Brouillette v. R., [1998] 1 CTC 2229, 97 DTC 624

Archambault T.C.J. :

On December 23, 1987, Ms. Brouillette and Mr. De Ruelle each transferred 200,000 class A shares of the capital stock of Orient Express Café Ltée (Orient Express) to Claude P. Buisson, trustee of a trust (Fiducie Thierry) for the benefit of their son Thierry. A few hours later, the trust sold those shares to A.L. Van Houtte Inc. (Van Houtte). In computing their income for the 1987 taxation year, the appellants did not include any taxable capital gain resulting from this transfer. Instead they claimed the deduction provided for in subsection 73(5) of the Income Tax Act (Act). This provision, which was in effect until December 31, 1987, permitted a carry-over (rollover) of tax on the capital gain to a maximum of $200,000 where a taxpayer transferred to his child shares of a corporation operating a qualified small business. According to the Minister of National Revenue (Minister), the sole purpose of using Fiducie Thierry as an intermediary between the appellants and Van Houtte was to enable the appellants to avoid complying with the rules for computing the capital gain, thus artificially creating the conditions provided for in subsection 73(5) of the Act. The Minister disallowed the deduction under subsection 73(5) of the Act on the assumption that the appellants had sold these shares directly to Van Houtte.

The Minister contended in the alternative that, although the appellants had actually transferred the 400,000 shares to Fiducie Thierry, those transfers did not meet the conditions set out in subsection 73(5) of the Act and, consequently, the capital gain established by the Minister of National Revenue under the Act was correct. According to counsel for the Minister, a transfer to a “trust” for the benefit of a child did not constitute a transfer to a “child”, as required by subsection 73(5) of the Act.

Counsel for the appellants summarized the points at issue in his written submission as follows:

[TRANSLATION]

Were the inter vivos gifts of 400,000 class A shares of Orient Express Café Ltée made by the appellants to their son valid, complete and enforceable?

By making these gifts J [1] were the taxpayers entitled to benefit from the provisions of subsection 73(5) of the Income Tax Act?

Facts

The appellants have been married since October 1970 and had a son, Thierry, in August 1973. In 1978, they founded Orient Express, a company operating a business for the roasting, sale and distribution of coffee and other related products. This company is governed by the provisions of the Canada Business Corporations Act. The appellants held all the shares of Orient Express. At May 1, 1987, Ms. Brouillette owned 50 common shares and Mr. De Ruelle 35 common shares.

The appellants separated from bed and board on May 8, 1987. During the months of May, June, July and August 1987, they met and consulted their financial and legal advisers on numerous occasions in order to come to an agreement on the division of their family patrimony and on custody of their child Thierry, the fate of Orient Express, their respective roles in that company and on the constitution of a separate patrimony for their son in order to guarantee his education, support and entry into the job market.

At the end of August 1987, the president of Van Houtte approached the appellants unsolicited by them. Van Houtte wished to purchase Orient Express. The negotiations extended over a three-month period until early December 1987, when the appellants and Van Houtte reached an agreement in principle for the sale of virtually all the shares of Orient Express for $1,801,500.00. Ms. Brouillette was to retain 10 per cent of the shares and remain in the employ of Orient Express.

The appellants wished to minimize the tax consequences of this disposition while benefitting their son Thierry. The legal advisers suggested an arrangement enabling them to avail themselves of the $500,000 capital gains exemption scheme and the rollover provided for in subsection 73(5) of the Act. On June 18, 1987, the Minister of Finance of Canada announced significant amendments to the capital gains exemption program. The $500,000 exemption that was to be available in respect of all property would henceforth be restricted to the shares of corporations operating a small business or farming business. The exemption would be limited to $100,000 for other property. The uncertainty caused by the announcement of these amendments to the Act complicated the planning for the sale to Van Houtte.

A resolution passed on December 17, 1987, by Van Houtte’s board of directors approved the purchase of Orient Express’s shares. The most relevant passage from that resolution reads as follows:

[TRANSLATION]

On a duly seconded motion, it is unanimously resolved

(a) that shares be purchased from the following persons in the numbers appearing opposite their names:

Number of	Number of
Assignor	class A shares	class B shares
Nicole Brouillette	725,205	72,700
Pierre-Michel De Ruelle	580,295	32,300
Fiducie Thierry Nicolas De	400,000
Ruelle

(b) that the sum of $1,810,500 be paid for these shares in three instalments:

(i) $710,500 on December 23, 1987,

(ii) $1,000,000 on March 18, 1988, and

(iii) $100,000 on June 23, 1988;

the whole subject to the price adjustment clauses set forth in the AGREEMENT OF SALE;

(c) that the AGREEMENT OF SALE and its schedules submitted at the meeting be approved.

On December 23, 1987, Orient Express amended its by-laws so as to subdivide its 85 class A shares into 1,895,000 class A shares. On that same date, it further issued 105,000 class B shares in consideration of debts to the shareholders.

As appears in the notarial deed dated December 23, 1987, the appellants and Claude P. Buisson appeared before Chantal Bouchard, a notary practising in Montréal at 1:00 p.m. on that day. Pursuant to this notarial deed, the appellants each assigned and conveyed to Mrs. Buisson 200,000 class A shares of the capital stock of Orient Express having a value of $200,000. In consideration of this assignment, each of the appellants received a promissory note from the trust for an amount of $150,000. The most significant passages of this deed are as follows:

[TRANSLATION]

WHEREAS the First Assignor [Mr. De Ruelle] is currently the beneficial owner with clear title and exclusive ownership of 780,295 class A shares and 32,300 class B shares of the capital stock of ORIENT EXPRESS CAFÉ LTÉE;

WHEREAS the First Assignor intends to assign or transfer certain shares of the capital stock of ORIENT EXPRESS CAFE LTÉE, the said assignment includ- ing an element of gratuity, and intends to make, from time to time, inter vivos gifts by particular title, in cash or in kind, to or for the benefit of THIERRY NICOLAS DE RUELLE (hereinafter called the “BENEFICIARY”) and whereas he intends to entrust to the TRUSTEE the investment, administration and disposition of the assets thus assigned, transferred or given, at the TRUSTEE’S complete discretion, to the exclusion of all control by the First Assignor;

