Fiducie Historia – Tax Court of Canada finds that trust distributions were lawful and deductible even though on paper the trustees had improperly delegated their powers

A discretionary family trust, whose beneficiaries included the family patriarch (LR) and his two sons (the Rémillard Brothers), was a shareholder of a family corporation (Maybach) along with LR and the Rémillard Brothers. The proceeds of an asset sale were used by Maybach to redeem the shares held by LR and the Rémillard Brothers. However, since the trustees of the trust would thereafter all be unrelated individuals, this would have caused an acquisition of control of Maybach-group companies and an extinguishing of losses. To avoid this result, the trustees entered into an agreement with the Rémillard Brothers, in intended reliance on s. 256(7)(a)(ii), providing:

The Trustees hereby undertake to exercise their powers … according to the directives provided by the Brothers and to make no decision regarding the Historia Trust without first obtaining the agreement of the Rémillard Brothers. …

If the Trustees or any of them disagree with the directives received from the Rémillard Brothers, they must then resign … .

The trust then paid distributions of over $50 million to LR that were authorized by the Rémillard Brothers.

Article 1275 of the Civil Code of Quebec (the CCQ) provided:

The … beneficiary may be a trustee but he shall act jointly with a trustee who is neither the settlor nor a beneficiary.

CRA considered that the above agreement had the effect of constituting the Rémillard Brothers as de facto trustees of the trust, contrary to the trust deed and Art. 1275, so that the determinations to make the distributions pursuant to such unlawful agreement were a nullity, with the result that the distribution amounts were not “payable” as required by s. 104(6).

Smith J rejected the trust’s argument that the distributions should be considered to have “became payable” for purposes of s. 104(6) solely because they were paid to the beneficiary and irrespective of whether they were unlawful.

However, he went on to find (at paras. 83, 104), in light of the testimony, that the independent trustees, although consulting with the Rémillard Brothers, had in fact been making the trust decisions:

Even if clauses 2.1 and 2.2 of the Agreement were contrary to the trust deed and Article 1275 of the CCQ … the Court concludes based on the preponderance of the evidence submitted that the Rémillard brothers did not act as trustees or “de facto trustees.” …

[D]espite the Agreement, the Rémillard brothers did not, in fact, usurp the trustees' powers.

Accordingly, the distributions were not unlawful, and had been payable.

Neal Armstrong. Summaries of Fiducie Historia v. The King, 2024 CCI 76 under s. 104(6)(b) and General Concepts – Illegality.