Ross P Alger and Paul a Ferner in Trust for the Children of Sam Hashman v. Minister of National Revenue, [1972] CTC 2227, 72 DTC 1191

W O Davis:—The appellants herein have appealed from assessments to income tax for the taxation years 1966 and 1967 dated December 9 and 23, 1969, respectively. The issue in respect of both years concerns the correct interpretation of subsections (2), (4), (7) and (10) of section 63 of the Income Tax Act, RSC 1952, c 148 and amendments thereto, and their application with respect to a certain trust settlement dated July 19, 1961. In the assessments appealed against, the Minister of National Revenue has assessed the appellant trustees on the income earned by the said trust settlement, which income was in their hands at the close of each of the two years in question.

On January 10, 1969 Sam Hashman, of the city of Calgary, Alberta, executed what is referred to as “a settlement agreement”, setting forth in writing the terms of a trust for the benefit of his four children, the said trust to take effect retroactively as of July 19, 1961.

These two appeals came on before me for hearing at Calgary, Alberta on November 8, 1971 at a sittings of the Tax Appeal Board as it was then constituted, and counsel for the parties, with the Board’s concurrence, undertook to file an agreed statement of facts and written argument, the question being solely one of law and the interpretation of certain documentary extracts.

In due course, the aforesaid trust agreement, executed January 10, 1969, was filed in place of an agreed statement of facts, and written arguments were also filed in due course by counsel for the parties.

lt appears that income tax returns were filed for the trust by the trustees for each year, wherein the trustees reported no income for the trust since the trustees considered that, in pursuance of the terms of the trust settlement, the income of the trust had been allocated and set aside at the end of each calendar year for the benefit of the specific beneficiaries of the trust. Income tax returns were also filed each year on behalf of each of the beneficiaries of the trust, being the infant children of the said Sam Hashman born prior to December 31, 1964, and then living, and income tax was paid by the trustees on these incomes, as exigible.

Late filing penalties in the amount of $30 were levied on the trustees in respect of the late filing of the children’s 1966 income tax returns. However, on November 4, 1969 the late filing penalty was refunded to the trust with the accompanying explanation that the penalty was cancelled “as income of trust taxable in the hands of the Trustee”. Subsequently, on December 9, 1969, the respondent assessed the trustees to tax and penalties on the 1966 income of the trust with a notation on the Notice of Assessment to the effect that “Income earned by Trust is deemed taxable in Trustee’s hands”. Similarly, and for the same reason as that given for 1966, the respondent assessed the trustees to tax on December 23, 1969 for the year 1967.

On February 26, 1970 the appellant trustees made formal objections to the assessments just referred to and, after a period of more than 180 days had elapsed without the Minister having notified the trustees that he had vacated or confirmed the said assessments or reassessed, the appellants then instituted an appeal to the Tax Appeal Board.

In assessing the appellants in respect of the 1966 and 1967 taxation years, the Minister has assumed, inter alia:

(a) that pursuant to the provisions of paragraph 1(b) of the Trust. the accumulated income allocated to each beneficiary of the Trust as of December 31st of each year is only paid to each beneficiary if he or she either attains the age of twenty-one years, or dies before attaining that age and leaves surviving a child which does attain that age. The accumulated income of the Trust allocated to each beneficiary is not payable to the beneficiary’s estate in the event of the death of the beneficiary before attaining the age of twenty-one.

(b) that as of December 31st, 1967, none of the children of Sam Hashman born prior to December 31st, 1964, had attained the age of twenty-one years.

(c) that accordingly, the income of the trust allocated to each beneficiary as at December 31st of each year had not vested in that beneficiary.

In addition, in his Reply to the appellants’ Notices of Appeal, the respondent submits that, pursuant to the terms of the trust, the income from the corpus of the trust had not vested in any of the beneficiaries as at December 31, 1967.

