Ann Maloney, Trustee Under the Katherine Jacomina Maloney Trust v. Minister of National Revenue, [1982] CTC 2841, 82 DTC 1823

The Chairman:—The appeal of Ann Maloney, in her capacity of trustee with respect to the trust of Katherine Jacomina Maloney, is from an assessment for the 1979 taxation year.

The issue is whether interest income from a mortgage held in the trust is taxable in the hands of the trustee or whether it is the beneficiary of the trust that is liable for tax.

Summary of Facts

The appellant Ann Maloney was represented at the hearing by her husband Victor Maloney, a lawyer. The evidence is that Victor Maloney lent money to his infant daughter Katherine on July 9, 1976 which was then used to make a loan to Paul and Susan Rioux, in the amount of $25,588.26 by way of a mortgage security on parcel 1324 Broadway Avenue, Thunder Bay, Ontario (Exhibit A-1, page 2) (Par 7(b) and (c) of the respondent’s amended reply to notice of appeal).

On July 9, 1976 the following declaration of trust was executed:

Declaration of Trust

WHEREAS arrangements have been made by ANN MALONEY, as Trustee for KATHERINE JACOMINA MALONEY, to lend by way of Lot 50 and Southerly 18’ of Lot 51, Block “K”, Plan W-196 known municipally as 1324 Broadway Avenue, Thunder Bay F, Ontario, in the amount of $25,588.26.

AND WHEREAS the said ANN MALONEY has arranged for the title to the said mortgage to be taken in her name as Trustee for the said KATHERINE JACOMINA MALONEY.

AND WHEREAS the said ANN MALONEY has arranged to borrow the said amount of $25,588.26 in her capacity as Trustee for KATHERINE JACOMINA MALONEY, and to pledge and hypothecate the said mortgage as security for the loan to the Trustee.

AND WHEREAS it is expedient that the said Trustee should declare the trusts on which she holds the said mortgage.

NOW THEREFORE the said Trustee hereby declares that she holds the said mortgage as Trustee for KATHERINE JACOMINA MALONEY until the said KATHERINE JACOMINA MALONEY attains the age of 18 years when the said mortgage shall be conveyed and assigned to the said KATHERINE JACOMINA MALONEY absolutely, or if the mortgage has in the meantime been paid out, the proceeds of the said mortgage shall be reinvested for the benefit of the said KATHERINE JACOMINA MALONEY. The said KATHERINE JACOMINA MALONEY shall not have an indefeasible vested interest in the said mortgage or in the proceeds thereof until she reaches the age of 18 years, and if the said KATHERINE JACOMINA MALONEY shall die before reaching the age of 18 years, leaving issue, the issue of such child shall have no interest in the said mortgage or the proceeds thereof. In the event of the death of the said KATHERINE JACOMINA MALONEY before reaching the age of 18 years, then the said mortgage or the proceeds thereof shall be transferred or paid to ANN MALONEY.

IN WITNESS WHEREOF the Trustee has hereunto set her hand and seal this 9th day of July A.D. 1976.

SIGNED, SEALED AND DELIVERED )

in the presence of: )

) ) )

(signed) SHELLEY ACROYD ) (signed ANN MALONEY

) ANN MALONEY, Trustee for

KATHERINE JACOMINA MALONEY

In 1979 the appellant received interest income in the amount of $4,860.20 from Paul and Susan Rioux, the mortgagors, which was not reported as income of the trust.

The appellant was required under paragraph 231 (3)(a) of the Income Tax Act, SC 1970-71-72, c 63, as amended, to file Form T-3 (Trust Information Return and Income Tax Return) which she did under protest on February 5, 1981, contending that no trust existed and that an income tax return had been filed on behalf of Katherine Maloney.

A tax return was in fact filed on behalf of Katherine Maloney for the 1979 taxation year; however, her total income, net income and taxable income were reported as nil. Mr Victor Maloney, while admitting he had erred in not reporting interest income from the mortgage in his daughter’s return, contended that it was not necessary to file his daughter’s tax return since she would not have had sufficient income to attract any tax.

