Date: 20101019
Dockets: A-428-09
A-429-09
Citation: 2010 FCA 280
CORAM: NOËL
J.A.
SHARLOW
J.A.
LAYDEN-STEVENSON J.A.
Docket: A-428-09
BETWEEN:
PAUL ANTLE
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Docket: A-429-09
BETWEEN:
RENEE MARQUIS-ANTLE SPOUSAL
TRUST
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
NOËL J.A.
[1]
These are two appeals
against the judgments of Miller J. of the Tax Court of Canada (the Tax Court judge),
dated September 18, 2009, dismissing the appeal by Mr. Antle (the appellant)
and quashing the appeal by the Renee Marquis-Antle Spousal Trust (the Trust)
from assessments issued by the Minister of National Revenue (the Minister) under
the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the Act)
in respect of their 1999 taxation year.
[2]
The two appeals were
consolidated by order of this Court dated November 12, 2009. The reasons which
follow dispose of both appeals and will be filed in docket A-428-09. A copy
will be filed as Reasons for Judgment in docket A-429-09.
[3]
The assessments in
question arise from a sale of shares by the appellant to a Canadian arm’s
length purchaser. In order to shelter the resulting capital gain from tax, the
appellant embarked on a plan known in tax circles as a capital step-up
strategy. In summary, the plan was for the appellant to settle a Barbados trust in favour of his wife, to convey the subject shares
to the Trust which would then sell the shares to his wife, who in turn would
sell them to the arm’s length purchaser. This series of transactions was to
take place in sequence in the course of the same day so that the proceeds of
disposition would find their way back into the appellant’s newly incorporated
business the next day by way of a loan from his wife. Documents purporting to
give effect to this plan were executed on December 14, 1999 and the Trust was
said to have come to an end in early 2000 upon payment of the trustee’s account.
[4]
Based on the
inter-play between certain provisions of the Act and of the Canada-Barbados Income Tax Treaty (the Treaty), both the appellant and the
Trust took the position in filing their respective returns that no tax was
payable in Canada as a result of these transactions. It is
common ground that, but for this plan, a taxable capital gain in the amount of
$1,299,821 would have been realized by the appellant on the sale of the shares
to the arm’s length purchaser.
[5]
The first assessment
issued by the Minister disregards the interim sale of the shares to the Trust
on the basis, inter alia, that the Trust was not validly constituted,
and levies the applicable tax in the appellant’s hands on the assumption that
the shares were sold directly to the arm’s length purchaser. The second
assessment was issued on the alternative assumption that the Trust did acquire
the shares before they were sold to the arm’s length purchaser, and is liable
to the applicable tax.
[6]
The Tax Court judge
held that the Trust was not validly constituted because it lacked certainty of
intention, certainty of subject-matter, and that in any event no transfer of
the shares to the Trust had taken place. He went on to express the view, in obiter,
that the Trust was not a sham. In the alternative to his conclusion that the
Trust was not validly constituted, he went on to find, also in obiter,
that the result obtained was abusive of the Act and the Treaty and that
accordingly, the sale of the shares to the Trust was to be disregarded based on
the general anti-avoidance rule (section 245). Having so found, he confirmed
the assessment issued against the appellant and vacated the one issued against
the Trust.
[7]
In support of his
appeal, the appellant submits that the Tax Court judge applied the wrong legal
test to determine if the Trust had been validly constituted and that he
incorrectly determined that there had been an abuse of the Act and the Treaty.
The Trust likewise maintains that it was validly constituted and that the
assessment issued against it ought to have been vacated solely because it had
been dissolved at the time when the assessment was issued, and the Act does not
empower the Minister to assess a Trust which no longer exists.
