Roland St-Onge:
1 This appeal is from a reassessment dated June 21, 1974 with respect to the appellants' 1973 taxation year. It came before me on June 16, 1975 in the City of London, Ontario.
2 The undisputed facts are as follows:(1) Two of the executors and trustees of this estate, Fitz James Bridges and Margery Lee Bridges, are residents of Mount Clemens, Michigan, USA, and the third executor and trustee, R Robert Easton, is resident in Ontario.
(2) All of the assets of the estate are and always have been physically situated within Ontario and the trust is and always has been a resident of the Province of Ontario.
(3) The names and residences of the three daughters of Fitz James Bridges are and were at all material times Harriet Burton of Hood River, Oregon, USA, Sally Benner of Traverse City, Michigan, USA, and Mary Harmeson of East Lansing, Michigan, USA.
(4) The late Maude E Bridges died on February 27, 1962, and letters probate of her last will and testament were granted to the appellants on November 5, 1962 by the Surrogate Court of the County of Essex.
(5) The taxation year of this trust ends each year on December 31 and its 1973 taxation year thus ended on December 31, 1973. Pur suant to paragraph 4(b) of said last will and testament, Fitz James Bridges elected as life tenant to take only 90% of the net income of the trust for its 1973 taxation year and the appellants, accordingly, pursuant to the second proviso of paragraph 4(b), exercised their discretion as executors and trustees with respect to the remaining 10% of said net income in favour of paying said 10% equally to the said Harriet Burton, Sally Benner and Mary Harmeson. Accordingly, pursuant to subsection 104(21) of the Income Tax Act, the trust in the return of its income for its 1973 taxation year under Part I of the Act designated $4,196.51 to Fitz J Bridges, $155.43 to Harriet Burton, and the same amount to Sally Benner and to Mary Harmeson, that is, in total the sum of $4,662.79 in net taxable capital gains earned by this trust in 1973.
(6) In assessing the appellants' T3-1973 return the respondent accepted the appellants' designation under subsection 104(21) of the Act.
(7) None of the US resident beneficiaries has a permanent establishment in Canada.
3 According to the exhibits filed by the appellants, it appears that this trust in its T3-1972 return similarly designated $127.86 in net taxable capital gains earned by it in 1972 equally to the three daughters of Fitz James Bridges. Initially the Minister refused to assess this return but finally the trust was assessed tax of $27.52. Following an objection the Minister refunded the said $27.52 on July 15, 1974.
4 Then, for the 1973 taxation year which is under appeal, the trust tried to obtain the same treatment but the Minister refused and explained his reasons in a letter dated May 31, 1974, which reads in part as follows:
Please be advised that the 1972 objection was allowed by the Department on a Judgment basis and was not to create a precedent, because of the small amount of tax involved. Because of the rather large amount involved in 1973, I am directed to have our Head Office officials look at this matter again.
5 Naturally this letter did not please Mr Easton who had substantial correspondence with the Department.
6 At the hearing of this appeal no witness testified and counsel for the appellants argued on two grounds: (1) on the merits of the case, and (2) on res judicata.
7 On the merits, he explained that the scheme of the old Act at sections 63 to 65 inclusive was to treat a trust as a channel so that it would hold income for the beneficiaries in order to avoid double taxation. According to him we have the counterpart in the new Act at sections 104 to 108 inclusive and he explains:
That principle may be expressed by saying that to the extent that trust income is payable to a beneficiary in a taxation year under the terms of a trust, whether it in fact is paid or not, to such extent the amount so payable is deductible from the trust income for such taxation year and the trustees are not required to include same in taxable income and pay tax thereon (subsections (6) and (21) of section 104).
8 He also stated that, according to Article VIII of the Canada-US Tax Convention, a non-resident does not have to pay tax on capital gains, and that the Minister, by taxing the trust in his reassessments, is trying to do indirectly what he is forbidden to do directly.
9 He admitted that a trust is taxed as an individual and that no deductions may be taken under section 109 or paragraph 110(1)(d), but he also maintained that once a trust designates the beneficiaries under subsection 104(21), this provision preserves and applies the “conduit” principle to capital gains received by a trust, a principle otherwise preserved for ordinary trust income by subsection 104(6). Consequently the net capital gains obtained in 1972 and 1973 by the trustees are deemed to be taxable capital gains of “the daughters of Fitz James Bridges designated by the trustees in the T3 (all of whom are US residents)”. If the capital gains are deemed those of the US residents, then Article VIII of the Canada- US Tax Convention applies, which article reads as follows:
Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.
10 On the other hand, counsel for respondent argued that, notwithstanding the fact that the trust has made a designation pursuant to subsection 104(21), it must nevertheless, in order to remove the equivalent amount from its income, be eligible to make a deduction in computing its income pursuant to subsection 104(6) of the Act. According to him, a trust ordinarily is able to do so. However, where the payment is made to a non-resident beneficiary, subsection 104(9) provides that the trust in such circumstances shall not be able to make a deduction pursuant to subsection 104(6) of the Act.
11 As to the question of res judicata, both counsel referred the Board to voluminous jurisprudence which I have read with great interest, but I do not intend to comment on it in great detail.
12 When the Minister makes a reassessment following a notice of objection, his decision can in no way whatsoever be regarded as a judgment from a competent tribunal, for the following reasons. According to the jurisprudence cited, the Minister can reassess at any time before the rendering of a judgment. In no way can his decision be considered as a judgment and, consequently, in the case at bar the Minister exercised an administrative and not a judicial function. Furthermore, the Minister is not a tribunal, since he is always one of the two parties before the court. As no one is a good judge in his own case, the Minister's decision, when he reassesses on a notice of objection, is only administrative, and cannot be branded as “a decision of a competent tribunal”. He is not a tribunal but only a party before it. Consequently the appeal cannot succeed on the question of res judicata.
13 As to the other issue, the new Income Tax Act is not ambiguous in that respect. When a payment is made to a non-resident beneficiary, subsection 104(9) provides that a trust in such a case shall not be able to make a deduction pursuant to subsection 104(6) of the Act. Counsel for the appellant admitted that a trust is taxed as an individual. Consequently, the appellants who are taxed as any ordinary taxpayer in this country are not allowed to take advantage of subsection 104(6) since subsection 104(9) prevents them from doing so.
14 For the above reasons the appeal is dismissed.
Email this Content