Jeremy Cole Trust, Seth Leonard Cole Trust v. Minister of National Revenue, [1980] CTC 3027, 81 DTC 8

D E Taylor:—These are appeals heard on common evidence in Toronto, Ontario, on September 22, 1980 against income tax assessments in which the Minister of National Revenue treated certain amounts as income of the appellants rather than as income of the beneficiaries. On all essential points the appeals are identical and for simplicity, the singular term “appellant” or “beneficiary” will be used and references will be made only from the information filed re “Jeremy Cole Trust”.

The appellant is a trust established pursuant to an Indenture made the 26th day of November 1971 between Carl Cole as Settlor and Pearl Cole, Bruce Cole and Sharon Cole as Trustees. Pursuant to the trust indenture, until the beneficiary, Jeremy Cole, attains the age of 21 years, the trustees are to accumulate the income of the trust, provided that they may pay part of the income or capital to or for the beneficiary at such times and in such manner as they in their absolute discretion consider advisable for the maintenance, support, education, advancement or benefit of the beneficiary. Until the end of 1971, the trustees accumulated the net income derived from the assets of the trust fund.

The trustees were the parents of the infant beneficiary and the amount of the income for the trust for 1972, 1973 and 1974 was not determined with finality until after the end of those years. The income in question was paid out on March 25, 1976. The relevant income for the said years was reported as taxable in the hands of the beneficiary. The Minister of National Revenue reassessed so that the income was that of the trust and imposed a late filing penalty for the year 1972. The amounts of income at issue were:

In assessing, the respondent relied, inter alia, upon subsections 104(6), 104(13), 104(18) and 104(24) of the Income Tax Act, SC 1970-71-72, 63, as amended.

Contentions

For the appellant:

—The trustees held discussions with their accounting advisors with respect to the income tax treatment of the continued accumulation of income in the trust fund as opposed to the application of such income to or for the benefit of the beneficiary.

—The trustees made an affirmative and unanimous decision to treat all of the income of the trust in that particular year as the income of Jeremy Cole and not to accumulate it within the trust. It was determined by the trustees to make the income payable for the benefit of the beneficiary, and this obligation would be recognized as and when required by the parents of the infant beneficiary.

— Promissory notes were not prepared, but T-3’s were issued on behalf of the trustees indicating that all of the income of the trust was payable to the beneficiary. Formal written notice of the creation of the obligation was not put in writing.

—The income made payable by the trustees to or for the beneficiary was in fact in future years actually paid to or for his benefit.

—All of the income of the trust for each relevant taxation year was payable in the year to the beneficiary and, accordingly, was deductible in computing the income of such trust for the taxation year in accordance with subsection 104(6) of the Income Tax Act.

—The Minister of National Revenue accordingly erred in not allowing the deduction of this amount in computing the income of the trust.

For the respondent:

—The amounts were income of the appellant by virtue of the trust indenture.

—The right of the appellant’s beneficiary to any part of the income had not vested and no part of the said income was payable to the said beneficiary in those years.

—The beneficiary was not entitled to enforce payment of any amount of the trust’s income in the taxation years.

Evidence

The following statutory declaration was filed as Exhibit A-1:

WE, PEARL COLE, BRUCE COLE and SHARON COLE, all of the City of Toronto, in the Municipality of Metropolitan Toronto, DO SOLEMNLY DECLARE THAT:

1. We are the Trustees of the SETH LEONARD COLE TRUST pursuant to an Indenture made the 15th day of December, 1969 between Carl Cole as Settlor and Pearl Cole, Bruce Cole and Sharon Cole as Trustees.

2. Section 3.1 of the Trust provides that until the beneficiary, SETH LEONARD COLE, attains 21 years of age the Trustees are to accumulate the income provided that they may pay in part of the income or capital to or for the beneficiary at such times and in such manner as the Trustees in their absolute discretion consider advisable for the maintenance, support, education, advancement or benefit of the beneficiary.

3. Up until the end of 1971 the Trustees accumulated the net income derived from the trust fund.

4. In 1972 we had discussions with our auditors, MESSRS. PERLMUTTER, OREN- STEIN, GIDDENS, NEWMAN & CO, with respect to the income tax treatment of continued accumulation of income in the trust fund as opposed to making the income available for and payable to or for the benefit of SETH COLE. Similar discussions were held from time to time with our accounting and legal advisors in years subsequent to 1972.