The crux of the problem to be considered is the matter of exactly when the interest of the beneficiaries vested, or will vest, and the answer in turn rests upon the correct interpretation to be given to paragraph 1(b) of the aforesaid trust agreement, which is as follows:

NOW. THEREFORE THIS AGREEMENT WITNESSETH:

1. All property acquired and to be acquired by the Trustees under the provisions of this Agreement (which shall include all property acquired by the Trustees on and since the effective date hereof) for the Beneficiaries and also the monies, investments, securities and other property whether real or personal, which from time to time in the exercise of the powers herein contained, may at any time be purchased, acquired, invested in or converted by the Trustees out of the trust monies or property or out of the income and realization therefrom, all of which and the property for the time being and from time to time in the hands of the Trustees are herein referred to as “the trust fund”, are held by the Trustees upon the trusts and subject to the rights, powers, privileges and provisos herein declared and expressed concerning the same, that is to say:

(b) On or as of December 31 of each year to divide the net income from the trust fund into as many equal shares as there shall be children. of the Settlor (born prior to the 31st day of December, 1964) then living and to hold each such share in trust for each such child and to keep such share invested and to accumulate the income thereon, subject to the provisions hereof, until such child attains the age of 21 years when such income and the accumulations thereon shall be paid to such child; Provided That, for the purpose of making such division, if a child of the Settlor (born prior to the 31st day of December, 1964) shall be deceased at the time of making any such division, but such deceased child shall leave a child or children him or her surviving, then the share of income that would have been set aside for such deceased child if living shall be divided among and held in trust for the children of such deceased child in equal shares and the share held for each such child of such deceased child shall be kept invested and the income thereon accumulated until any such child of such deceased child attains the age of twenty-one (21) years when such income and the accumulations thereon shall be paid to such child of such deceased child; Provided That in the event any such child of such deceased child shall fail to attain the age of twenty-one (21) years then such income and the accumulations thereon that would otherwise have been paid to such child of such deceased child shall be divided among the remaining children of such deceased child as attain the age of twenty-one (21) years and if no children of the deceased child attain the age of twenty-one (21) years then such income and the accumulations thereon shall be divided among the children of the Settlor that do attain the age of twenty-one (21) years and the foregoing provisions as to a deceased child of the Settlor shall apply mutatis mutandis.

Reference might also be made here to paragraphs (d) and (e) of the said clause 1, which read:

(d) Notwithstanding anything herein contained, the Trustees may in their discretion advance to or on behalf of any child of the Settlor (born prior to the 31st day of December, 1964) or, in the case of a deceased child of the Settlor (born prior to the 31st day of December, 1964) with a child or children then living, then to or on behalf of any child or children of such child (a) from the income held in trust for such child, if any, (b) from the capital of any child’s portion of the trust fund, if any, and (c) such amounts from the trust fund as the Trustees may consider necessary or reasonable for the maintenance, education and advancement in life of such child of the Settlor or the children of a deceased child of the Settlor.

(e) In the event of the death of all the children of the settlor (born prior to the 31st day of December, 1964) before any of them attain the age of twenty-one (21) years and none of such deceased children of the Settlor are survived by a child or children who attain the age of twenty-one (21) vears, then the trust fund shall be paid, transferred and delivered to DINA HASHMAN (wife of the Settlor); PROVIDED THAT if she be not then living then the trust fund shall be paid, transferred and delivered to ISAAC HASHMAN. brother of the Settlor, and EDITH SUGARMAN, sister of the Settior, in equal shares and if either of the said Isaac Hashman or Edith Sugarman be not then living, then the trust fund then remaining shall be paid to the survivor thereof and if the survivor thereof be then deceased to the children then living of both the said Isaac Hashman and of the said Edith Sugarman — the trust fund to be distributed to all such children in equal shares.

The relevant provisions of section 63 of the Income Tax Act as applicable to the 1966 and 1967 taxation years are as follows:

63. (2) A trust or estate shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for his own income tax, be deemed to be in respect of the trust or estate property an individual; but where there is more than one trust and

(a) substantially all of the property of the various trusts has been received from one person, and

(b) the various trusts are conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary, or group or class of beneficiaries,

such of the trustees as the Minister may designate shall, for the purposes of this Act, be deemed to be in respect of all the trusts an individual whose property is the property of all the trusts and whose income is the income of all the trusts.