WHEREAS the Second Assignor [Ms. Brouillette] is currently the beneficial owner with clear title and exclusive ownership of 1,114,705 class A shares and 72,700 class B shares of the capital stock of ORIENT EXPRESS CAFÉ LTÉE;

WHEREAS the Second Assignor intends to assign or transfer certain shares of the capital stock of ORIENT EXPRESS CAFÉ LTÉE, the said assignment including an element of gratuity, and intends to make, from time to time, inter vivos gifts by particular title, in cash or in kind, to or for the benefit of THIERRY NICOLAS DE RUELLE (hereinafter called the “BENEFICIARY”) and whereas he intends to entrust to the TRUSTEE, the investment, administration and disposition of the assets thus assigned, transferred or given, at the TRUSTEE’S complete discretion, to the exclusion of all control by the Second Assignor;

WHEREAS these presents record an initial transfer and assignment by the First Assignor and the Second Assignor respectively and determines the TRUSTEE’S absolute authority with respect to the property or sums of money assigned, transferred or given in accordance with the terms of this agreement and in respect of all property or all other sums of money that may be assigned, transferred or given, as the case may be, in future, in accordance with this trust;

WHEREAS THE BENEFICIARY is at present a minor;

THAT IS WHY this agreement attests to the assignments and transfers of the First Assignor and the Second Assignor to the BENEFICIARY and the trust (hereinafter called FIDUCIE DE THIERRY NICOLAS DE RUELLE) as follows:

Agreements

I. Assignments and Transfers

The First Assignor hereby assigns and transfers to the TRUSTEE, that TRUSTEE accepting in trust for and on behalf of the beneficiary, 200,000 class A shares of the capital stock of ORIENT EXPRESS CAFE LTÉE, which shares have a present value of $200,000.00, for consideration of $150,000, represented by a demand note issued by the trust this day and made to the order of the First Assignor (hereinafter called the “PROPERTY IN TRUST”, which will include all property that may be added thereto or be acquired for reinvestment, including the accrued income) until the said property or trust is wound up as hereinafter stipulated.

The Second Assignor hereby assigns and transfers to the TRUSTEE, that TRUSTEE accepting in trust for and on behalf of the beneficiary, 200,000 class A shares of the capital stock of ORIENT EXPRESS CAFE LTÉE, which shares have a present value of $200,000.00, for consideration of $150,000, represented by a demand note issued by the trust this day and made to the order of the Second Assignor (hereinafter called the “PROPERTY IN TRUST”, which will include all property that may be added thereto or be acquired for reinvestment, including the accrued income) until the said property or trust is wound up as hereinafter stipulated.

2. Issuance and Possession

Payment of the property assigned or transferred hereunder has been made this day by the issuance of the shares assigned and transferred by the First Assignor and the Second Assignor to the TRUSTEE, the latter having exclusive possession as of this day.

4. Purpose and Term of the Trust

Distribution of the income and principal of the trust will be left entirely to the TRUSTEE’S discretion; however, the TRUSTEE shall pay to the beneficiary all the income and principal of the trust by the time he attains the age of 25 at the latest.

Furthermore, the TRUSTEE may, entirely at his discretion, advance to the beneficiary part or all of the principal of the trust if the TRUSTEE deems that this advance is to the beneficiary’s benefit.

Should the aforementioned beneficiary die before he reaches his twenty-fifth birthday, the balance of the property in trust, principal and income, will belong to his legatees and/or his legal heirs.

7. Liability Release

The TRUSTEE will execute this trust without assuming any liability whatever, and, in light of the scope of the powers conferred upon him, will not in any way be liable for any fault, error, omission or act whatever, except those in the nature of a delict or quasi-delict.

11. Acceptance

The TRUSTEE accepts the present assignment, transfer and gift for the exclusive benefit of the beneficiary and undertakes to hold it for him in accordance with the trust here created.

(My emphasis.)

According to a resolution by the directors of Orient Express dated December 23, 1987, that company approved and registered the transfer of 400,000 class A shares to Fiducie Thierry.

At 6:00 p.m. on December 23, 1987, the appellants and Fiducie Thierry sold the following shares to Van Houtte for the sum of $1,810,500:

The price of the shares sold by the appellants was payable in three instalments and that of Fiducie Thierry in two instalments, the whole as follows:

On December 23, 1987, the directors of Orient Express passed a resolution approving the transfer of the shares by the appellants and Fiducie Thierry to Van Houtte. Copies of certified cheques from Van Houtte dated December 23, 1987, covering the first instalment were filed in evidence, including a copy of the cheque for $100,000 payable to Fiducie Thierry.

A balance sheet of Fiducie Thierry to December 31, 1987, shows assets consisting of a $100,000 term deposit and a balance of the price receivable of $298,510 [2] as well as a liability of $300,000. The appellants also filed the annual balance sheets of Fiducie Thierry for the years 1989 to 1994. Starting in 1990, Ms. Brouillette replaced Mr. Buisson as trustee of Fiducie Thierry. Fiducie Thierry paid sums of money to Thierry to enable him to pay for flying lessons.

Appellants Position

The appellants contend they are entitled to the rollover under subsection 73(5) of the Act because genuine transfers of 400,000 shares of Orient Express were made to Fiducie Thierry. The transfers of the shares clearly involved a liberality of $100,000 to their son Thierry and the deed of trust meets all the conditions of the Civil Code of Lower Canada in effect in 1987. This transfer constituted a direct gift or, at the very least, an indirect gift acknowledged as a gift by the Quebec Court of Appeal in Charlebois v. Charlebois, [1974] C.A. 99 (Que. C.A.). The deed was in notarial form and the trustee had duly accepted the transfer of the shares. The use of the word “transfer” by Parliament in subsection 73(5) is conducive to a liberal interpretation of this provision. Relying on the definition adopted by Thorson P. in Fasken Estate v. Minister of National Revenue (1948), 49 D.T.C. 491 (Can. Ex. Ct.) , 493, counsel for the appellants contended it had to be concluded that the appellants had indirectly transferred their shares to their son by transferring the shares to Fiducie Thierry. The comment by Thorson P. which he cited in his written submission and which he himself underlined was as follows:

[TRANSLATION]

According to these authorities, the word transfer definitely embraces indirect transfers such a fiduciary gift inter vivos since a novation through the intervention of a trustee, a transaction in which the relationship between the assignor and the assignee is much more tenuous and distant, is included therein.