[8]
It is not necessary
to go beyond the Tax Court judge’s conclusion that the Trust was not validly
constituted in order to dispose of the appeals. The Tax Court judge said in
this regard (Reasons, para. 49):
I reach the inevitable conclusion that [the appellant] did not truly
intend to settle shares in trust with [the trustee]. He simply signed documents
on the advice of his professional advisers with the expectation the result
would avoid tax in Canada. I find that on December 14th, he never
intended to lose control of the shares or the money resulting from the sale. He
knew when he purported to settle the Trust that nothing could or would derail
the steps in the strategy. This is not indicative of an intention to settle a
discretionary trust. Frankly, I have not been convinced [the appellant] even
fully appreciated the significance of settling a discretionary trust, beyond an
appreciation for the result it might provide. I conclude that his actions and
the surrounding circumstances cannot support a conclusion that signing the Trust
Deed, as worded, reflects any true intention to settle shares in a
discretionary trust. I do not find that [the appellant] is saved by the
language of the Trust Deed itself, no matter how clear it might be. It does not
reflect his intentions. …
[My emphasis]
[9]
The appellant does
not dispute that he never intended to grant the trustee control of, or
discretion over, the shares. Nor does the appellant challenge the factual
finding of the Tax Court judge that, when all surrounding circumstances are
considered, there was a failure of certainty of intention in this case. The
sole attack against the Tax Court judge’s conclusion is that it is based on
circumstances that are external to the trust deed which is otherwise clear and
unambiguous. The contention is that this amounts to an error of law.
[10]
In support of this
contention, the appellant referred to the English cases Knight v. Knight
(1840), 49 E.R. 58, 3 Beav. 148, and Knight v. Broughton (1843), 8 E.R.
1195 (HL). I do not believe that these decisions stand for the proposition
advanced by the appellant. The statement in the passage relied upon by the
appellant is framed as “a general rule” (Knight v. Knight, at p. 68) and
is followed by words which suggest that context remains relevant (idem).
[11]
It would be a surprising
result if courts were bound by the formal expression of the parties and could
not look to the surrounding circumstances, including the conduct of the
parties, in assessing whether the intent to settle a trust is present. Indeed,
in Fraser v. Minister of National Revenue, 91 DTC 5123 at page 5128,
Reed J. stated that both the written documents and the actions of the parties
were to be considered in the determination of the intention of the parties:
… in any event, intention
is determined by all of the evidence, including the conduct of the parties and
the terms of the written documentation which flowed between them, and not
merely on the basis of one person’s subjective view.
On
appeal, (95 DTC 5685), this Court reiterated that a finding of whether or not a
trust has been created was to be made on the facts of the case, as evidenced by
both the documents and the actions of the parties.
[12]
A test that requires
one to look at all of the circumstances, and not just the words of the trust
deed, is an approach that appears to have been adopted by Canadian courts
generally. In Mohr v. C.J.A. (1991), 40 E.T.R. 12, for instance the
British Columbia Court of Appeal held that (p. 13):
While the words “trust”,
“trustees”, and ‘trust deed’ appear from time to time in the agreement, and
there is an incomprehensible reference to “a liquidation trust provision in
keeping with the current Trust Act of B.C.,” those words and
expressions are not determinative of the issue. The task of the Court is to
construe the agreement against the background facts to determine “objectively
the ‘aim’ of the transaction”.
[My
emphasis]
[13]
This approach was
also followed by the Court of Queen’s Bench of Alberta in Canada Trust Co.
v. Pricewaterhouse Ltd. et al. (2001), 288 A.R. 387, and in McEachren v.
Royal Bank (1990), 24 A.C.W.S. (3d) 731, [1991] 2 W.W.R. 702. Finally, in Air
Canada v. M&L Travel Ltd., [1993] 3 S.C.R. 787, a case relied upon by
the appellant, the Supreme Court refers to the words of the trust deed as
“evidence of intention’’ and then goes on to consider not only the words but
also the actions of the parties (para. 30).
[14]
In my view, it was
open to the Tax Court judge to consider the actions of the appellant and the
surrounding circumstances in determining whether certainty of intention was
present despite the clarity of the trust deed.
[15]
This suffices to
dispose of the appeals. However, I believe it useful to address briefly the Tax
Court judge’s opinion, in obiter, that the Trust was nevertheless not a
sham.
[16]
The authors of Waters’
Law of Trusts in Canada, 3rd Edition, Thomson Carswell at page 145 address
the concept of a sham as it applies to the very situation with which the Tax
Court judge was confronted:
What is the position if
the terms of the trust instrument appear usual in character, but the actual
intention is to disregard those terms and for the settler, either as trustee
himself or as instructor of the trustee, to retain control of the assets and do
with the trust property as he pleases? This hidden intention being revealed, is
the trust void as a “sham”, or is the trust valid but the trustee is acting in
breach of trust?
