves with Mr. Gibson's position on this point.

Mr. Gibson argued that the Court should not of its own motion raise issues of law that are not raised by the parties, even where such issues have to do with the existence of one of the parties, or are essential to the determination of the very question before the Court. His position was that the Court should confine itself to a consideration of the narrow issues formulated and articulated by the parties. As will be evident from the rest of these reasons, had I accepted the issues for determination in the manner in which they were stated by the parties, I would have been unable to reach any conclusion. The Court cannot be forced to base its decisions upon faulty legal premises.

In support of his position Mr. Gibson cited Jones v. National Coal Board, [1957] 2 All E.R. 155. In that case, a new trial was ordered because the judge had repeatedly intervened in the examination and cross-examination of witnesses. Denning, L.J. outlined the duties of the judge at page 159:

In the system of trial which we have evolved in this country, the judge sits to hear and determine the issues raised by the parties, not to conduct an investigation or examination on behalf of society at large, as happens, we believe, in some foreign countries. Even in England, however, a judge is not a mere umpire to answer the question“ how's that?" His object above all is to find out the truth, and to do justice according to law; and in the daily pursuit of it the advocate plays an honourable and necessary role. Was it not Lord Eldon, L.C., who said in a notable passage that "truth is best discovered by powerful statements on both sides of the question” (see Ex p. Lloyd (1) (1822), Mont. 70, n.) and Lord Greene, M.R., who explained that justice is best done by a judge who holds the balance between the contending parties without himself taking part in their disputations? If a judge, said Lord Greene, should himself conduct the examination of witnesses,

“he, so to speak, descends into the arena and is liable to have his vision clouded by the dust of the conflict.” (See Yuill v. Yuill (2), ([1945] 1 All E.R. 183 at page 189.)

Lord Denning's admonition against a judicial descent into the arena is unassailable but it falls far short of supporting counsel for the respondent's remarkable position. Where the issue is one of the locus standi of one of the parties the court has a positive obligation to raise the point. If the appellant does not exist, it cannot be assessed and it has not standing to appeal an assessment. The question of standing is a question of law (Thorson v. Attorney General of Canada et al. (No. 2), [1972] 1 O.R. 86 (Ont. H.C.) [rev’d, [1925], S.C.R. 138, 43 D.L.R. (3d) 1]) and it goes to the jurisdiction of this Court. Jurisdiction is granted to a court by the law and cannot be conferred by the parties.

. . .[W]e make it clear that in our view the question of locus standi goes to jurisdiction of the court and therefore the approach adopted by the department in this case, while understandable, is not appropriate. The parties are not entitled to confer jurisdiction, which the court does not have, on the court by consent and, if this court had been minded to grant declaratory relief, the respondent would have had to advance any arguments which were available to them or to accept the consequences of not doing so. (The Queen v. Secretary of State, [1989] 1 All E.R. 1047 (C.A.) at page 1056.)

Parties to an action may agree on certain facts and this agreement may form the basis for a judicial admission by which the presiding judge will be bound. Parties cannot, however, make a judicial admission on a point of law, because “the Court may not be bound by error in an admission by the parties as to the law. . .” (Custom Glass Ltd. v. M.N.R., [1967] C.T.C. 289, 67 D.T.C. 5207 (Ex. Ct.), at page 294 (D.T.C. 5210)). The Court is not bound by concessions on points of law. In C.(G.) v. V.F(T.), [1987] 2 S.C.R. 244 at 257-58 (see also Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564 at 612), Beetz, J., delivering the unanimous judgment of the Supreme Court of Canada, stated:

At the hearing, counsel for the appellants conceded that the award of custody to a third person would amount to a declaration of partial deprivation and that it was therefore necessary to establish the existence of serious cause within the meaning of art. 654 C.C.Q. for giving custody to someone other than the person having parental authority. This concession on a point of law is not binding on the Court.

The issue of the validity of this trust is a question of law because it must be determined in accordance with principles of law and because it is an issue of standing which, in itself, is a question of law. Despite submissions made by counsel for the respondent, parties to an action cannot make a judicial admission on a point of law. They cannot agree on a matter of standing and thereby confer jurisdiction upon a court. While it is accepted that a judge should not regularly intervene in a cross-examination or overly involve himself in the dispute between the parties, he or she must nonetheless be satisfied that the court has jurisdiction to deal with a matter, and a consensus between the parties cannot confer such jurisdiction. Moreover, even where an issue does not go to the court's jurisdiction or the standing of one of the parties, the court must still decide the case on the basis of the law. It cannot fulfil that obligation if it is forced to accept without question doubtful propositions of law, or to base its determinations on flawed legal premises or an ill-conceived articula- tion of the issues merely because of some agreement between the parties. The Tax Court of Canada has original jurisdiction over areas governed by public statutes of wide application. The effect of its judgments in many instances goes beyond the narrow dispute between the Minister and the particular taxpayer. Its judgments bear upon the interpretation of fiscal statutes and their application to taxpayers generally. Moreover, a decision in favour of a particular appellant will result in a payment out of the Consolidated Revenue fund not otherwise authorized by Parliament (cf. Clarkson Company Ltd. v. The Queen, [1979] C.T.C. 96, 79 D.T.C. 5150, at page 97 (D.T.C. 5151)). This Court is a court of law; it is not a private arbitration tribunal to which the parties can dictate the law.

Where a question of standing or indeed any other significant question of law that has not been raised by counsel and this is important to a proper determination of a case arises, the Court has an obligation to counsel and to the parties to recall counsel and invite further argument. It should not have had to be stated that counsel have an obligation to deal with the issues so raised by the Court.