Furthermore, in his Interpretation Bulletins IT-486 dated April 26, 1982, and IT-486R dated December 31, 1987, the Minister recognized that the rollover under subsection 73(5) applied to the transfer of shares to a trust for the sole benefit of a minor child. According to counsel for the appellants, the Minister could not argue against the appellants an interpretation different from his official interpretation unless that interpretation was in flagrant contradiction with the text of the act and, in his view, this was not the case. He relied on a number of decisions, including Harel v. Quebec (Deputy Minister of Revenue) (1977), [1978] 1 S.C.R. 851 (S.C.C.); Québec (Deputy Minister of Revenue) v. Ciba Geigy Canada Ltd. (August 24, 1981), Doc. Montreal 500-09-001 153-766 (Que. S.C.) and Québec (Sous- ministre du Revenu) c. Transport Lessard (1976) Ltée, [1985] R.D.F.Q. 191 (Que. C.A.).

Minister’s Position

In his argument, counsel for the Minister devoted effort to defending the position adopted at the time of the assessment, that is to say that the artificial use of the intermediary Fiducie Thierry should be disregarded and that the appellants had actually transferred 400,000 shares to Van Houtte. Instead, he contended that, even though the shares had been transferred to Fiducie Thierry, the transfer did not meet the condition stated in subsection 73(5) of the Act that the transfer be made to a “child”. In his written sub- mission filed with the Court last December, counsel for the Minister summarized his position as follows:

[TRANSLATION]

Arguments advanced in support of the respondent’s position

(1) We contend that the provisions of subsection 73(5) of the Income Tax Act (the Act) concern the transfer of property to a child, not the transfer to other persons (e.g., a trust).

(2) The Supreme Court has recognized that property transferred to a trust belongs to the trustee, not to the beneficiary (see on this point Tucker v. Royal Trust Co.), [1982] 1 S.C.R. 250 (S.C.C.).

(3) The rules of interpretation developed by the Supreme Court in Québec (Communauté urbaine) c. Notre-Dame de Bonsecours (Corp.) (1994), [1995] 1 C.T.C. 241 (S.C.C.) clearly indicate that the tax laws are subject to the ordinary rules of interpretation. Applying those rules to subsection 73(5) of the Act, we submit that a transfer made to a trust is not a transfer contemplated by this paragraph.

Even the extended or broader meaning of the word child appearing in paragraph 70(10)(a) of the Act does not include a trust.

Furthermore, according to the recent Supreme Court judgment in Friesen v. R., [1995] 2 C.T.C. 369 (S.C.C.) where the meaning of the words is clear, it is not necessary to seek the purpose and object of the provision; one must consider the ordinary meaning of the words. Furthermore, the Court must not adopt an interpretation that requires the addition of words to a text if another acceptable interpretation exists. The interpretation advanced by the appellants, if accepted by the Court, would invite it to read the following underlined words in subsection 73(5): “For the purpose of this Part, where a taxpayer has transferred property ... to his child or to trust for the benefit of his child...”.

This interpretation of the text would clearly go against the rules of interpretation and the recent Supreme Court decision in Friesen.

(4) The decisions in Paxton v. R. (1994), [1995] 1 C.T.C. 2229 (T.C.C.) and Orr v. Minister of National Revenue, [1989] 2 C.T.C. 2348 (T.C.C.) are not applicable to the extent that the transfers in those judgments were not made to a trust (Paxton is currently under appeal).

(5) An opinion expressed in an interpretation bulletin is not enforceable against the Minister and cannot replace a statutory provision contemplating only transfers to children.

See on this point the Supreme Court judgments in Harel v. Quebec (Deputy Minister of Revenue) (1977), [1978] 1 S.C.R. 851 (S.C.C.) and Harvey v. Smith Drugs Ltd. v. The Queen.

(6) Since the provisions of subsection 73(5) of the Act do not apply, it is the ordinary rules provided for computing capital gains that apply in one way or another.

Whatever the Court’s conclusions with respect to the transfers of the shares to the trust, the tax consequences remain the same and the appellants’ appeals should be dismissed because subsection 73(5) of the Act contemplates only the transfer of shares to the taxpayer’s child.

(a) if the transfer of the shares to the trust were valid (which is denied), the capital gain included in computing the appellants’ incomes would remain the same because the appellants are deemed under subparagraph 69(l)(/?)(i) and subsections 104(1), 104(2), 248(1) and 251(1) to have received proceeds equal to fair market value;

the trustee was not dealing with the appellants at arm’s length in accordance with the following provisions of the Income Tax

Act'. Act:

-the trust also means the trustee under subsection 104(1) of the Act;

-the trust is deemed to be an individual in respect of the trust property under subsection 104(2) of the Act;

-an individual is a person within the meaning of subsection 248( 1 ) of the Act;

-the appellants and the trustee acted in concert, having similar economic interests or in accordance with a common will; consequently, they were not dealing with each other at arm’s length within the meaning of subsection 251(1).

See on this point Minister of National Revenue v. Meritt Estate and Fournier v. Minister of National Revenue, [1991] 1 C.T.C. 2699 (T.C.C.).

(b) if the share transfer was made by gift, the capital gain included in computing the appellants’ income would remain the same because the appellants are deemed to have received consideration equal to fair market value;

(c) if the Court held that the trust did not exist and that the transfer was made directly to Mr. Buisson (the trustee), the latter could be only a conduit or the agent of the appellants so that the share transfer could be made to A.L. Van Houtte Ltd. in accordance with their instructions.