Mr Victor Maloney also admitted having made a mistake in his own tax return in claiming under paragraph 109(1 )(d) of the Act the maximum exemption of $500 for Katherine Maloney as a wholly dependent child.

Findings of Act

The appellant’s position with respect to the taxability of interest income is not easily understood and appears to be contradictory. On the one hand, she claims that no trust exists, notwithstanding the executed declaration of trust filed as Exhibit A-1. On the other hand, while claiming that the income should properly be taxed in Katherine Maloney’s hands, the 1979 tax return filed on behalf of the infant (considered in Victor Maloney’s 1979 tax return to be a wholly dependent child) shows nil income.

In his notification, the Minister confirmed that he reassessed the appellant “on the ground that Katherine Jacomina Maloney, an infant or minor, did not have an indefeasible vested interest in the mortgage(s) or in the proceeds thereof held in the trust; and therefore the income from the mortgage(s) was properly taxed in the trust by virtue of subsection 122(1) of the Act”.

Tax payable by inter vivos trust.

(1) Notwithstanding section 117, the amount determined under that section to be the tax payable under this Part of an inter vivos trust other than a mutual fund trust upon its amount taxable for a taxation year is the greater of

(a) 39% of its amount taxable for the year, and

(b) the amount otherwise determined thereunder to be its tax payable under this Part upon its amount taxable for the year.

The Minister accepted that a bona fide loan was made by Mr Maloney to his daughter and the moneys reloaned to Mrs Rioux by way of a trust. The question as to whether Mr Maloney’s loan to his infant daughter was a transfer of property to a minor under subsection 75(1) of the Act was not an assumption on which the Minister’s assessment is based and is therefore not in issue in this appeal.

The issue decided by the Exchequer Court in Joseph B Dunkelman v MNR, [1959] CTC 375; 59 DTC 1242, cited by Mr Maloney, which allowed the appellant’s appeal, is distinguishable from that of the present appeal because, in that case, the issue was the transfer of property to minors and not the taxability of the trust. Whether in drafting the trust agreement, as suggested by Mr Maloney, he followed verbatim the wording of the trust agreement in Dunkelman is immaterial. The trust agreement in the instant appeal speaks for itself and clearly states: “The said KATHERINE JACOM- INA MALONEY shall not have an indefeasible vested interest in the said mortgage or in the proceeds thereof until she reaches the age of 18 years”.

Mr Maloney cited paragraph 6 of Interpretation Bulletin IT-286R which reads as follows:

6. Pursuant to subsection 104(18) income is considered to be payable for purposes of subsections 104(6) and (13) where

(a) the income is held in trust for an infant or minor whose right thereto has vested, and

(b) the only reason that it was not payable was because the beneficiary was an infant or minor.

The right referred to in (a) does not have to vest indefeasibly. The requirements in

(b) will be complied with where the terms of the trust provide that the amount be withheld solely because the beneficiary is an infant or minor. However, where the terms of the trust agreement provide that the payment may be withheld for any reason other than that described in (b) above, subsection 104(18) does not apply. This would be the case where the trustee chooses not to exercise the discretion given to him, eg because the beneficiary is not in need of funds or the guardian of the beneficiary does not need the amount for any of the purposes for which it could be paid.

Subsection 104(18) of the Act reads as follows:

(18) Trust for Infant. Where the income of a trust for a taxation year or any part thereof was not payable in the year but was held in trust for an infant or minor whose right thereto had vested and the only reason that it was not payable in the year was that the beneficiary was an infant or minor, it shall, for the purpose of subsections (6) and (13), be considered to have been payable.

Subsection 104(18) of the Act is not applicable to the facts of the present appeal and the Interpretation Bulletin is of no help to the appellant.

The reason the mortgage interest is not payable to Katherine Jacomina Maloney is not only because she was an infant but because she had no vested right in the mortgage. Under the trust agreement, the mortgage and the proceeds therefrom were clearly vested in the trust and the Minister did not err in taxing the interest on the mortgage in the hands of the trust under subsection 122(1) of the Act.

For these reasons, the decision will go dismissing the appeal.

Appeal dismissed.