In In Re Lawrence's Will Trusts, [1972] Ch. 418, at pages 436-37, Megarry, V.C. stated:

I should add this. In the course of this judgment I have referred to certain authorities that were not cited in argument. A judge who, after reserving judgment, comes upon possibly relevant authorities not cited in argument is in a position of some difficulty. Naturally he wishes to avoid the expense and delay of restoring the case for further argument; yet the paramount consideration is that of avoiding any injustice to litigants or their counsel. It seems to me that a distinction can be made. If the authorities are such as to raise a new point, or to change or modify, even provisionally, the conclusion that the judge has already reached, or to resolve his doubts on a point, I can see no alternative to restoring the case for further argument; and, of course, authorities do not always wear the same aspect after they have been dissected in argument as they appeared to wear before. On the other hand, if the authorities do no more than confirm or support the conclusions that the judge has already reached on a point that has been fairly argued, then in most cases I cannot see that it is wrong for the judgment torefer to them without any further argument. A litigant to whom the authorities are adverse would have been defeated in any event, and a litigant whose cause the authorities support is not likely to object to the advent of reinforcements. Further, if an appeal is contemplated, or if the case is reported, the citation of the additional authorities may be of assistance in showing that they were not overlooked and in preventing them from being overlooked in the future. Similarly, I do not think that objection could fairly be taken to the citation of an authority which could not affect the result but merely, for example, provides an apt phrase or extraneous parallel.

The question of the validity of the trust and of its standing to bring this appeal as well as the possible effect upon my determination of the claim for exemption if its existence depended solely on section 16 of the Perpetuities Act of Ontario was of such critical importance that it warranted recalling counsel.

Essentially, both counsel asserted that the trust was a valid conventional inter vivos trust the beneficiaries of which were the members of the union. Their position was based upon two cases: In re Denleys Trust, [1969] 1 Ch. 377, and Re Lipinski's Will Trusts [1977] 1 All E.R. 33.

Neither case supports the validity of the fund as a trust.

The decision in Re Lipinski's Will Trusts must be viewed in light of the decision in Doris Leahy v. Attorney General for New South Wales, [1959] A.C. 457, [1959] 2 All E.R. 300 (P.C.). That landmark decision was analyzed at some length in Waters, Law of Trusts in Canada (2nd ed.) at pages 506-508:

Prior to the decision of the Privy Council in Leahy v. A.G. N.S.W., [1959] A.C. 457, [1959] 2 All E.R. 300, it was thought that a gift on trust for the work or purposes of a non-charitable association was possibly another anomalously valid non- charitable purpose trust, provided there was no uncertainty of purpose and no contravention of the perpetuity rule. As we have said, this may have been because the enforceability principle of Morice v. Bishop of Durham, (1805), 10 Ves. 522, 32 E.R. 947, appeared to be less important than it had been, but it was also due to the somewhat ambiguous way in which the courts were solving the problems of these gifts. Whether the donor made his gift to the association simply by its name, or by way of a trust for the association, the crucial test in those days was whether the association could expend immediately both capital and income. In determining whether such an expenditure could be carried out, reference was made both to the terms of the instrument creating the gift, and, if this language did not prevent an immediate expenditure, then to the rules of the association. Sometimes the courts referred to the nature of the association or its purpose, taking together in this way evidence both of its rules and of its character. The character of a dining club, for instance, is an organization that could easily be terminated at any time, but the character of a cloistered religious order is of a continuing dedication to a certain way of life. But whether they referred to the donor's language or to such objective evidence as the rules and character of the association in question, the courts were in pursuit of the intention of the donor. As Lord Campbell L.C. said in Carne v. Long, 55 D.T.C. 1145, the donor must be presumed to have known what the rules of the association were. In almost all cases the character of the association to which the donor is giving, and which is clearly discernible, will give a ready clue to the rules. A dining club may well have rules which permit the expenditure of capital at any time, or the division of the club's assets between the members at a time of their choosing. A cloistered religious order is likely to have rules requiring the holding of capital as an endowment, thus reflecting the continuing nature of the association.

Leahy v. A.G. N.S.W., supra gave a new slant to these authorities. A gift for a purpose must be clearly distinguished from a gift for persons, said the Privy Council. The non-charitable purpose trust remains subject to, and is invalidated by, the principle of enforceability in Morice v. Bishop of Durham, supra, whose importance the court now chose to revive. As to a gift for persons, the court considered that it is not really a question whether the capital as well as the income of a gift can be expended by the members at any time, but whether the gift is to the members existing when the instrument of gift takes effect, or both to those members and to future members. Three propositions therefore arose from the decision in this case:

(1) If the gift is for a purpose (necessarily a trust), then, the purpose being non- charitable, the gift is void. The principle of Morice v. Bishop of Durham continues to be “the guiding principle.” The anomalous cases of specific graves and animals remain anomalous.

(2) If the gift is to the present members of the association, and they can expend capital as well as income when they will, this is an absolute and immediate gift to persons, and is valid. It is most unlikely, though possible, that a gift to such persons and with such a result could take effect by way of a trust. Such a trust was construed to be present in Re Drummond, [1914] 2 Ch. 90, but the court had reservations as to whether on the facts it would have come to the same conclusion.

(3) If the gift is for present and future members, so that the present members must hold on trust, then the gift is void both for uncertainty of beneficiaries, and for perpetuity.

[Emphasis added.]

The court then reiterated that, in determining into which of these three classes the particular gift falls, the intention of the donor is the governing factor, and that his intention is to be spelled out both from the words he uses in his instrument of gift and also from the rules and nature of the association to which he is giving. The court added that his intention may also be found in the property given. For instance, land would normally be intended for building purposes or otherwise as an endowment.

The result of Leahy v. A.G. N.S.W. is that, unless the gift is for present members when the instrument of gift takes effect, and they can spend it or divide it up among themselves as and when they choose, a gift to an unincorporated associa* tion is void. A class (1) gift fails for unenforceability, and a class (3) gift fails for uncertainty of objects and for perpetuity reasons. Any gift which is construed as a trust is highly likely to fail, because it is almost bound to fall into class (1) or class (3).