(7) Lastly, if the Court held that subsection 73(5) could apply to a transfer of property to a trust for the child’s benefit, the appeal should be dismissed on one of the following grounds:

(i) the shares were not transferred by gift to a trust, but at best there was a transfer of a certain value in cash; consequently, the Department was correct in disregarding that transfer on the ground that it was null and void; we refer you on this point to the following authorities:

art. 981, Civil Code of Lower Canada

Academic commentators

Higher v. Crown Trust Co., [1977] 1 S.C.R. 418 (S.C.C.)

Charlebois v. Charlebois, [1974] C.A. 99 (Que. C.A.)

R. v. Littler, [1978] C.T.C. 235 (Fed. C.A.)

Gervais v. R. (1984), 85 D.T.C. 5004 (Fed. T.D.)

(ii) the object and spirit of subsection 73(5) were frustrated by the approach used by the appellants (to the extent that this subsection was enacted in order to defer capital gains where shares are actually transferred to children). The appellants never intended to transfer the shares to their child, but only to give a certain sum of money. The decision to sell the shares to A.L. Van Houtte Ltd. was made even before the trust was formed.

-House of Commons Debates, June 29, 1978, pp. 6891 to 6895.

-Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536 (S.C.C.).

-Industries SLM Inc. (currently under appeal).

(Footnotes omitted.)

Analysis

The point for determination in these appeals is essentially whether the appellants were entitled to the rollover provided for in subsection 73(5) of the Act. That provision read as follows in 1987:

73(5) For the purposes of this Part, where at any particular time a taxpayer has transferred property to his child who was resident in Canada immediately before the transfer and the property was, immediately before the transfer, a share of the capital stock of a small business corporation, except where the rules in subsection 74(2) require any taxable capital gain from the disposition by the taxpayer of that property to be included in the income of a person other than the taxpayer, the following rules apply:

(a) the taxpayer shall be deemed to have disposed of the share at the time of the transfer for proceeds of disposition equal to the amount, if any, by which

(i) the fair market value of the share at that time

exceeds the lesser of

(ii) the taxpayer’s capital gain otherwise determined from the disposition of the share, and

(iii) the amount of the taxpayer’s cumulative small business gains account immediately before the transfer or such lesser amount as the taxpayer specifies in respect of the transfer of the share;

(b) the child shall be deemed to have acquired the share at a cost equal to the proceeds of disposition determined under paragraph (a); and

(c) where two or more shares have been disposed of at the same time, this subsection applies as if each share had been separately disposed of in the order designated by the taxpayer or if the taxpayer does not so designate, in the order designated by the Minister.

The issue before the Court concerns only the question relating to the transfer to a child.

I need not dwell on the question whether the transfer of the 400,000 shares of Orient Express constituted a valid transfer to Fiducie Thierry. [3] Even supposing that there was a valid, complete and enforceable transfer, the appellants did not meet the condition that the shares had to be transferred to a “child”.

Mr. Buisson or Fiducie Thierry were clearly not the child of the appellants. Counsel claimed that the notion of “transfer” was broad enough to cover an indirect transfer and that, in the transfer of the 400,000 shares to Fiducie Thierry, the shares were indirectly transferred to Thierry.

Consequently, the scope of the expression “transfer” must first be defined. The Act does not provide a definition of this term. However, the courts have had the opportunity to do so on a number of occasions. One decision often cited is that by Thorson P. in Fasken, supra.

In that case, the taxpayer had lent a significant sum of money to the company owned first by him and later by members of his family. The amount of that debt increased from year to year and the company signed an acknowledgment of indebtedness stating the new amount of the debt. On December 31, 1924, the acknowledgement of indebtedness was executed in favour of three trustees. The evidence showed that those trustees held that claim in trust and that, in accordance with that trust, the trustees had to pay Mrs. Fasken half of the residual net income (upon payment of a certain amount of income to one of her sons). In that case, the Department had added the interest income received by Mrs. Fasken to Mr. Fasken’s income in accordance with the following attribution rule of the Income War Tax

Act:

Where a husband transfers property to his wife, or vice versa, the husband or the wife, as the case may be, shall nevertheless be liable to be taxed on the income derived from such property or from property substituted therefor as if such transfer had not been made. [4]

(My emphasis.)

In Fasken, counsel for the taxpayer argued that Mr. Fasken had not transferred property to his spouse. As Mr. Fasken had asked that the company acknowledge the indebtedness to the three trustees rather than to him, there was a novation which extinguished the former indebtedness and created a new indebtedness to the three trustees. According to counsel for Mr. Fasken, this novation could not constitute a transfer of indebtedness to anyone, but rather a contract whereby Mr. Fasken released the company from its indebtedness in consideration of its assuming a new obligation to the trustees. Alternatively, counsel for Mr. Fasken contended, that if there was a transfer, that transfer had been made to the trustees, not to Mrs. Fasken. [5] Thorson P. summed up the position of counsel in Fasken as follows:

... In the Alternative, it was contented that if there was any transfer such transfer was to the trustees and not to Mrs. Fasken', the argument was that the only thing she was given was the right to receive a certain portion of the interest, that she never became entitled to any portion of the indebtedness, either directly or as a beneficiary, that she could not have sued the Company for it, her only remedy being against the trustees and that what went to the trustees and through them to her was not property that had ever belonged to David Fasken but something else substituted for it, that it was not the same property as that which he had owned and that consequently it could not be said that he had transferred any of his property to his wife within the meaning of the Act.

(My emphasis.)

The first question that Thorson P. had to decide was whether what Mrs. Fasken was entitled to constituted property within the meaning of the Act. He concluded on this question as follows:

What Mrs. Fasken became entitled to is manifest from clause (5) of the declaration of trust, namely, the right to receive from the trustee one-half of the interest on the indebtedness that should come to their hands from time to time after the interest on Andrew Fasken’s claim had been paid. In my view, the word “property” as used in the Act is clearly wide enough in meaning to include such a right.

(My emphasis.)

