Ablan Leon (1964) Ltd. v. MNR, 76 DTC 6280, [1976] CTC 506 (FCA)

Heald, J:—This is an appeal from a judgment of the Trial Division, allowing the respondent’s appeal from the decision of the Tax Review Board in respect of reassessments made under the Income Tax Act for the 1965, 1967, 1968 and 1969 taxation years. Each reassessment attributed to the appellant’s taxable income for the relevant years, all of the net income from a furniture, home-furnishing and appliance business carried on under the name Ablan Leon Distributors. It is the appellant’s position that Ablan Leon Distributors Limited was a limited partnership under The Limited Partnerships Act of Ontario, that the appellant was the general partner and general manager of the partnership, operating same for the benefit of the partners thereof, its partners being seven “primary” trusts. lt is the appellant’s further position that the profits of said partnership were to be distributed as follows: Accordingly, in its tax returns, the appellant had included only 10% of the net income derived from the alleged limited partnership.

The issue in this appeal is whether the appellant, as it contends, was the owner only of a 10% interest in the limited partnership and was thus taxable only on a 10% share of the taxable income thereof, or was, as contended by the respondent, in fact liable for tax on the whole of the taxable income of the business since, in the submission of the respondent, no partnership ever came into existence, at least for tax purposes. The answer to this question depends, at least to some extent, on whether or not trusts were ever created and, if so, whether or not they ever became limited partners with the appellant as general partner in the business from which the income in question was derived. The respondent contends that no partnership ever came into existence or ever existed between the appellant and the seven “primary trusts”. The respondent submits further that the seven “primary trusts” never came into existence, and, alternatively, if they did, it was not until the execution of the trust documents which was not earlier than the fall of 1964 (some time after May 1, 1964, the date on which, in the submission of the appellant, the limited partnership commenced to do business).

This trial was a lengthy and complex one. A perusal of the transcript thereof establishes the following factual situation. Prior to May 1, 1964 the Leon furniture business was carried on by a partnership of five corporations, each of which was owned by one of the five Leon brothers: Anthony, Edward, George, Lewie and Joseph. George is an invalid, Joseph is a practising medical doctor, the other three are active in the Leon furniture business. By a letter dated March 5, 1964 Mark Perlmutter, a chartered accountant, advised the Leons’ general solicitor that, because of the enactment of section 138A of the Income Tax Act, companies comprising a corporate partnership would likely to be deemed to be associated, each with every other, by the Minister of National Revenue and that this difficulty could be overcome by transferring the business to a limited partnership consisting of a general corporate partner (the shares of which would be owned in equal proportions by the five Leon brothers) together with several trusts as limited partners. Perlmutter gave an example demonstrating that by the use of primary and secondary trusts for members of the Leon families, the income from the Leon family furniture business could be split some 42 ways. He stated that on an annual net income from the business of $500,000 there would be an annual tax saving of about $140,000.

The plan recommended by Perlmutter and W D Goodman (a Toronto lawyer) was to create five primary family trusts, the beneficiaries of which were to be trusts for the benefit of the wives and children of the Leon brothers. Additionally, there were to be two personal primary trusts for the personal benefit of George and Joseph Leon. Perlmutter also stated that the proposed plan might accomplish “substantial estate planning advantages”. He also advised that the trusts “must be settled by a non-resident” and that “the capital contributions of the partners be equal and substantial”.