In Re Lipinski's Will Trusts, [1972] 1 All E.R. 33 it was decided that a testamentary gift for the construction of new buildings or the improvement of existing buildings of an association was a valid gift. It was construed as an absolute gift to the members of the association and was thus valid in accordance with the second proposition for which Waters cites Leahy v. Attorney General for New South Wales.

In In re Denley's Trust, [1968] 3 All E.R. 65, it was argued that a testamentary gift of land through which the trustees were to maintain the land for the benefit of the employees of a company was a purpose trust and failed on the grounds of the so-called ''beneficiary principle". Goff, J. decided, however, that because a clause in the will entitled the employees to the use and enjoyment of the land, they could enforce the trust and it was therefore valid. He stated at pages 382-84:

I think there may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust, quite apart from any question of uncertainty or perpetuity. Such cases can be considered if and when they arise. The present is not, in my judgment, of that character, and it will be seen that clause 2(d) of the trust deed expressly states that, subject to any rules and regulations made by the trustees, the employees of the company shall be entitled to the use and enjoyment of the land.

Where then, the trust, though expressed as a purpose, is directlyor indirectly for the benefit of an individual or individuals, it seems to me that it is in general outside the mischief of the beneficiary principle.

Thus Goff, J. recognized that if the employees had standing to enforce the terms of the trust, the beneficiary principle would not apply to invalidate the trust.

In view of clauses 2.04 and 2.05 of the trust agreement the members of the union do not have any standing to enforce the terms of the trust. Nowhere in the trust agreement is it provided that employees are entitled to participate in this training program, and indeed clause 2.05 states that no employee shall have any rights in the fund apart from those provided in the agreement.

The question then becomes whether anyone else has standing to enforce the terms of the trust. The settlor, L.I.U.N.A., has no right to enforce the terms of the trust once it has been created :

Again, irrespective of the form of the instrument, the settlor as such has no power to sue the trustees for failure to carry out the responsibilities they have undertaken. The settlor will have no power and control over the trust except to the extent that the trust instrument specifically provides to the contrary. Thus, even though the trust instrument may take the form of an agreement between the settlor and the trustees, such parties will have no power to terminate or vary the terms of the trust unless there is in the instrument a provision which confers such a power upon them. [2]

Counsel for the respondent argued that the beneficiaries of the trust were the members of the trade union for the time being. It follows from counsel's position that the beneficiaries are persons who belong to a shifting and amorphous mass of individuals and that a person who is not a beneficiary one day may become one by joining the union and may lose that status if he or she leaves the union. Even during their tenure of the ephemeral status which counsel attributes to them they still have no rights against the trust. Such persons are not beneficiaries in any sense that is relevant to the law of trusts.

In my opinion, the fund fails as a conventional inter vivos trust. It has certainty of intention, and certainty of subject matter. The intention of the settlors, L.I.U.N.A. and O.C.A. is clear. As well, the subject-matter, $45,000 from L.I.U.N.A. and $0.07 to $0.10 per employee hour worked from the O.C.A., are clearly identified as property subject to the trust. The third requisite certainty, that of object, is clear. The trust is set up for the purpose of providing training to members of L.I.U.N.A. It is a trust created in favour of purposes as opposed to one created in favour of persons. Such purpose trusts are void. While beneficiaries can enforce a trust in favour of persons, a trustee cannot be compelled to discharge his duties by a purpose. [3]

Subject to one or two minor anomalies involving graves and animals, the only exception to this general rule is found in the case of charities. The validity of the fund, a purpose trust, depends, absent section 16 of the Perpetuities Act, upon its being charitable. To exist as a valid charitable trust, it must satisfy the following three conditions (Canada Trust Co. v. Ont. Human Rights Comm., supra, at page 507):

(i) the trust must have one of the following four purposes:

a) relief of poverty

b) advancement of education

c) advancement of religion

d) other purposes beneficial to the community as a whole;

(ii) the purpose must be wholly and exclusively charitable; and

(iii) the trust must promote a public benefit.

Although counsel for the appellant stated that he doubted that the object was charitable, and counsel for the respondent avoided committing himself, the first two conditions are not at issue here. The only stated purpose of the trust is clearly the advancement of education, and this satisfies at least the first requirement. At issue, however, is the aspect of public benefit, which requires that the trust be available to a sufficient cross section of the community.

In Oppenheim v. Tobacco Securities Trust Co., supra, it was decided that a trust for the education of the children of employees was not a charitable trust because it did not satisfy the test of public benefit. Lord Simonds stated at page 306:

These words “section of the community” have no special sanctity, but they conveniently indicate first, that the possible (I emphasize the word "possible") beneficiaries must not be numerically negligible, and secondly, that the quality which distinguishes them from other members of the community, so that they form by themselves a section of it, must be a quality which does not depend on their relationship to a particular individual. It is for this reason that a trust for the education of members of a family or, as in In re Compton, supra, of a number of families cannot be regarded as charitable. A group of persons may be numerous but, if the nexus between them is their personal relationship to a single propositus or to several propositi, they are neither the community nor a section of the community for charitable purposes. [4]

It was decided that the trust was not a charitable trust because the common attribute of the beneficiaries was that they all had a parent who had a contract of service with the same employer. There was no public element in the relationship of parent and child. In addition, a contract of service or employment is personal and constitutes a personal relationship between the parties.

In Powell v. Compton, supra, a testatrix provided that an educational trust be set up for the children of specific individuals. The trust was not a valid charitable trust because the beneficiaries were defined by reference to a personal relationship. Lord Greene stated at pages 130-31:

It seems to me that the same principle ought to apply when the claimants, in order to establish their status, have to assert and prove, not that they themselves are A.B., C.D. and E.F., but that they stand in some specified relationship to the individuals A.B., C.D. and E.F., such as that of children or employees. In such a case, too, a purely personal element enters into and is an essential part of the qualification, which is defined by reference to something, i.e., a personal relationship to individuals or an individual which is in its essence non-public.

The fact that in cases where a personal element forms an essential part of the qualification the numbers involved may be large does not appear to me to make any difference to the principle to be applied. Once that element is present numbers can make no difference.