5. At that time, towards the end of 1972, the Trustees made an affirmative and unanimous decision to treat all of the income of the trust in that particular year as the income of SETH COLE and not to accumulate it within the trust. It was determined to make the income payable for the benefit of the beneficiary and this obligation would be recognized as and when required by the parents of the infant beneficiary. The amount of the income for the trust for 1972 was not determined until after the end of the year but the decision to have all of the income vest in the infant or made prior to the end of 1972. Similarly, at the end of 1973 and shortly before the end of 1974 the Trustees made the same affirmative decision to have all of the income of the trust generated in that year payable for the benefit of SETH COLE, consistent with their decision of the previous year. Again, in each instance the ramifications of these decisions were discussed with the auditors.

6. Promissory notes were not prepared but T-3’s were issued on behalf of the Trustees indicating that all of the income of the trust was payable to the beneficiary. No formal written notice of the creation of the obligation was put in writing because of the fact that the parents of the beneficiary, namely BRUCE COLE and SHARON COLE, were two of the three Trustees who had made the decision in each instance to make the income payable to the beneficiary and accordingly they were informed in their capacity as parents of SETH COLE of the fact that they had an enforceable right to payment of the income for the trust.

/. The balance sheet of the trust prepared for 1972, 1973 and 1974 was not prepared by our auditors but rather by a bookkeeper whom we employed. The amounts payable to the beneficiary were improperly reflected in the balance sheet as retained earnings rather than as a liability. The bookkeeper inadvertently adopted the same presentation that had been used in 1971 and in prior years even though the facts and terms of the income had changed for 1972. This is purely a mechanical bookkeeping error and has been corrected in the current financial statements.

7. All of the income made payable by the Trustees to SETH LEONARD COLE has in fact been paid to or for his benefit.

AND we make this solemn declaration conscientiously believing it to be true and knowing it is of the same force and effect as if made under oath and by virtue of the Canada Evidence Act.

SEVERALLY DECLARED before	)
me at the City of Toronto,	)
in the Municipality of	)	Pearl Cole
Metropolitan Toronto this	)
12th day of April, 1976	I
	)	Bruce Cole
	)
	)
	)	Sharon Cole

The trust indenture was also filed as Exhibit A-2 and certain critical paragraphs are quoted:

3.1 Until the beneficiary attains 21 years of age, the trustees shall accumulate the net income derived from the Trust Fund provided, however, that the Trustees may, from time to time, pay such part or parts of the net income derived from the trust fund or such part or parts of the capital thereof to or for the beneficiary at such time or times and in such manner as the trustees in their absolute discretion may from time to time consider advisable for the maintenance, support, education, advancement or benefit of the beneficiary.

3.5 If any person shall become entitled to an interest in the trust fund before attaining the age of twenty-one years, the share of such person may be held and kept invested by the trustees and the income or capital, or so much thereof as the trustees in the trustees’ absolute discretion considers necessary or advisable, may be used for the care, support and general benefit and education of such person until he or she attains the age of twenty-one years.

3.6 The trustees may make any payments to or for any beneficiary under the age of twenty-one years or otherwise under disability to the parent or guardian in fact or in law of such person, and the receipt of such parent or guardian shall be a sufficient discharge to the trustees.

Argument

Counsel for the appellant put forward that there were three bases upon which the Board could find in favour of the appellant:

(1) ... if the actions of the trustees in making, in exercising their discretion, making the allocation, filing the T-3’s, if that constitutes payment, then the appellant should succeed.

(2) In the alternative, an amount being payable is if the recipient is entitled to enforce payment. Now in this case, the case before the Board today, how could the infant beneficiary ever enforce payment? The reality of it is that while they are infants, they would be acting through their guardians, their parents, Bruce Cole and Sharon Cole or either of them. Either parent is entitled to act independently to recover monies on behalf of the infant beneficiary.

Now, it would’ve been cleaner had there been a promissory note perhaps issued, but I believe that is window dressing particularly in a family situation such as this with the parents and the trustees having identity with the lack of formality that was perhaps the manner of administering family trusts. The rights still flow . . . through the ability of his parents to enforce those rights as a result of the decision that had been made . . .

. . . I have referred to two cases Re Vestey’s Settlement [1970] 2 All ER 891 and Harold J Sachs v Her Majesty The Queen, 80 DTC 6291. Both are authorities for that proposition as well that the exercise of the discretion by the trustees results in aright on the beneficiaries which they are capable of enforcing. They may have procedural difficulties, but it is clearly a right which they are capable of enforcing.

