Paul Heller v. Minister of National Revenue, [1988] 1 CTC 2135, 88 DTC 1076

Bonner, T.C.J.:—The appellant appeals from assessments of income tax for the 1982 and 1983 taxation years.

The relevant facts are not in dispute. In 1956 the appellant, by deed in writing, created a trust and settled the sum of $50 upon three trustees, namely, Samuel Heller, Edwina Heller and Denham John Kelsey. The trust property was then used to purchase 50 shares of Paul Heller Limited. No other funds were given or advanced to the trustees at any subsequent time. In 1982 and 1983 the trustees paid dividends to Edwina Heller, the appellant's spouse. In making the assessments in dispute the respondent proceeded on the basis that subsection 74(1) of the Income Tax Act required that the dividends be deemed to be the income of the appellant.

Subsection 74(1), in the form applicable to the taxation years in question, read:

74(1) Where a person has, on or after August 1, 1917, transferred property either directly or indirectly by means of a trust or by any other means whatever to his spouse, or to a person who has since become his spouse, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada and the transferee is his spouse, be deemed to be income or a loss, as the case may be, of the transferor and not of the transferee.

Paragraph 21 of the trust deed authorized payment to the appellant's spouse in the following terms:

21. The Trustees may pay all or any part of the income of the Trust Property to or for the benefit of the wife and/or the Beneficiary during their several lives at such times in such manner and in such amounts in such equal or unequal proportions with power to make payment to or for the benefit of one and not of the other and with power to change both the payee and the proportions from time to time as the Trustees in their absolute discretion deem advisable. In the same manner in the absolute discretion of the Trustees they may pay all or any part of the income of the Trust Property to any other person or persons who might under the provisions of this Indenture become beneficially entitled to the Trust Property or any part thereof and the Trustees may accumulate and capitalize any part of the income of the Trust Property for any period not being longer than twenty-one years from the date of the execution of this Indenture.

It was the position of the appellant that he did not transfer property to his spouse within the meaning of section 74 because, during the period between the settlement of the $50 and the time of the exercise by the trustees of their discretion to pay part of the income from the trust property to his spouse, he had no interest in any of the trust property. He had not, he said, transferred property to his spouse. Rather, property had been transferred to the trustees. The income from the trust property reached his spouse only as a result of the exercise by the trustees of what he described as an absolute discretionary power.

The appellant argued that the position is analogous to that considered in Huston et al. v. M.N.R., [1961] C.T.C. 414; 61 D.T.C. 1233. Here, he asserted, as in the Huston case, there did not exist prior to the decision to make the payment which has been included in income any property or legal or equitable right of any kind forming the source of the payment. In his argument the appellant relied as well on the decision of the House of Lords in Gartside and Another v. C.I.R., [1968] A.C. 553; [1968] 1 All E.R. 121.

It is impossible to give effect to the appellant's argument in light of the decision of the Federal Court — Trial Division in George A. Murphy v. The Queen, [1980] C.T.C. 386; 80 D.T.C. 6314. In that case a trust was created by the will of the taxpayer's father. In its original form the trust provided for payment of an annuity to the taxpayer's mother and for division of the balance of the revenue of the trust among the taxpayer and his two sisters. Some years after the death of the father a family agreement was made. It became the foundation for a court order under The Variation of Trusts Act varying the trusts laid down by the father's will. The taxpayer was, of course, a party to that agreement. The taxpayer's mother and one sister died. After the death of the mother and of the sister the taxpayer and his surviving sister would each have been entitled to a one-half share of the income had the variation not been made. However, the trust as varied called for payment of the income to six beneficiaries as the trustees in their absolute discretion might determine. One of the six beneficiaries was the taxpayer's wife. During the taxation years in question the trustees directed that a share of the income be paid to her. The taxpayer was assessed to income tax on the basis that the payments made to his wife formed part of his income. He contended that there had been no transfer by him of property which vested in his spouse. The appeals were unsuccessful.

At page 395 (D.T.C. 6322) Cattanach, J. noted that all that is called for by the opening words of subsection 74(1) is:

. . . a transferor and a transfer of property by him by any means to his wife. It is not necessary, in order to fall within this wording, that all of the rights to property transferred became immediately or even eventually the property of the spouse.

[Emphasis added.]

Here, as in Murphy, the appellant provided the framework whereby his wife became eligible to be chosen to receive income from a trust of property. The rights to the appellant's spouse as a member of the eligible class fell within the subsection 248(1) definition of "property" which reads in part as follows:

248(1) In this Act, . . .

"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action, . . .

In short, the rule is that where a person has transferred property to a trust, subsection 74(1) will apply if and to the extent that that person's spouse receives income from the property (or property substituted therefor) as a result of the exercise by the trustees of a discretion to pay income to such person.

The decisions relied on by the appellant do not assist him. The Huston decision has no bearing at all on the question now before this Court. In the Gartside case the House of Lords had to consider whether a beneficiary under a discretionary trust had an interest in possession within the meaning of The Finance Act. At pages 617-18 (All E.R. 134) Lord Wilberforce said:

No doubt in a certain sense a beneficiary under a discretionary trust has an "interest": the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion “fairly” or "reasonably" or "properly" that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustees and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund's income: it may be a right, with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed.

Nothing said by Lord Wilberforce supports a conclusion that the appellant did not transfer property indirectly by means of a trust to his spouse within the meaning of subsection 74(1). In Gartside the House of Lords was dealing with the word "interest", a word which, as was emphasized in the paragraph immediately prior to the passage just quoted, derives much of its meaning from its statutory setting.

For the foregoing reasons the appeals will be dismissed.

Appeals dismissed.