The second question he had to decide was whether property had been transferred from David Fasken to his wife. In answering this question, Thorson P. stated his comments on the notion of the word “transfer” that have so often been cited in case law and by counsel for the appellants in his submission:

The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to his wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer. The plain fact in the present case is that the property to which Mrs. Fasken became entitled under the declaration of trust, namely, the right to receive a portion of the interest on the indebtedness, passed to her from her husband who had previously owned the whole of the indebtedness out of which the right to receive a specified portion of the interest on it was carved. If David Fasken had conveyed this piece of property directly to his wife by a deed such conveyance would clearly have been a transfer. The fact that he brought about the same result by indirect or circuitous means, such as the novation referred to by counsel involving the intervention of trustees, cannot change the essential character of the fact that he caused property which had previously belonged to him to pass to his wife. In my opinion, there was a transfer of property from David Fasken to his wife within the meaning of the Act.

(My emphasis.)

For the attribution rule to apply, Mrs. Fasken had to receive income from that property. On this question, Thorson P. said:

...But it was not the interest itself that was transferred. There was not a fresh transfer of property from David Fasken to his wife in each of the year 1925 to 1926 when she received payments of interest, what was transferred was the right to receive the interest, not the interest itself, and that right could be and was transferred only once. The amounts of interest received by Mrs. Fasken were the fruits of such right and could properly be regarded as income derived from it. The right was, therefore, property from which income was derived.

(My emphasis.)

I believe it is clear from Thorson P.’s remarks that he drew a clear distinction between the indebtedness itself and the right Mrs. Fasken had to receive the income from that indebtedness. In that case, it was not the indebtedness that was transferred to Mrs. Fasken, only the right to receive the income therefrom.

It must therefore be determined in the instant case whether the appellants transferred the 400,000 shares of Orient Express to their son Thierry. There can be no doubt that, if the transfer had been made directly to Thierry, the Court would not have to consider whether the condition that the transfer be made to a child was met. The same would be true if the appellants had transferred the shares to Mr. Buisson as Thierry’s mandatary. In that case, if the mandatary had accepted ownership of the shares for the mandator, that is Thierry, it would readily have been concluded that the appellants had in fact transferred the shares to their child.

However, the shares were transferred to Mr. Buisson acting as the trustee of Fiducie Thierry. Did ownership of the 400,000 shares pass to Thierry? To answer this question, the scope of the rights and obligations created by a trust in Quebec must be determined. The Supreme Court of Canada provides us with the answer to this question in Tucker v. Royal Trust Co., [1982] 1 S.C.R. 250 (S.C.C.).

In that decision, the Supreme Court finally resolved a problem that was the subject of lengthy controversy in Quebec case law and doctrine. Was it possible to make a deed of donation and trust for the benefit of primary beneficiaries who did not exist when the deed of donation and gift was made? The answer to this question depended on the solution to the following problem: who became the owner of the property conveyed in trust?

The Supreme Court held that a deed of donation and trust made for the benefit of the unborn children of the donor was valid and that the property conveyed in trust to a trustee who had accepted the gift sufficed to make the trust irrevocable. It was the trustee who became the owner of that property for the duration of the trust. There was thus no impediment to the validity of the trust, since it was not necessary that there be beneficiaries in whom ownership of the property conveyed would be vested. Beetz J., speaking for the Court, relied on Mignault’s reasoning at page 272 of the judgment in Royal Trust, supra:

It must be said that it is difficult to escape the logic of Mignault’s reasoning, if we assume that ownership cannot remain in suspense. This reasoning may be summarised as follows. The grantor is no longer the owner of property conveyed in trust: if it is a testamentary trust, he is dead, and if it is a trust created by way of gift inter vivos, it is essential to its validity that the grantor has actually and irrevocably divested himself of the property conveyed in trust. Property cannot be both given and retained. Ownership is not vested in the beneficiary of the income, who is only a creditor of the trustee. /t also is not vested during the trust in the beneficiary of the capital: in a great many cases he ranks second or third and has not even been born or conceived. When the property held in trust is finally conveyed to him, as art. 981 I expressly provides, the trust has terminated. That leaves only the trustee in whom ownership of the trust property can be vested. Clearly the right of ownership is not the traditional one, since, for example, it is temporary and includes no fructus. It is a sui generis property right, which the legislator implicitly but necessarily intended to create when he introduced the trust into the civil law.

(My emphasis.)

In La Fiducie entre vifs, Répertoire de droit, Chambre des notaires du Québec, December 1988, document no. 2, Pierre Lessard describes the rights of the beneficiaries of a trust as follows, at page 38:

[TRANSLATION]

122. The beneficiaries are entitled to receive the income from the trust and to share in the assets at the time it is wound up. However, the deed of beneficial gift may provide that the beneficiaries of the income are different from the beneficiary of the principal. The settlor may also grant the trustee full discretion as to the total or partial distribution of annual income to those of the beneficiaries of the income who he will designate. The settlor may also grant the trustee total discretion in remitting all or part of the principal of the trust to the beneficiary of the principal at the time he will determine. The beneficiary's right in the trust is called an “interest”. For the beneficiary, this interest constitutes an asset that enters into his patrimony.

123. The beneficiary incurs no liability for the debts of the settlor or of the trust. The creditors of the settlor or trust will have recourse only against the patrimony of the trust.

125. The beneficiary may alienate his interest in the income or principal in the trust. He need only have the capacity to dispose of a moveable property. 126. The rights of the beneficiaries of the income amount to a right of claim on its net income. However, the beneficiaries must have a right in the income from the trust. If the trust is discretionary and the trustees have the discretion to pay all or part of the income from the trust, the beneficiaries of the income will have no right in the income from the trust until the trustee has exercised his discretion. The trustee must from time to time provide the beneficiaries with sufficient statements of account to enable them to assess their situation. If the beneficiaries detect any defect in the trustee’s administration, they may institute an action in liability or removal.

133. Lastly, the beneficiaries of the income and the beneficiaries of the principal have no right of ownership of the property of the trust for as long as it exists.

(Footnotes omitted and my emphasis.)

It therefore appears that the only right that Thierry had was a right to claim income from the trustee, if the trustee exercised his discretionary power, and the right to acquire ownership of the principal at the time the trust was wound up, as provided when he would attain the age of 25.