The term “sham” in
English and offshore parlance, adopted in Canada, is not a precise term. It is more a turn of
speech; its meaning has been given as “something that is not what it seems; a
counterfeit” (Black’s Law Dictionary, 7th ed. (St-Paul. Minn.: West Group 2000)). It
originated in England with regard to
transactions, to which of course there are always at least two parties, and it
means the parties’ true intent is that others shall be misled by the terms
appearing in the transactional instrument. The real terms are something other,
and the instrument is therefore declared void. Used in the trust law setting,
now a practice in Canada as elsewhere, it
describes a trust that the courts will declare void because the provisions in
the trust instrument do not represent the settlor’s true intent as to the terms
upon which the trustee is to hold the trust asset(s). Though the trust
instrument sets out the persons or purposes that are to benefit, the settlor’s
true intent is to retain control of the assets purportedly held in trust
because the true intent is to appear to have disposed of the assets and so to
evade tax, to defeat personal creditors, or prejudice the claim of an estranged
spouse or the children of the relationship. A trust created by the settler who
declares himself the trustee of the property, rather than make a transfer of
assets to another as trustee, lends itself to this misrepresenting behaviour.
But another as trustee who agrees to assist the falsity, or who is indifferent
to whether, in fact, he merely implements the settlor’s decisions, will equally
enable the assertion to be made that the fraud [sic] [I believe the
intended word was “trust”] is but a deception, and consequently void.
[17]
In addressing this
issue, the Tax Court judge reiterated with even greater force some of his
earlier findings (Reasons, para. 67):
… I do not accept that [the trustee] had any real discretion. These
matters were absolutely preordained. The pretence of discretion was critical to
make the strategy work, but I entertain no doubt whatsoever in this
situation, it was a pretence. If [the trustee] received the shares at all,
he received them on the basis that the sole beneficiary [i.e. the wife] had
already agreed to buy them. By distributing the proceeds of such sale back to
the sole beneficiary, there was no possibility of any comeback against him. The
arrangement was, in and of itself, effectively void of discretion.
[My
emphasis]
[18]
However, he ruled
that there was no intentional deception and therefore no sham (Reasons, para.
71):
The stumbling block for the [r]espondent is that, while all the
circumstances point to an arrangement that was inaccurately reflected in the
Trust Deed, there was no intentional deception but, if there was deception it
was by the very existence of this clever avoidance strategy. Although [ the
appellant] and [the trustee] and indeed, Mr. Brown, Mr. Devries and Mr.
Batallia could all, with some legitimacy, say we believe the trustee always had
the discretion to say no, I find they all knew with absolute certainty that
the trustee would not say no. The plan was such it made no sense for the trustee
to say no.
[My
emphasis]
[19]
The Tax Court judge
found as a fact that both the appellant and the trustee knew with absolute
certainty that the latter had no discretion or control over the shares. Yet
both signed a document saying the opposite. The Tax Court judge nevertheless
held that they did not have the requisite intention to deceive.
[20]
In so holding, the
Tax Court judge misconstrued the notion of intentional deception in the context
of a sham. The required intent or state of mind is not equivalent to mens
rea and need not go so far as to give rise to what is known at common law
as the tort of deceit (compare MacKinnon v. Regent Trust Company Limited,
(2005), J.L.Rev. 198 (CA) at para. 20). It suffices that parties to a
transaction present it as being different from what they know it to be. That is
precisely what the Tax Court judge found.
[21]
When regard is had to
the reasons as a whole, it is apparent that the only reason why the Tax Court
judge reached the conclusion that he did is his finding that the appellant and
the trustee - as well as all participants in the plan - could say “with some
legitimacy” that they believed that the trustee had discretion over the shares
(Reasons, para. 71). While the claim to “some legitimacy” may show that there
was no criminal intent to deceive (as would be required in a prosecution
pursuant to subsection 239(1) of the Act) and perhaps no tortious deceit, it
does not detract from the Tax Court judge’s finding that both the appellant and
the trustee gave a false impression of the rights and obligations created
between them. Nothing more was required in order to hold that the Trust was a
sham.
[22]
I respectfully
conclude that the Tax Court judge was bound to hold that the Trust was a sham
based on the findings that he made.
[23]
I would therefore
dismiss both appeals with one set of costs in file A-428-09. I express no views
on the alternative ground on which the Tax Court judge confirmed the validity
of the assessment against the appellant.
“Marc Noël”
“I
agree
Karen
Sharlow J.A.”
“I
agree
Carolyn
A. Layden-Stevenson J.A.”
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