In In Re Hobourn Aero Components Ltd.'s Air Raid Distress Fund, [1946] 1 All E.R. 501, a fund was collected by employees of a company to provide benefits for employees in dire distress as a result of enemy action. It was held that the funds were not held on charitable trust because it was a private trust. It existed to benefit subscribers only and its paramount purpose was self-help.

In Dingle v. Turner, supra, Lord Cross of Chelsea stated at page 625:

To establish a trust for the education of the children of employees in a company in which you are interested is no doubt a meritorious act; but however numerous the employees may be the purpose which you are seeking to achieve is not a public purpose. It is a company purpose and there is no reason why your fellow taxpayers should contribute to a scheme which by providing “fringe benefits” for your employees will benefit the company by making their conditions of employment more attractive.

Canadian cases have dealt with this issue in much the same way. In Baker v. National Trust Co. et al., supra, a specific bequest” "for charitable purposes" to employees of a particular company did not satisfy the test of public benefit. The Oppenheim, Compton and Hobourn cases were cited by the Supreme Court of Canada with approval.

In each of these cases the relationship was with a particular employer. In this case, membership in the union is the only qualification for the training program. The relationship between the members and the union is not dissimilar, at least in the context of the question that I am considering, to that of employee and employer. It is a personal relationship and therefore does not Satisfy the test of public benefit. Accordingly, the fund fails as well as a charitable trust. [5]

I have concluded that the trust survives solely by reason of section 16 of the Perpetuities Act of Ontario.

The provision reads as follows:

16. (1) A trust for a specific non-charitable purpose that creates no enforceable equitable interest in a specific person shall be construed as a power to appoint the income or the capital, as the case may be, and, unless the trust is created for an illegal purpose or a purpose contrary to public policy, the trust is valid so long as and to the extent that it is exercised either by the original trustee or his successor, within a period of twenty-one years, notwithstanding that the limitation creating the trust manifested an intention, either expressly or by implication, that the trust should or might continue for a period in excess of that period, but, in the case of such a trust that is expressed to be of perpetual duration, the court may declare the limitation to be void if the court is of the opinion that by doing so the result would more closely approximate the intention of the creator of the trust than the period of validity provided by this section.

(2) To the extent that the income or capital of a trust for a specific non-charitable purpose is not fully expended within a period of twenty-one years, or within any annual or other recurring period within which the limitation creating the trust provided for the expenditure of all or a specified portion of the income or the capital, the person or persons, or his or their successors, who would have been entitled to the property comprised in the trust if the trust had been invalid from the time of its creation, are entitled to such unexpended income or capital.

The obvious purpose of this provision is to preserve otherwise invalid trusts of the type with which we are concerned here. While one might question the necessity of both construing the otherwise invalid trust as a power to appoint income and capital and of also providing that the trust is valid there can be no question of the effectiveness in preventing the failure of obviously meritorious purpose trusts such as the fund involved in this case. In Wood and Whitebread v. The Queen in right of Alberta, Public Trustee of Alberta, The Theosophical Society et al., supra, a bequest was made to "the Edmonton Lodge of the Theosophical Society of Canada, a non-profit organization formed for religious, literary and educational purposes". Stevenson, L.J.S.C., (as he then was) decided that this bequest was a purpose trust. Turning to The Perpetuities Act, 1972, S.A. c. 121, he stated that it prevents the trust from being void for uncertainty or for any other cause by construing it as a power. In his view, this legislation remedied the perpetuities problem as well as the beneficiary problem. He stated at page 281 :

The Perpetuities Act does not, in my view, remedy only the perpetuities problem. It could have done this by simply adopting the "wait and see" principle or by imposing an arbitrary perpetuity. It does not do this but instead converts the disposition into a power. It is also clear to me that the absence of a beneficiary to enforce the power is of no significance because those who take if the power is not exercised (here next of kin) are available to ensure execution. Nor does the law recognize the objection of delegation in relation to powers of appointment or discretionary trusts.

Stevenson, L.J.S.C., then went on to determine whether the bequest was certain, for the Perpetuities Act of Alberta clearly referred to "a trust for a specific non-charitable purpose”. He decided that the disposition lacked the necessary specificity because of the practical impossibility in interpreting" religious, literary and educational” in relation to the various objects of the society. The bequest was, however, upheld through the use of the Wills Act and was construed as a trust for a charitable object, namely, the advancement of education. I am not faced with the same problem in this case. The non- charitable purpose of this trust is quite specific and I have therefore concluded the validity of the fund as a trust is preserved solely by section 16 of the Perpetuities Act of Ontario.

Having determined that the trust's validity is preserved by section 16 of the Perpetuities Act, I turn now to a consideration of the entitlement to an exemption. I can dispose readily of the argument that the fund is a labour organization. Paragraph 149(1)(k) provides an exemption for “a labour organization or society or a benevolent or fraternal benefit society or order".

It is clearly not a labour organization. Counsel for the respondent referred to a number of provincial statutes in which that expression is defined. These statutes are not in pari materia and are of no assistance. The expression “labour organization” has not been judicially defined in any Canadian court, but in Stone v. Textile Examiners & Shrinkers Employers’ Ass'n, 137 App. Div. 655 at page 658, 122 N.Y.S. 460 at page 462, Dowling, J. said:

The ordinary definition of trade union or labor organization is thus stated: “A combination of workmen of the same trade or of several allied trades, for the purpose of securing by united action the most favorable conditions as regards wages, hours of labor, etc., for its members." 28 Am. & Eng. Ency of Law [2nd Ed.] 440. “An association of workmen usually, but not necessarily, employed in the same trade, for the purpose of combined action in securing the most favorable wages and condition of labor.” 24 Cyc. 816.

I agree with this observation. It is not, however, necessary to formulate an exhaustive definition to determine what the fund is not. It would be straining the ordinary meaning of the term to suggest that a fund controlled equally by representatives of labour and management and substantially funded by contributions from the members of an employers' organization was a" labour organization".

