McNeeley – Federal Court of Appeal applies the principle that the Act must prevail over an overlapping Regulation

A distribution to an employee under an employee benefit trust (EBP) is taxable under s. 6(1)(g) rather than being subject to the usual trust distribution rules in s. 107. On the other hand, various s. 107 rules are stated to apply to a prescribed trust described in Reg. 4800.1. A trust for employees, which held shares in a family-controlled company, made distributions to employees including family members. Their tax reporting relied on the trust being a prescribed trust, so that a capital gain was treated as being realized on the distribution pursuant to s. 107(2.1) (as a result of an s. 107(2.001) election), with that capital gain being allocated to the beneficiaries.

Webb JA and the Tax Court below treated that distribution as instead having been made by an EBP, so that the full value of the distribution was includible in the beneficiaries’ income under s. 6(1)(g). Webb JA noted that the trust satisfied the terms both of the EBP definition and the description of a prescribed trust. In finding that it was an EBP, he cited Oldman for the proposition that “[o]rdinarily … an Act of Parliament must prevail over inconsistent or conflicting subordinate legislation,” and then stated:

[S]ince the definition of a prescribed trust is set out in the Regulations, the paramountcy of the definition of an employee benefit plan in the Act must govern. Otherwise, the Act would be amended by the Regulations if an arrangement, such as the one in this appeal, is not an employee benefit plan as defined in the Act because it is also a prescribed trust as defined in the Regulations.

Neal Armstrong. Summaries of McNeeley v. Canada, 2021 FCA 218 under s. 248(1) – EBP and Statutory Interpretation – Regulations/Statutory Interpretation.