(4) For the purposes of this Part, there may be deducted in computing the income of a trust or estate for a taxation year such part of the amount that would otherwise be its income for the year as was payable in the year to a beneficiary or other person beneficially interested therein or was included in the income of a beneficiary for the year by virtue of subsection

(2) of section 65.

(7) For the purposes of subsections (4), (4a), (4b) and (6), an amount shall not be considered to have been payable in a taxation year unless it was paid in that year to the person to whom it was payable or he was entitled in that year to enforce payment thereof.

(10) Where the income of a trust or estate for a taxation year or any part thereof was not payable in the year but was held in trust for an infant or minor whose right thereto had vested and the only reason that it was not payable in the year was that the beneficiary or other person beneficially entitled was an infant or minor, it shall, for the purpose of subsections (4) and (6), be considered to have been payable to him in the year.

(The italics are mine.)

lt is the appellants’ submission that the gift of income under the trust agreement is vested in the infant children of Sam Hashman and that the only reason that it was not payable to the children in the year was hat the persons beneficially entitled were still infants. The appellant relies upon such authorities as In re Bevan’s Trust (1887), 34 Ch D 716, in support of this submission and on the provisions of subsection 63(10) of the Income Tax Act. In my opinion, the key to that provision rests upon the question of vesting, that is, had the right to the income from the trust vested in the children of Sam Hashman at the relevant point of time? To so determine, one must carefully consider the provisions of paragraph 1(b) of the trust agreement (supra) and the conditions for possible distribution to other beneficiaries as contained in paragraph (e) thereof.

The appellants also argue that, in the instant matter, a gift was given at a future date accompanied by a gift of maintenance of the whole or a part of the income (see paragraph 1(d)), and that such payment of income is to be treated as having vested the gift. In this regard reference was made to /n re Ussher, [1922] 2 Ch 321, and In re Turney, [1899] 2 Ch 739.

The Minister, on the other hand, takes the position that the beneficiaries’ right to the income of the trust had not vested in the years in question, as none of the beneficiaries had attained the age of 21 years and because that eventuality, under the terms of the trust agree- ment, is a condition prerequisite to the vesting. He therefore submitted that, if his submission is correct, then the income must be taxed in the hands of the trustees rather than in the hands of the infant beneficiaries.

Both counsel drew my attention to many decisions of the Canadian courts and of the courts of Great Britain, where the question of the vesting of an interest arising under a trust settlement has called for resolution, and I have considered those references as well as the very able and extensive written submissions put forward on behalf of the respective parties.

In arriving at a conclusion in this matter, it must be kept in mind that the corpus of the trust and the income arising therefrom are to be distinguished, as each is dealt with separately in the trust agreement. As already indicated, the sole question calling for determination is whether or not the income from the trust corpus has vested in the hands of the beneficiaries. Upon that determination rests the answer to the question of whether or not the trustees have a liability for income tax.

The trust agreement sets out very clearly that the trustees are required “to divide the net income from the trust fund into as many equal shares as there are children of the Settlor (born prior to the 31st day of December, 1964) then living and to hold each such share in trust for each child and to keep such share invested and to accumulate the income thereon, subject to the provisions of the said trust until such child attains the age of 21 years, when such income and the accumulations thereon shall be paid to such child”. It appears clear that the interest of a child is contingent until such time as it has attained the age of 21 years, at which time it may very well become vested. It seems that the settlor had it well in mind that the benefit of any beneficiary under the trust agreement was not to be transferred to any one of his children or to the child or children of a deceased child until such child or children had attained the age of 21 years.

The question of vesting must, in my opinion, depend upon a full and careful consideration of the specific provisions of the settlement agreement. On this basis, and keeping in mind the very useful jurisprudence cited with respect to trusts and the vesting of interests thereunder, I have concluded that, in the present circumstances, the beneficiaries under what may be referred to herein as “the Hashman Trust” do not have a vested interest in the income from the corpus of the trust until such time as they have fulfilled all of the personal qualifications required by the terms of the said trust, and therefore did not have a vested interest under the said trust in the years 1966 and 1967.

Having reached this conclusion, I would confirm the Minister’s assessments and dismiss these appeals.

Appeals dismissed.