The remaining question is whether the appellant has brought itself within paragraph 149(1)(l). The general rule is that a person claiming exemption must bring itself squarely within the plain words exempting provision. [6] Counsel for the respondent in argument put in issue each constituent element of paragraph 149(1 )(l).

Paragraph 149(1 )(l) had its origins in paragraph 4(h) of the Income War Tax Act, R.S.C. 1927 c. 97 which exempted from tax:

(h) The income of clubs, societies and associations organized and operated solely for social welfare, civic improvement, pleasure, recreation or other non-profitable purposes, no part of the income of which inures to the benefit of any stockholder or member.

The provision was re-enacted in a somewhat modified form as paragraph 57(1)(g) of the 1948 Income Tax Act, S.C. 1947-48, c. 52:

(g) a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof.

Paragraph 149(1)(l) was enacted as paragraph 62(1 )(i) by S.C. 1970-71-72 c. 63 and re-enacted in its present form by S.C. 1974-75-76 c. 26 to add the further condition that such a club, society or association, in the opinion of the Minister, not be a charity within the meaning of subsection 149.1(1).

Paragraph 149(1)(l) now reads as follows:

No tax is payable under this Part upon the taxable income of a person for a period when that person was

(I) a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organ- ized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association the primary purpose and function of which was the promotion of amateur athletics in Canada.

Although in the English version the words "organized and operated exclusively for" have always been used, in the French version the words "organisé et fonctionnant pour des fins" were replaced in the enactment of S.C. 1970-71-72,

c. 63 by the words “dont l’unique objet est d'assurer". I shall revert to this difference when I consider the application of this portion of the paragraph to the appellant.

I shall, therefore, as counsel for the respondent invited me to do, examine each constituent element of paragraph 149(1 )(l).

A. À club, society or association—un cercle, une société ou une association.

Clearly the appellant is neither a club nor a society. Is it an association? Counsel for the appellant stated that in his discussions with the officials of the Department of National Revenue it had never been suggested that it was not a club, society or association. I informed him that I would treat it as common ground that the fund was a club, society or association unless I heard to the contrary from counsel for the respondent. Counsel for the respondent made no admission and specifically put the point in issue in his argument. In order to deal adequately with the respondent's response to this point it is necessary that I set out a further aspect of Mr. Drache's argument. His position was that no portion of the income of the fund was "payable to or available for the personal benefit of any proprietor, member of shareholder thereof" because, as a trust, the fund had no proprietors, members or shareholders. Rather, it had a settlor, trustees and beneficiaries. Presumably his position was that the beneficiaries were the indeterminate and shifting group ofmembers of the trade union who were or might be chosen to participate in the training program.

Mr. Gibson's rather ingenious rejoinder to Mr. Drache's argument was that the appellant was not a “club, society or association” within the meaning of paragraph 149(1)(l) because the only type of “club, society or association" contemplated by that paragraph was the type that had members, proprietors or shareholders. It followed, therefore, in Mr. Gibson's submission, that Mr. Drache, by his own argument that the fund had no proprietors, members or shareholders, had effectively destroyed his client's qualification as a club, society or association of the type contemplated by paragraph 149(1)(I).

I cannot accept the arguments of either party on this point, notwithstanding their ingenuity. Mr. Drache's position is based upon the erroneous premise that the fund is a conventional inter vivos trust with ascertainable beneficiaries. It is not. Its survival as a purpose trust depends solely upon section 16 of the Perpetuities Act of Ontario. Since I cannot accept his premise, I cannot accept the conclusion to which he proceeds or the corollary which Mr. Gibson bases upon that flawed conclusion.

The fund is a trust for a specific non-charitable purpose formed by agreement between two entities—L.I.U.N.A. and the O.C.A. It is an association consisting of those two entities. The term "association" is a somewhat vague one of some breadth and elasticity. It implies a relationship between two or more persons for a common purpose. I doubt that I can improve on the definitions in two standard dictionaries:

Oxford English Dictionary 2nd Edition:

A body of persons who have combined to execute a common purpose or advance a common cause; the whole organization which they form to effect their purpose; a society: e.g. the British Association for the Advancement of Science, the National Football Association, the Church Association, the Civil Service Supply Association.

Robert, Dictionnaire Alphabétique et Analogique de la Langue Française:

Groupement de personnes qui s'unissent en vue d’un but déterminé.

Counsel did not in argument suggest whom they considered to be the members of the association, although I should have thought it essential to the existence of an association that there be persons who are associated with one another. Mr. Drache, in his attempt to meet the condition that no part of the income of the fund be payable to or otherwise available for the personalbenefit of any proprietor, member or shareholder of the fund, argued that no person to whom those words could apply existed. Acceptance of this proposition would have been fatal to the appellants case. An association cannot exist without members. Nor can I accept that the members of the association are the members of the trade union who might benefit from the training program. They have no rights as against the fund and are in no sense bound together with respect to the fund in any manner that would make them members of a distinct or separate association.

Counsel for both parties took the position that the fund was an ordinary inter vivos trust the beneficiaries of which were the members of the union. For the reasons that I set out at length above, I cannot accept the proposition. Indeed had I done so I would have had to dismiss the appeal. If a conventional inter vivos trust can be an “association” within the meaning of paragraph 149(1 )(l) it would follow from counsel's argument that the beneficiaries of that trust would be the members of that association. The use of the fund’s income in the training program would obviously be for the members' benefit and would disqualify the fund. I doubt that as a general rule a conventional inter vivos trust having specific beneficiaries would be within the contemplation of paragraph 149(a)(1) [7] . Both counsel stated in argument that it made no difference to their position whether the fund was held to be a conventional inter vivos trust or one whose validity depended on section 16 of the Perpetuities Act of Ontario. It would, on the contrary, have made a substantial difference. A purpose trust, the validity of which depends upon section 16 of the Perpetuities Act of Ontario, can—and in this case does—form the legal basis for an association of the type described in paragraph 149(1)(l). If it were an inter vivos trust with ascertained beneficiaries having enforceable rights against the trust and the trustees with respect to the disposition of income and capital of the trust it would not have met condition D set out below.