(3) Subsection 104(18) provides that even if the income is not otherwise payable within subsection 104(24) in the criteria that I previously described to you, but was held in trust for an infant whose right thereto had vested and the only reason it was not payable is because the beneficiary was an infant or a minor, it shall, for the purposes of subsections (6) and (13), be considered to be payable. I suggest as I have that the actions of the trustees result in the income vesting in the beneficiary, but even apart from that, I believe that even without that discretion, at law, a proper analysis of the law, the beneficiary’s right in this trust is vested from inception.

Counsel summarized:

.. . this income is properly taxable in the hands of the beneficiary as opposed to the Trust .. . either because the actions of the trustees constitute payment; or because they gave the beneficiary an enforceable right to the amount payable; or in the alternative, on the basis that even without an exercise of discretion, this is a vested amount held for an infant beneficiary.

Further to Vestey (supra) and Sachs (supra), this additional case law was noted by counsel for the appellant:

Fie Banbury [1950] 2 All E R 250; James B McLeod v The Minister of Customs and Excise, [1926] CTC 290; Re Penton’s Settlements, [1968] 1 All ER 36; Re Barton, White et al v Barton, [1941] 3 DLR 653; Phipps v Ackers and Others, [1558-1774] All ER 381; Hashman Trustees v MNR, [1972] CTC 2227; 72 DTC 1191.

Counsel for the respondent:

. .. the question merely becomes whether any amount was paid to the beneficiary in the year 1972 and ’73 and ’74 and (2), whether any amount was payable in respect of which he was entitled and would enforce payment and (3), whether the three conditions of 104(18) are satisfied.

Vestey (supra) . . . gave the power to the trustee to pay or apply the income and it said such payment or application to be made in such shares in such manner and on such terms as the trustees in their discretion should think fair. In that case, there was an allocation and as I read the facts briefly from this case, that the allocation was actually done. In the present case, the evidence shows that there was no allocation done as such. It was merely, if at all, a declaration, but the funds remained mingled.

. . . how could the beneficiary in this appeal, how could the beneficiary enforce the payment. The beneficiary’s right was dependent upon the discretion of the trustees and the trustees could change the discretion because the discretion was to pay, because something else might come to light and a trustee is not acting in the capacity where he makes one decision and then that decision sticks forever. A trustee does not become functus after having expressed his intention. The trustee can change his mind right up to the time the amount is paid. I found no authority which would say that once the trustee has expressed an intention as to how he is going to exercise the discretion, that there is any way that the beneficiary could enforce that declaration. The discretion given to the trustee is to make a payment and until that is done, he could change his mind even if he had decided it, to make the payment to the beneficiary at sometime in the future.

The three conditions (in subsection 104(18)) are that it was held in trust for the infant or minor; and even assuming it was held, the right thereto to divest it; and then the only reason that it was not paid in the year was that the beneficiary was an infant or minor. Now, that has never been shown before you that the only reason for not paying was that the beneficiary was a minor. In fact, the beneficiaries were paid after a few years in ’76, so this condition in any event is not satisfactory.

In summary, counsel commented:

. . . it is not relevant what the trustees as parents of the children would have done, whether there would’ve been a question of enforcement or not. This is a legal question. We have to assume the legal position on the basis that the right that was given to the beneficiaries was enforceable and it has to come, that right has to be found within the four corners of the trust because the rights and the restrictions on those rights on the beneficiary are to be found within the four corners of this document. And it also is pertinent that the discretion is also exercised within the powers given under the trustee.

Case references provided to the Board included:

Re Rutherford and Rutherford, 26 DLR (2d) 369;

Canada Trust Company, Surviving Executor of the Estate of Charles Arthur Ansell v MNR, [1966] CTC 785; 66 DTC 5508;

Ross P Alger and Paul A Ferner, Trustees for the Children of Sam Hash man v MNR, [1972] CTC 2227; 72 DTC 1191;

Fast v Van Vliet, 49 DLR (2d) 616;

Brotherton v Commissioners of Inland Revenue, Mears v CIR, [1977] TR 317.

Findings

As I understand it, the position of counsel for the appellant with respect to the relevant action taken by the trustees and described at the hearing is that they fulfill the requirement under one, two, or all of the following:

(1) “paid”—Subsection 104(24);

(2) “payable”—Subsections 104(6) and 104(24);

(3) “vested”—Subsection 104(18).