In light of these comments from case law and doctrine, I must conclude that, under the notarial deed, Mr. Buisson became the owner of the 400,000 shares of Orient Express. Thierry never acquired ownership of those shares since Mr. Buisson, as trustee of the trust, sold them to Van Houtte a few hours after acquiring them. All the appellants transferred to their son was an uncertain interest in the income and an interest in the principal of the trust. It therefore cannot be contended, as their counsel argued, that the appellants had “indirectly” transferred these shares to their son through the trust.

Even if it could be contended that Thierry indirectly benefited from the transfer of the 400,000 shares of Orient Express to the trust, I do not believe this was sufficient to conclude that the conditions of the rollover provided for in subsection 73(5) of the Act were met. If Parliament had intended the rollover under subsection 73(5) of the Act to apply to a transfer in trust for the exclusive benefit of a child, it would simply have stated so expressly. This moreover is what it did in respect of the transfer of capital property to a spouse in subsection 73(1) of the Act [6]

Even if, in the final analysis, one could entertain a doubt as to the interpretation of the expression “transfer to a child”, I do not believe that the rollover under subsection 73(5) of the Act can apply to a transfer in trust for the exclusive benefit of a child. To resolve the ambiguity that could arise as to the scope of this expression, we should first rely on the usual rules of interpretation. In Stubart Investments Ltd. v. R., [1984] 1 S.C.R. 536 (S.C.C.), 578, Estey J. adopted the modern rule of construction for interpreting tax statutes, accepting the wording of this rule by Dreidger in Construction of Statutes:

To-day there is only one principle or approach, namely, the words of an Act are to be read in their entire context in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.

It must therefore be determined whether the interpretation advanced by counsel for the appellants of this expression, read in its entire context, harmonizes with the scheme of the Act, the object of the Act and the intention of Parliament. In my view, Parliament did not intend the rollover provided for in subsection 73(5) of the Act to apply to the transfer of shares to a trust for the benefit of children. In this conclusion, I am relying on the fact that paragraph 73(5)(b) of the Act provides that the child (and only the child) shall be deemed to have acquired the shares at a cost equal to the taxpayer’s proceeds of disposition. As Fiducie Thierry is considered as a taxpayer separate from the beneficiaries of the trust for the purposes of the Act, [7] if the rollover applied to a transfer to a trust, as counsel for the appellants claimed, provision would have had to be made for a rule under which the trust would be deemed to have acquired the shares at a cost equal to the settlor’s deemed proceeds of disposition. [8] However, this is not the case; paragraph 73(5)(b) concerns only the child.

If the trust is not deemed under any rule to acquire the shares at a cost equal to the settlor’s proceeds of disposition, a serious irregularity could arise. This point is better illustrated by an example. Let us suppose that a taxpayer sells qualified shares for $300,000 to a trust for the exclusive benefit of his son, whereas his cost is $100,000 and he claims a $200,000 deduction in computing his capital gain under subsection 73(5) of the Act; the taxpayer would be deemed to have disposed of his shares for the sum of $100,000. If we apply paragraph 73(5)(£) of the Act, only the child would be deemed to have acquired the shares for the sum of $100,000. If the shares were sold by the trust for $300,000 before being distributed to the child, the trust would calculate its capital gain by deducting from those proceeds its actual cost of $300,000. This sale by the trust would result in no capital gain. Even if the child were deemed to have acquired the shares for $100,000, that would be of no consequence since the child will never dispose of the shares since the trust had already resold them. In this example, the taxpayer would have received a capital gains exemption, not a rollover, which is merely a deferral of a capital gain.

This result thus clearly constitutes an irregularity that cannot be presumed to have been desired by Parliament. When the expression “transfer to a child” in subsection 73(5) of the Act is interpreted in the entire context of the Act, it must be concluded that a disposition to a trust, even for the exclusive benefit of a child, does not meet the conditions stated in that subsection. As the appellants did not transfer their shares to their child, they may not avail themselves of the rollover provided for in subsection 73(5) of the Act.

Since counsel for the appellants placed great emphasis in his submission on the persuasiveness of the administrative interpretation of subsection 73(5) of the Act, I must now address this question. In his Interpretation Bulletin IT-486 dated April 26, 1982, the Minister states in paragraph 12 that no one may make an inter vivos rollover under subsection 73(5) to a trust for the exclusive benefit of a minor child:

12. It is the Department’s view that an individual may make an inter vivos rollover under subsection 73(5) of a share of the capital stock of a small business corporation to a trust solely for the benefit of a minor child provided the following conditions are met:

(a) the trust must be irrevocable;

(b) the terms of the trust must provide for the property to be held in trust for the exclusive benefit of the child and there must not be any trust provision which could have the effect of depriving the child or any of his rights as the beneficial owner of the property;

(c) the terms of the trust must provide for the distribution of the share to the child for his use absolutely when he attains a certain age or for the distribution of that property to his estate if he should die before attaining that age; and

(d) use of the trust must be required because a provincial or other relevant statute does not permit property to be deeded to, or owned directly by, a child that is a minor.

On December 31, 1987, the Minister published a revised Interpretation Bulletin, IT-486-R, in which he reiterated the statement made in paragraph 12, eliminating subparagraph (d) respecting the reason for resorting to the trust.

In support of his point of view, counsel for the appellants relied on a number of decisions, the most important of which is that rendered by the Supreme Court of Canada in Hard, supra. In that case, the point for determination was whether compensation paid by an employer for accumulated unused sick leave could constitute a payment in “recognition of long service” under the Quebec Income Tax Act. Grandpré J. stated at page 858:

It therefore appears to me that the wording of the section is entirely in accordance with the spirit that guided the legislator, and I do not hesitate to conclude that the assessment should be set aside and the judgment of the Court of first instance reinstated.

If I had the slightest doubt on this subject, I would nevertheless conclude in favour of appellant on the basis of respondent’s administrative policy. Clearly, this policy could not be taken into consideration if it were contrary to the provisions of the Act. In the case at bar, however, taking into account the historical development that I will review rapidly, this administrative practice may validly be referred to since the best that can be said from respondent’s point of view is that the legislation is ambiguous.