On this aspect of the case, I have concluded that the fund is a purpose trust that is an association within the meaning of paragraph 149(1)(l). Section 149 grants exemption from tax to persons who would otherwise be taxable. Prima facie, the only persons susceptible of being taxed are corporations, individuals and trusts (which are deemed be individuals for the purposes of the Income Tax Act under subsection 104(2)). Since a natural person cannot be an association and since paragraph 149(1)(l) is obviously not restricted to incorporated associations, clubs or societies, it must necessarily encompass associations of persons whose legal relationship is of the type created here. If I! had concluded that the fund was not a valid trust I would have to consider whether an unincorporated association that was neither a trust nor a corporation was a "person" within the meaning of paragraph 149(1)(l). [8]

B. ... that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149. 1(1)...

In attempting to determine whether the fund was a valid trust, one of the questions that I put to counsel was whether its validity could be supported on the basis that it was a charitable trust. To this question I was given a variety of interesting responses. Mr. Drache stated that it was not relevant what the Court thought because only the Minister could make that determination. Mr. Gibson, with whom both counsel for the appellant agreed, stated that only the Federal Court of Appeal could make this determination because it was a court of first instance in such matters. At another point in his argument, Mr. Drache stated that he did not need to determine what the Minister's opinion was as he, as counsel, should be able to decide whether the fund was a charity.

In light of the contradictory and confused positions taken by counsel on this point it is necessary to set out the respective areas of authority.

1. Where the question is one of standing before the Court, that is to say, the existence of the appellant as a valid trust, and that validity depends upon its being a charitable trust, it is clearly a matter for the court hearing the case to determine. Equally, if its entitlement to an exemption depends upon its being a charity, the Court hearing the case must make that determination.

2. Where there is an appeal from a refusal to register a charity under section 149.1 the appropriate tribunal is the Federal Court of Appeal under subsection 172(3).

3. Where a person seeks exemption under paragraph 149(1 )(l) one of the conditions to its entitlement is that, in the opinion of the Minister, it not be a charity within the meaning of subsection 149.1(1), that is to say, a charitable organization or charitable foundation as defined in that subsection, the opinion is one that the Minister must form.

4. The power to grant a declaratory judgment respecting the validity of the trust rests with a superior court of the province to whose law the trust is subject.

The question whether the fund was a charity arises again in the context of paragraph 149(1)(l).

No evidence was adduced by the appellant to establish that the fund was not, in the opinion of the Minister, a charity within the meaning of subsection 149.1(1).

Counsel for the respondent's position was somewhat ambiguous. He said:

The Minister has assumed that it was not the whole thing, so what we have to do is go through each and every part. And the first hurdle the taxpayer has to overcome is to establish that it is a club, society or association that in the opinion of the Minister was not a charity. Now, I'd started to say before we don’t really know what the Minister thinks about it being a charity or not because as far as I'm aware they've never asked to be registered as a charity; and until you asked to be registered as a Charity, then the Minister just doesn't really address what's going on here.

I suppose an argument could be made that this is education and if this is education, then it's charitable.

I raised with Mr. Drache the question of ascertaining the Minister's opinion by applying to him for registration as a charity. The Minister's refusal would have satisfied this condition in paragraph 149(1)(l). Mr. Drache replied:

I do not follow that practice, Your Honour. I consider that to be a waste of time. I am being paid to make a determination of whether we should or should not do— I am not talking about in the context of this case but in the context of a charity. If I know that it is not going to be registered as a charity it is not my practice to spend time and effort in order to get a negative result.

The result of this is that we have no evidence of the Minister’s opinion and no admission. Mr. Gibson's position that “what we have to do is go through each and every part" indicates that he intended to put the matter in issue. It is trite law that the onus of proof is upon the taxpayer who challenges an assessment and that it is for the taxpayer who seeks an exemption to satisfy every constituent element of the statutory provision granting the exemption. I should have thought that it would have been a simple matter to ascertain the Minister's opinion by asking the question on discovery. This evidently was not done and in the absence of any evidence I would have had to conclude that the appellant had failed to satisfy the onus of proof on this point. I think, however, that if it were the Minister's position that this aspect of the appellant's qualification as an exemption was lacking, that is to say the Minister's opinion was that it was not a charity, the Minister would have the obligation of specifically pleading that point and the onus of putting his opinion before the Court. The Minister's opinion, whether that opinion be right or wrong, is, like any other state of mind, a matter of fact. It is a fact that is peculiarly within the Minister's knowledge and it would be unfair to impose on an appellant the onus of establishing a fact relating to the Minister's state of mind when it could easily be established by the Minister.

In Anderson Logging Co. v. The King, [1925] S.C.R. 45, [1917-27] C.T.C. 198, 52 D.T.C. 1209, affirmed [1926] A.C. 140, [1917-27] C.T.C. 260, 52 D.T.C. 1215 (P.C.), the question of onus was discussed by the Supreme Court of Canada. Duff, J., as he then was, stated at page 1211 D.T.C.:

First, as to the contention on the point of onus. If, on an appeal to the judge of the Court of Revision, it appears that, on the true facts, the application of the pertinent enactment is doubtful, it would, on principle, seem that the Crown must fail. That seems to be necessarily involved in the principle according to which statutes imposing a burden upon the subject have, by inveterate practice, been interpreted and administered. But, as concerns the inquiry into the facts, the appellant is in the same position as any other appellant. He must show that the impeached assessment is an assessment which ought not to have been made; that is to say, he must establish facts upon which it can be affirmatively asserted that the assessment was not authorized by the taxing statutes, or which bring the matter into such a state of doubt that, on the principles alluded to, the liability of the appellant must be negatived. The true facts may be established, of course, by direct evidence or by. probable inference. The appellant may adduce facts constituting a prima facie case which remains unanswered; but in considering whether this has been done it is important not to forget, if it be so, that the facts are, in a special degree if not exclusively, within the appellant's cognizance; although this last is a consideration which, for obvious reasons, must not be pressed too far.

