Harold J Sachs v. Minister of National Revenue, [1979] CTC 2459, 79 DTC 415

The Assistant Chairman:—By way of reassessments, the Minister of National Revenue added a different amount to the reported income of Harold J Sachs (the appellant) for each of the years 1975 and 1976, and in the accompanying T7W-C for each year it was stated the amounts were added as being “unreported taxable dividends from Canadian Corporations”. Following notices of objection, the Minister issued a notification with respect to both reassessments confirming the same “in particular on the ground that income from property transferred by the taxpayer to minors has been deemed to be income of the taxpayer in accordance with the provisions of subsection 75(1) of the Act” (the Income Tax Act after tax reform.) The appellant appealed from both reassessments to this Board.

The parties agreed that the evidence in this case would be the Trust Document (Exhibit A-1) and the allegations of fact in paragraphs 2 to 5 of the defence to the notice of appeal, with one qualification. The one qualification was with respect to paragraph 3. Should it be that the appellant’s wife, Merida Phyllis Sachs, who was also the trustee, was a beneficiary under the trust, then at all relevant times she was over the age of 18 years. There was a separate defence filed for each appeal, but they were identical except for the amounts in dispute. Counsel for the parties also advised that if the Board held the assessments were correct in principle then the amounts added were not in dispute.

On December 1,1971, the appellant, as settlor, executed a trust deed. The trustee of the trust thus created was the wife of the appellant, Merida Phyllis Sachs. The settlor transferred to the trustee certain shares which in 1975 paid dividends of $4,666,67, and in 1976 paid dividends of $9,333.33. The Minister of his interpretation of the trust deed and subsection 75(1) of the Income Tax Act after tax reform was of the view that those sums were income to the appellant and assessed accordingly. The appellant contends that a correct interpretation fo the trust deed shows that the dividends are not within the ambit of subsection 75(1) and so the appeal should be allowed.

Subsection 75(1) of the said Act reads as follows:

Where a taxpayer has, since 1930 transferred property to a person who was under 18 years of age, either directly or indirectly, by means of a trust or by any other means whatever, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada, be deemed to be income or a loss, as the case may be, of the transferor and not of the transferee, unless the transferee has, before the end of the year, attained the age of 18 years.

The appellant, as stated, admitted the allegations of fact in the defence filed, with the stated reservation as to paragraph 3, which facts were:

2. On December 1, 1971, appellant settled upon his wife Merida Phyllis Sachs as trustee, $1 and other good valuable consideration for the purpose of establishing the Harold Sachs Family Trust (Trust).

3. On December 31, 1975, all beneficiaries of the Trust were under 18 years of age and appellant was at all times a resident in Canada.

4. On December 1, 1971, appellant transferred to the Trustee all of his shares in Glacier Realties (Ottawa) Ltd.

5. In the 1975 taxation year the Trust received dividends from Glacier Realties (Ottawa) Ltd in amount of $4,666.67 and remitted the said dividends to the beneficiaries of the Trust.

6. The Minister of National Revenue included the amount of $6,222.22 in appellant’s income for the 1975 taxation year on the assumption that the dividends received by the Trust in the 1975 taxation year were deemed to be income of the appellant and not of the beneficiaries of the Trust pursuant to the provisions of section 75(1) of the Income Tax Act.

7. By Notice of Objection dated January 17, 1978, appellant objected to said assessment and by letter dated July 4,1978 the Minister of National Revenue confirmed the assessment.

(This defence related to the 1975 taxation year. The allegations were the same for the 1976 taxation year except the year was changed as were the amounts.)

The trust deed is a document of some 19 pages, but only Article VIII thereof shall be reproduced:

ARTICLE VIII: PAYMENT OF INCOME AND CAPITAL

The Trustee shall invest and keep invested the Trust Estate until the first day of December, 1991 (hereinafter referred to as the “distribution date”) and may, from time to time, pay none, some or all of the net income derived therefrom or none, some or all of the capital thereof to or for the benefit of one, some or all of the children of the Settlor as the Trustee shall, in his absolute and uncontrolled discretion, determine; any income not so paid or applied in any calendar year to be added to form part of the Trust Estate; on the distribution date the Trust Estate shall be divided into as many equal shares as there shall be children of the Settlor then alive; and any child of the Settlor who shall not be then alive, but who shall have children him or her surviving, shall be considered alive for the purposes of such distribution; the Trustee shall keep the share from each such child invested and shall pay income and capital to such child upon such terms and in such manner as hereinbefore provided until such child shall attain the age of twenty-five (25) years, whereupon A of his or her share shall be paid to him or her for his or her own use absolutely; the remainder of such share shall be kept invested as aforesaid and the income and capital shall be paid as aforesaid until such child shall attain the age of 30 years whereupon the amount of such share remaining shall be paid to him or her for his or her own use absolutely; provided, however, that in the event that any such child shall die prior to the distribution date or, surviving the distribution date shall die prior to attaining the age of 25 years or, having attained the age of 25 years, shall die prior to attaining the age of 30 yars, leaving children him or her surviving, then the interest of such child in his or her share shall be subject to the defeasance and the share of such child or the amount thereof remaining shall be held in trust for the children of such deceased child alive at the date of such deceased child’s death in equal shares per stirpes, upon such terms and in such manner as herein provided; in the further event that such deceased child shall die in such manner as aforesaid, leaving no children him or her surviving, then the share of such deceased child or the amount thereof remaining shall be subject to defeasance and shall be held in trust for the brothers and sisters of such deceased child alive at the date of the death of such deceased child in such manner as herein provided; in the further event that there shall be no children of the Settlor alive at the distribution date or all of them shall die prior to attaining the age of 25 years or, if one of them shall have attained the age of 25 years but shall die prior to attaining the age of 30 years leaving no children them Surviving, to pay over the Trust Estate to or for the benefit of MERIDA PHYLLIS SACHS for her own use absolutely.

Counsel for the appellant clearly admitted that there was a transfer of property from the settlor to the trustee, but he did not admit and he clearly Stated he would not admit that there was a transfer of property to the beneficiaries of the trust—the childern. His submission was that, based on the trust deed, nothing vested in the children until 1991 and until that time the trustee had a discretion insofar as the income was concerned. The trustee could pay the income to any or all childern, could pay corpus to any or all children and, if she saw fit, could accumulate the income. There was no vesting in any child until 1991 and, in each of the years 1975 and 1976, the children in existence in those years, at the best, only had a hope of receiving any income or corpus. Counsel referred to a portion of the reasons for judgment of Thurlow, J (as he then was) in the case of Joseph B Dunkel man v MNR, [1959] CTC 375 at 379; 59 DTC 1242 at 1244:

It goes without saying that, if the rule set out in s 22(1) applies, the appellant will be liable for tax on the income in question, regardless of how harsh or unjust the result may appear to be. But, as it is not within the purview of the general taxing provisions of the statute to tax one person in respect of the income of another, the subsection must, in my opinion, be regarded as an exception to the general rule, and while it must be given its full effect so far as it goes, it is to be strictly construed and not extended to anything beyond the scope of the natural meaning of the language used, regardless again of how much a particular case may seem to fall within its supposed spirit of intendment.

Counsel for the respondent submitted that, by the Trust Deed, the children received a vested interest subject to divestment. His submission continued that, even if the children did not have a vested interest, nonetheless subsection 75(1) would still apply to make the income of the trust the income of the appellant. Counsel referred to the Reasons of Mr Boisvert in the case of John Arthur Meade v MNR, 34 Tax ABC 155; 63 DTC 997-33, and submitted that the instant appeal is the same as that case, and the appeal in the Meade case was dismissed.

Counsel for the appellant in reply to the submission of counsel for the respondent, while agreeing that the two cases were very similar, submitted that in one respect there was a marked difference. The first few lines of Article VIII (supra) clearly indicated the trustee could pay none or some or all of the income to the children, while in the Meade case the trustee had to pay some or all of the income to the child—he could not retain it all. He referred to clause 5(b) of the trust deed in the Meade case which reads as follows:

(b) In the second place after payment thereout of the yearly outgoings to accumulate such income and add the same at any time and from time to time to the corpus of the Trust Fund, with power to the Trustee in its sole discretion to pay or apply all or any part of such income towards the maintenance and education of James John Meade, the son of the Settlor, until he attains the age of twenty-one years.

It would appear to me that, subject to a consideration of the appellant’s submission with respect to difference—and in his submission it was a crucial difference—between this case and the Meade case, the Meade case should apply. His submission was that property was transferred to the child in the Meade case, but no so here. As I view the trust deed and subsection 75(1), property has been transferred to a person under the age of 18 years indirectly by means of a trust. As I read Article VIII of the trust deed, the property transferred to the trustee was from that instant vested in the children of the appellant, however, subject to divestment should it be that one child died and left him surviving no children. Such being the case, I am of the view that the income of the trust has been properly assessed as income of the appellant.

Judgment will go dismissing the appeals.

Appeal dismissed.