The relevant provision of the Quebec statute was modelled on that of the federal statute. When the Quebec legislature modelled its statute on the federal statute, the provincial legislature knew of the federal administrative interpretation favouring the taxpayer. For a number of years, the provincial government itself had adopted that administrative interpretation in administering its statute. For reasons that were not explained in court, the provincial department had reversed its stand and changed its administrative position.

It is important to emphasize the reservation expressed by Grandpré J. in adopting the Department’s administrative interpretation as a persuasive factor:

Once again, I am not saying that the administrative interpretation could contradict a clear legislative test; but in a situation such as I have just outlined, this interpretation has real weight and, in case of doubt about the meaning of the legislation, becomes an important factor.

This decision was followed by other judgments by the Supreme Court of Canada, in particular in Nowegijick v. R., [1983] 1 S.C.R. 29 (S.C.C.); Mat- tabi Mines Ltd. v. Ontario (Minister of Revenue), [1988] 2 S.C.R. 175 (S.C.C.), and R. v. Fries, [1990] 2 S.C.R. 1322 (S.C.C.). For example, in Nowegijick, Dickson J. said the following at page 37:

Administrative policy and interpretation are not determinative but are entitled to weight and can be an “important factor” in case of doubt about the meaning of legislation.

Professor Pierre-André Côté commented on these decisions in L'interprétation de la loi fiscale - quelques problèmes, 1991, Can. Tax J., vol. 39, no. 2, at page 258:

[TRANSLATION]

Although this is not spelled out in Hard or in subsequent cases, the difficulty giving rise to consideration of the administrative interpretation must, in principle, be a genuine and serious difficulty that resists any effort at interpretation through the usual methods. Except in the alternative, the argument drawn from the administrative interpretation appears to be a factor to be considered once it is established that there are two reasonable interpretations of a single text, that is to say two interpretations that are plausible, probable and acceptable in accordance with the usual rules of interpretation.

(Footnotes omitted and my emphasis.)

At page 270, Professor Côté also recognizes the non-binding nature of the administrative interpretation:

[TRANSLATION]

Because it is ultimately up to the judge to determine the meaning and the scope of the statute, the administrative interpretation can only be recognized as having a persuasive value analogous to that attributed to a non-binding case law authority or to a doctrinal opinion.

In my view, we are not dealing here with a situation in which two plausible, probable and acceptable interpretations can apply. I have already expressed my views on this question. The administrative interpretation is therefore not relevant and naturally not binding.

I would also add that the administrative interpretation contained in paragraph 12 of Interpretation Bulletin IT-486 and paragraph 10 of Interpretation Bulletin IT-486R seems to me to be more of an administrative tolerance than an administrative interpretation. I note that, in these two bulletins, the Minister limits transfers to a trust to those for the exclusive benefit of a minor child. The text of subsection 73(5) of the Act draws no distinction between minor and adult children. It can therefore be noted that the Minister is not limiting himself to interpreting this provision, but that he adds a condition there that the text of the Act does not contain.

Why does the Minister do so? The answer probably lies in large part in subparagraph 12(d) of the Interpretation Bulletin, which provided that use of a trust had to be required because a provincial statute did not permit property to be deeded to, or owned directly by, a minor child. It seems to me that the Department adopted this administrative tolerance in order to take into consideration a possible absolute prohibition by a provincial statute that could frustrate the intention of subsection 73(5) of the Act and permit the transfer of certain shares of small businesses from one generation to another tax free within the limits of that provision. [9]

As the rollover under subsection 73(5) of the Act does not apply, the usual rules for computing capital gains apply. [10]

Paragraph 40(1 )(a) of the Act provides as follows:

40(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph

(iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) subject to subsection (1.1), such amount as he may claim as a deduction, not exceeding the lesser of

(A) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

(B) an amount equal to the product obtained when '/s of the amount determined under sub- paragraph(i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property;

(My emphasis.)

The evidence did not show that the amount of selling expenses that the appellants were entitled to deduct was greater than that which the Minister allowed them. The same was true of the amount of the reserve and the adjusted cost base that the Minister used.

The only point requiring comment is the determination of the proceeds of disposition. The only proceeds of disposition that the appellants received upon the transfer of their shares was the sum of $150,000 each. In computing the capital gain on the 200,000 shares for each of the appellants, the Minister used proceeds of disposition of $200,000. In the deed of trust, each of the appellants declared the value of the 200,000 shares of Orient Express as being equal to $200,000. This moreover was the price that Fiducie Thierry obtained in selling them to Van Houtte a few hours after acquiring them. I therefore conclude that the amount of $200,000 represented the fair market value of those 200,000 shares.

Paragraph 69(1 )(Z?) of the Act provides as follows:

69(1) Except as expressly otherwise provided in this Act,

(b) where a taxpayer has disposed of anything

(i) to a person with whom he was not dealing at arm’s length for no proceeds or for proceeds less than the fair market value thereof at the time he so disposed of it, or

(ii) to any person by way of gift inter vivos,

he shall be deemed to have received proceeds of disposition therefor equal to that fair market value; and

The executing notary did not describe the notarial deed as representing a gift or a sale. Instead the parties used the neutral expressions “to assign” or “to transfer”. Indicators of a gift appear in the introductory paragraph:

[TRANSLATION]

WHEREAS the First Assignor intends to assign or transfer certain shares ... the said assignment including an element of gratuity ... to or for the benefit of THIERRY NICOLAS DE RUELLE (hereinafter called the “BENEFICIARY”) and whereas he intends to entrust to the TRUSTEE the investment, administration and disposition of the assets thus assigned, transferred or given, at the TRUSTEE’S complete discretion, to the exclusion of all control by the First Assignor.

(My emphasis.)

This wording appears to be consistent with the assignor’s intention to make a deed of donation and trust. However, in the article describing the assignment of the transfers, it is indicated that the assignor assigned and transferred 200,000 class A shares of the capital stock of Orient Express for consideration of $150,000. This wording could be considered as indicative of a contract of sale.