Counsel’s interpretation of the case law he cited leads me to conclude that his argument was based in large measure upon the case of Vestey (supra). It is clear that in Vestey the Court did not decide that the specific issue and receipt of a cheque as such was unalterably required in order to constitute payment. In fact, Lord Jenkins noted therein that if it were necessary, he would be disposed to view the actions taken in that case as “payment”. In the judgment, it was held that the actions of the trustees “had operated to transfer the specified sums of money to the respective infants” (900) and that this was an ‘application for the benefit of the beneficiary”. That was in fulfillment of the trustees’ obligation (termed “imperative” by Sir Raymond Evershed in his written judgment) to “pay or apply the income ...” (italics mine). In the constant case, the trustees had no such latitude to “pay” or “apply”, nor did they have any such specific directive (as an “imperative’’) so to do. That “imperative” in the instant case was that the trustees: “shall accumulate the net income”; and their “discretion”

In the instant case, the statutory declaration (Exhibit A-1) filed on behalf of the appellants (while questionable as admissible evidence), nevertheless may be regarded as expressing the action of the trustees in the light most favourable to the appellants when it states “It was determined to make the income payable for the benefit of the beneficiary and this obligation would be recognized as and when required by the parents of the infant beneficiary” (italics mine). In my opinion, at the highest possible level, the action of the trustees warrants only consideration as a statement of desire or intention. It cannot be regarded as a positive and irrevocable segregation to the beneficiary of the funds involved. In this matter, the trustees did not pay.

It might be argued from a strict reading of the trust agreement that the only power the trustees had was to “pay”, and not to make an amount payable. However, the following comment is to be found in Sachs (supra) at 6295:

The authority to pay income to beneficiaries, in my opinion, includes the authority to declare or designate income as held for them to the exclusion of the continuance of the trustee’s authority to deprive them of it and to the exclusion of the possibility of their being deprived of it upon the happening of events referred to in the trust deed.

Accordingly, counsel’s argument is that the same actions taken by the trustees noted above (as described in Exhibit A-1)—the “discussion” and the “affirmative and unanimous decision to treat . . . the income . . . as the income . . . of the (beneficiaries) ...’, together with the preparation and filing of the relevant T-3 Information Returns constituted the “declaration and designation” noted in Sachs (supra). However, the trustees’ actions alone must serve to establish that proposition from the appellants. They cannot rely upon the filing of the T-3 returns as any proof, and this will be referenced later. The actions of the trustees must exclude (a) “the continuance of the trustees’ authority to deprive them of it’’; and (b) “the possibility of their being deprived of it upon the happening of events referred to in the trust deed” (see Sachs reference noted above). On that precise point, it was argued by counsel for the appellants that the parents as guardians would be able to enforce payment (really against themselves) since the actions noted above had been taken by the same parents as trustees. As I see it, however, the decision recorded in Exhibit A-3 did not remove from the trustees their right and authority to abandon their intentions or simply reverse their actions. Neither the Vestey (supra) nor the Sachs (supra) conditions for “payable” therefore have been fulfilled. The filing of the T-3 forms alone merely reports on actions taken. It does not initiate or formalize any action. The T-3 forms are a supplement to the records, financial statements and tax returns of the trust. They can only record events and transactions, they do not become the events and transactions in themselves, nor do they certify that the events or transactions referenced did in fact occur.

Turning to the last possibility open to the appellants—subsection 104(18)—it would appear to me that to be “vested” as called for therein any amount first would need to meet all the rigid tests above for “payable”—but in addition, that the constraint against payment would arise out of the terms of the trust deed. In that sense and in that sense only would it be termed “not payable”. There is no such restriction in the trust documents at issue here. In the absence of such a restriction, it might be contended that the trustees had the inherent right to withhold payment because the beneficiary was an infant in this particular case. However, in this case the evidence was not that such payment was withheld because the beneficiary was an infant. The reason cited in Exhibit A-1 is that the obligation would be met “as and when required by the parents of the infant beneficiary”. In simple terms, the parents as trustees did not pay the funds to the infant because the parents as guardians did not require it in that year for any of the purposes for which it could be paid. It was not simply because they were constrained from doing so because the beneficiary was an infant. That clearly excludes it from any application under subsection 104(18) in my view. With regard to any contention that the income was vested in the beneficiary by virtue of the trust indenture itself, I find nothing in that indenture to support such a proposition.

Conclusion

The action of the trustees in these matters did not pay, make payable, or vest the amounts at issue in the beneficiaries as required to conform with any of the relevant provisions of the Act. The income in question for all three years remained that of the trusts and was subject to tax accordingly. Further, the Board was not given any valid reason to question the propriety of the late filing penalty for the year 1972.

Decision

The appeals are dismissed.

Appeal dismissed.