[Emphasis added.]

If one of the conditions to the application or non-application of a provision of the Income Tax Act is the Minister's opinion the Minister has an obligation to form an opinion and to communicate it to the party affected. He cannot use his failure to form an opinion as a basis for denying the taxpayer's claim. The Minister has failed to fulfil that obligation and accordingly I find that the appellant had no onus to establish the Minister's opinion.

There is of course an additional reason for not dismissing the appeal by reason of this appellant's failure to adduce evidence of the Minister's opinion. In the absence of any evidence of the Minister’s opinion it must be presumed that had he formed an opinion he would have done so on a correct legal basis. If he was properly instructed as to the law he would have concluded that the appellant was not a charity.

C. ... that was organized and operated exclusively for social welfare, Civic improvement, pleasure or recreation or for any other purpose except profit.

That the fund was organized for a purpose other than profit is incontrovertible. Its sole purpose as stated in the trust agreement is the training of members of the union. Paragraph 149(1)(l) requires however that it also be operated exclusively for the various purposes specified. Since the test is conjunctive, [9] an organization's qualification for an exemption is open to continuous re-examination. The Minister's position is that the substantial cash reserves built up in the years under appeal and the income generated from those reserves that is the subject of these appeals are evidence that the fund had ceased to carry out its original non-profitable object. Mr. Rothwell, the appeals assessor, called on behalf of the respondent, referred to Interpretation Bulletin IT-496 of February 18, 1983. Specifically his basis for confirming the assessments was paragraphs 8 and 11 of that Bulletin. While interpretation bulletins are not the law they provide some indication of administrative practice which may be useful as background information. Paragraphs 8 to 11 of IT-496 are as follows:

8. An association may earn income in excess of its expenditures provided the requirements of the Act are met. The excess may result from the activity for which it was organized or from some other activity. However, if a material part of the excess is accumulated each year and the balance of accumulated excess at any time is greater than the association’s reasonable needs to carry on its non-profit activities (see 9 below), The Department will consider profit to be one of the purposes for which the association was operated. this will be particularly so where assets representing the accumulated excess are used for purposes unrelated to its objects such as the following:

(a) long-term investments to produce property income,

(b) enlarging or expanding facilities used for normal commercial operations, or

(c) loans to members, shareholders or non-exempt persons.

This may also be the case where the accumulated excess is invested in a term deposit or guaranteed investment certificate that is regularly renewed within a year and from year to year, whether or not the principal is adjusted from time to time.

9. The amount of accumulated excess considered reasonable in relation to the needs of an association to carry on its non-profit activities is dependent on such things as the amount and pattern of receipts from various sources such as on membership fees, training course fees, exam fees and so on. It is conceivable that there would be situations where an accumulation equal to one year's reasonably anticipated expenditures on its non-profit activities may not be considered excessive while in another situation an accumulation equal to two months’ reasonably anticipated expenditures would be considered more than adequate. For example, a year-end accumulation equal to the following year's anticipated expenditures would probably be considered reasonable where an association carries out its “annual fund drive" in the last month of its fiscal period in anticipation of its nonprofit activities planned for the following year. However, where another association raises its funds on a regular basis throughout the year, it may be difficult to justify a year-end accumulation in excess of an amount equal to its expenditures for one or two months. It is noted that where the present balance of accumulated excess is excessive or an annual excess is regularly accumulated it may indicate that the association's aims are two-fold, to earn profits and to carry out its non-profit purposes. In such a case, the "operated exclusively” test in paragraph 149(1)(l) would not be met.

10. To qualify for exemption, an association must not only be organized exclusively for non-profit purposes but it must in fact be operated in accordance with these purposes in each year for which it seeks exemption under paragraph 149(1 )(l). A determination of whether an association was operated exclusively for and in accordance with its non-profit purposes in a particular taxation year must be based on the facts of each case which can be obtained only by reviewing all of its activities for that year. Such a determination cannot be made in advance of or during a particular year but only after the end of the year. An association that qualifies for exemption in a particular year may cease to qualify in a subsequent year by failing to operate in accordance with one of the purposes specified in paragraph 149(1)(l), by revising its objectives so that it is no longer organized in accordance with that provision or by otherwise failing to meet the requirements of that paragraph. See also IT-409, “Winding-up of a Non-Profit Organization”, for the Department's interpretation, in paragraph 3, as to where an association's tax- exempt status is lost in this special situation.

11. To qualify for exemption pursuant to paragraph 149(1 )(l), no part of the income of an association, whether current or accumulated, may be made available for the personal benefit of any proprietor, member or shareholder of an association (hereinafter referred to as a member). An association may fail to comply with this requirement in a variety of ways. Some of these are as follows:

(a) the association distributed income during the year, either directly or indirectly, to or for the personal benefit of any member;

(b) the association has the power at any time in the current or future years to declare and pay dividends out of income; or

(c) the association in the case of a winding-up, dissolution or amalgamation has

the power to distribute income to a proprietor, member or shareholder.

The presence of any of the circumstances described in (a), (b) and (c) would be conclusive evidence that income was payable or available for the personal benefit of a member, subject to the comments in 12 and 13 below and in 4 of IT-409 which deals with the distribution of taxable capital gains to members. To avoid possible difficulties regarding (c), an association may in its enabling documents provide that upon a winding-up, amalgamation or dissolution all of its assets and accumulated income are to be transferred to an organization with similar objects that qualifies for exemption pursuant to paragraph 149(1)(f) or (I) of the Act.