It seems to me after reading the deed as a whole that the appellants wanted to make a gift on the condition that the sum of $150,000 was remitted to each of the appellants. If this characterization is accurate, subparagraph 69(1 )(Z?)(ii) of the Act would apply and the appellants would be deemed to have received proceeds of disposition equal to the fair market value of those shares.

On the other hand, if we had to conclude that we are here dealing with a sale of shares in consideration of a sum of $150,000, it is subparagraph 69(l)(/?)(i) that should apply. This interpretation is based on the decision rendered by the Court of Appeal in R. v. Littler, [1978] C.T.C. 235 (Fed. C.A.), and on that by the Federal Court, Trial Division, in Gervais v. R. (1984), 85 D.T.C. 5004 (Fed. T.D.) . According to those two decisions, when a “sale” is made for insufficient consideration, the transfer cannot be considered as a gift for the purposes of the Income Tax Act. According to Jackett J., a gift and a contract of sale cannot coexist for the purposes of the Act. He wrote as follows at page 239 of that decision:

...A contract of sale, which is, by definition, a transfer of property for a consideration, cannot be a gift, which is, by definition, a disposition of property without consideration.

A little further on, Jackett J. commented on the decision by the Quebec Court of Appeal in Charlebois, supra, in which it was concluded that a sale for insufficient consideration constituted an indirect gift for the purposes of article 712 of the Civil Code. He wrote as follows:

...AS it seems to me, however, if that decision does hold that a sale at an undervaluation was an indirect gift for the purpose of Article 712 of the Civil Code, it should not be taken to extend the application of section 111 of the Income Tax Act in the Province of Quebec beyond what it would be in another province.

Assuming that this reasoning is applicable to section 69 of the Act, we must adhere to the application of subparagraph 69(l)(Z?)(i) of the Act.

Whatever interpretation I adopt, no matter whether we are here dealing with a gift or a sale, I come to the same conclusion: the appellants are deemed to have received consideration equal to the fair market value. In the circumstances of the instant case, I find that the appellants were not dealing with the trust at arm’s length. The evidence revealed no fact enabling me to find that the appellants were related to Mr. Buisson. However, as paragraph 251(7)(Z?) of the Act provides, the question as to whether unrelated persons were dealing with each other at arm’s length on a given date is a question of fact.

The courts have recognized that, where parties are acting in concert or in the same economic interest or in accordance with a common will, those parties are not dealing with each other at arm’s length. Counsel for the Minister cited two decisions stating this interpretation, Merritt Estate and Fournier, supra. Many of the facts in Merritt Estate are similar to those of the instant appeals. The accountant had suggested incorporating the company to which the late Mr. Merritt had transferred all his assets. Even though the company belonged to his children, no provision of the relevant act, the Estate Tax Act, provided for a rule similar to section 251 of the Act deeming related persons not to deal with each other at arm’s length.

As partial consideration for this transfer of assets, Mr. Merritt had received a debenture maturing 25 years later bearing an interest rate of three per cent. The point for determination was whether Mr. Merritt had been dealing with the company at arm’s length. Cattanach J. held that Mr. Merritt and the company had in fact not been dealing at arm’s length for the following reasons:

In my view, the basic premise on which this analysis is based is that, where the “mind” by which the bargaining is directed on behalf of one party to a contract is the same “mind” that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm’s length. In other words where the evidence reveals that the same person was “dictating” the “terms of the bargain” on behalf of both parties, it cannot be said that the parties were dealing at arm's length.

(My emphasis.)

Having defined the test he had to apply, Cattanach J. conducted the following analysis of the facts of that case, at page 5166:

In my view, it is immaterial that the whole arrangement was the “brain child” of the professional advisers. It would have been of no effect if the deceased had not accepted their advice, made the scheme his own, and given instructions that it be carried out. It is also immaterial whether he ever completely absorbed the details of the plan. He stipulated the result that he required from the scheme and, in effect, he instructed the carrying out of a scheme so devised as to accomplish that result.... It cannot therefore be said, in my view, that the deceased and the corporation were at that time persons dealing with each other at arm’s length. The only time when any decision was taken was when the instructions for the scheme as a whole were given, and the decision to give such instructions was a unilateral decision by the deceased. From that time on, everything that was done was done to implement those instructions and there was no part of the arrangement that involved bargaining between parties with independent interests.

(My emphasis.)

In the instant case, Mr. Buisson was the legal adviser who recommended the arrangement that was put in place in December 1987. Neither Ms. Brouillette nor Mr. De Ruelle could be the trustee of Fiducie Thierry since it is essential in Quebec civil law that property be transferred to another person for there to be a gift. The common law institution of the “declaration of trust” cannot exist in Quebec civil law. Ms. Brouillette confirmed in her testimony that she had trusted Mr. Buisson to act as trustee. It is also important to note that Mr. Buisson resigned approximately two years later and that Ms. Brouillette became the trustee of Fiducie Thierry. When Mr. Buisson agreed to act as trustee, I am convinced that he was definitely going to execute the deed of sale of 400,000 shares of Orient Express to Van Houtte. What was involved here was an arrangement whereby the appellants, while benefitting their son, were able to obtain tax benefits including splitting of the capital gain between their son and themselves.

To determine whether Mr. Buisson and the appellants had different economic interests, it must be observed that the former was not personally liable for the $300,000 debt owed to the latter. The appellants could hope to be repaid only out of the trust’s principal held for the benefit of their son. It must also be kept in mind that the appellants’ son was the only beneficiary of the income and principal and that the appellants wished to benefit their son by this transfer to the trust. I believe that Mr. Buisson did not have independent interests when he intervened in the notarial deed. [11]

In conclusion, the appellants and Fiducie Thierry were not dealing with each other at arm’s length and, under subparagraph 69(1 )(£>)(i) of the Act, the appellants are deemed to have received proceeds of disposition equal to fair market value.

Being unable to avail themselves of the rollover provided for by subsection 73(5) of the Act and being deemed to have received proceeds of disposition equal to the fair market value of the shares, the appellants failed in their attempt to show that the income tax assessments were ill-founded.

For these reasons, the appeals are dismissed, with costs.

Appeals dismissed.