The evidence in this case does not support the view that the fund had abandoned its original purpose of training members of the union. The funds were put in short-term investments such as treasury bills and term deposits. No particular attempt was made to maximize profits. I accept the evidence of Mr. Carrozzi, the union's representative on the board of trustees and Mr. Sulpher, the O.CA.'s nominee, as to the difficulties the fund had in carrying out its training objectives, due in part to inadequate acilities and in part to the inability to find adequate personnel to do the training.

It is true that the fund has grown substantially and significant amounts of income were earned. The following figures taken from the financial statements give some indication of the magnitude of the amounts involved.

At the end of 1985 the cash held by the fund was $624,008. In 1986, the total of cash and term deposits was $723,371 and by the end of 1987 had risen to $904 ,384.

It is not surprising that the Department of National Revenue concluded that, on these figures, the fund had departed from its original non-profit purpose of training workers and had embarked on a profit-making enterprise. The assessment is clearly based upon the Departmental practice set out in IT-496.

To put it bluntly, the problem here is that the amounts are so large. Yet the fund was operated in the same manner as it had always been. Paragraph 149(1)(l) is premised upon the assumption that such associations may earn income. Interpretation Bulletin IT-496 sets out certain practical guidelines which the Department applies in administering paragraph 149(1)(l). Essentially, the bulletin is no more than a notice to the public that if too much income is earned or if large surpluses are accumulated the Minister will draw an inference of fact that the fund is being operated for profit. while I do not wish to give the bulletin a legal effect that it clearly does not have, I can see no reason for criticizing the guidelines set out in paragraphs 8 and 9. Their application, however, depends upon the facts of the particular case. I do not think that on the facts that were established in evidence the inference draw by the Minister is justified. The fund is to some extent the victim of its own financial, if not educative, success. A number of factors contributed to this result, including

(a) high employment in the years in question, resulting in high contributions from members of the O.C.A. and decreased applications for training;

(b) high interest rates payable in the years under appeal on its investments;

and

(c) the fund's success in persuading the government of Canada to enhance the fund's already large surpluses with additional training grants.

These are not matters over which the fund had any control. It could not stop the flow of funds from the employers nor could it responsibly have failed to invest the excess cash in interest-bearing investments. Nor can it be criticized for applying for grants that the government made available. It does not follow, however, that, in order to earn a profit, it actively set out to divert funds from training that would otherwise have been done. There was no evidence that the purpose for which it was operated was to earn a profit as opposed to carrying out the objects for which the fund was set up. Indeed, given the restrictions upon the use to which the fund's moneys could be put it is difficult to conceive of any motive that the trustees would have had to earn interest other than as an incident of the fund's obligation to provide training to the members of the union.

For an organization to be operated for the purpose of earning a profit so as to disqualify it for the exemption under paragraph 149(1 )(l) it would be necessary that it do more than merely earn passive investment income. The earning of such income would need to be both an operating motivation of the fund and a focus of its activity. The evidence does not support this conclusion. [10] On the evidence the earning of the interest income was not the purpose—primary or secondary—for which the fund was operated. The earning of interest was simply an incident of the only purpose for which the fund was operated, the training of the members of the union; it was a means to an end and not an end in itself.

D. ... no part of the income of which was payable to, or was otherwise available for the personal benefit of any proprietor, member or shareholder thereof.

The final condition relates to the availability to the members of the fund's income. It was this condition that was fatal to the claim of the taxpayer in M.N.R. v. St. Catharines Training School Ltd. (1860), 2 De G.F. & J. 75, 45 E.R. 550.

No right to distribute profits exists here. The respondent relies upon paragraph 8.03(c) of the agreement which, in the years in question, authorized the trustees upon termination of the fund to distribute any remaining surplus in such manner as they saw fit. Such a distribution would be a distribution of capital except to the extent of the income earned in the year of distribution (Ansell Estate v. M.N.R., [1966] C.T.C. 785, 66 D.T.C. 5508, at page 802 (D.T.C. 5517); Abrahamson v. M.N.R., [1991] 1 C.T.C. 2061, 91 D.T.C. 213, at page 2071 (D.T.C. 220)). In my opinion this power in the trustees does not entitle the members (the union or the O.C.A.) to be paid any portion of the income in the year in which it was earned unless and until a determination is made to wind the fund up and to pay the remaining surplus, including the income earned in the year, to the members. Indeed, clause 2.05, quoted above, is inconsistent with such a right.

This conclusion is consistent with the Department of National Revenue's own administrative practice as set out in Interpretation Bulletin IT-409 which provides in paragraphs 2 and 3 as follows:

2. An organization which has qualified within paragraph 149(1)(l) loses its exempt status at the time it ceases to satisfy the provisions of that paragraph. Subsection 149(6) provides that the exempt portion of the taxable income of an organization which loses its exempt status during a taxation year shall be computed in proportion to the number of days in the taxation year that the organization qualified within paragraph 149(1)(l).

3. Paragraph 149(1)(I) provides in part that no part of the income of a non-profit organization shall be payable to or otherwise available for the personal benefit of any proprietor, member or shareholder thereof unless the proprietor, member or shareholder was a club, society or association, the primary purpose and function of which was the promotion of amateur athletics in Canada. The Department views a corporation as having lost its status as a non-profit organization at the time when a determination is made that, upon winding-up, an amount of incomeshall become payable to or otherwise available for the benefit of a proprietor, member or shareholder other than those that are excepted.

Neither counsel referred to this bulletin. The portion quoted above is a correct statement of the law and it supports the appellant's position. Where the trust document does not specifically permit the trustees to pay income to the members it is not until a determination is made on winding up to pay a portion of the income to the members that any part thereof becomes payable to or available for the personal benefit of a member. It is in the year in which that is done that the exemption is lost.

The appeals are allowed with costs and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that during the taxation years 1985, 1986 and 1987 the income of the appellant was exempt pursuant to paragraph 149(1)(I) of the Income Tax Act. I cannot agree with counsel for the appellant that an award of costs on a solicitor and client basis would be justified.

Appeal allowed.