Following a series of family meetings, it was decided to try to implement the plan proposed by Mr Perlmutter. Eddie Egnatios was asked by the family to be the settlor of the trusts referred to in Mr Perlmutter’s plan. Mr Egnatios was a brother-in-law of the Leon brothers and was a resident of Michigan, USA. Egnatios was instructed in what was wanted of him in settling the trusts by one or more of Marjorie Leon (the sister of the five Leon brothers), Anthony Leon, Mark Perlmutter and T G Spencer, the family solicitor. Mr Egnatios sent seven $100 cheques (to cover the primary trusts) and thirty-six $25 cheques (to cover the secondary trusts) to the trustees, Marjorie Leon and T G Spencer and all of the cheques were made payable to said parties as trustees. There was no indication as to which of the cheques was for which trust. Said two trustees were to be the trustees of all the trusts and were chosen by the Leon brothers and not by the settlor, Mr Egnatios. At the time the cheques were sent by Mr Egnatios to the trustees, there were no trust documents in existence establishing the trusts. In his evidence, Mr Egnatios acknowledged that, in issuing said cheques, he was fulfilling “the purpose of the trust and the purpose of my brothers-in-law”. The 43 cheques referred to supra were deposited in 43 separate bank accounts opened by the trustees. Mr Egnatios conceded in his evidence that he would have been hesitant to settle substantially larger amounts on the trustees if such larger amounts had been necessary. Mr Egnatios also agreed that the trust documents setting out the terms of the various primary and secondary trusts were executed by him at some unknown date not earlier than the fall of 1964 despite the fact said documents bore a date of May 27, 1964.

There was also evidence by Marjorie Leon, one of the trustees, that two of the primary trust documents as finally completed were incorrect in the following particulars:

(a) the George Leon Trust which was to have been a personal trust for the benefit of George Leon listed as beneficiaries the wife and children of George Leon; and

(b) the Joseph M Leon Trust which was to have been a personal trust for the benefit of Joseph Leon listed as beneficiaries the wife and children of Joseph Leon.

Notwithstanding the actual terms of these trust documents, the evidence is that the moneys payable to said trusts were paid directly to George Leon and Joseph M Leon.

The evidence also established that most of the secondary trusts for the benefit of the wives and children of the Leon brothers were not in the form as originally executed by Mr Egnatios since some pages thereof were inserted by the trustees subsequent to execution by the settlor. The evidence is, however, unclear as to whether or not said changes were later ratified by Mr Egnatios. In his evidence, Mr Egnatios was unable to clear this up. It was, however, apparent from his evidence that he was ignorant of the rights accruing to him under the trust agreements should a dispute arise at any time between the trustees.

Referring to the trust documents themselves, they provided that, in each case, the Leon brother, whose wife and children were being benefited, had the power to replace the trustees and could also direct payment of both trust income and capital among the beneficiaries.

The appellant was incorporated on April 21, 1964 and the 105 issued common shares were owned in equal shares by the five corporations owned by the five Leon brothers. The five Leon brothers were the appellant’s permanent directors.

The evidence establishes some irregularities concerning the early corporate activities of the appellant. The incorporating shareholders of the appellant were five in number. The minutes of the directors’ meeting at which shares were transferred from the incorporating shareholders to the Leon brothers and at which the first directors and officers resigned and the permanent directors and officers were elected are dated April 29, 1964, however no directors’ meeting was in fact held on that date and the minutes were not signed until some months later. Subsequent to April 29, 1964, the date of their supposed resignation, the first officers of the appellant signed various documents, in their respective capacities with the appellant.

Long before the execution or preparation of the trust documents, a purported agreement of limited partnership was entered into between the appellant as general partner with the seven primary trusts as limited partners. This agreement is dated April 28, 1964 and signed on that date on behalf of the appellant by Anthony and Joseph Leon, neither of whom were on that date, either officers, directors or shareholders of the appellant.

The limited partnership agreement provided that the partnership was to endure until April 30, 1984 or until earlier terminated. However, the certificates of limited partnership registered on April 30, 1964 provided for termination of the partnership on April 30, 1969. Said agreement also provided that no capital contribution was to be made by the appellant and that the limited partners were to contribute $10,000 each (the George Leon Family Trust and the George Leon Trust to make up their $10,000 share by contributing $5,000 each; with the same provision to apply to the Joseph M Leon Family Trust and the Joseph M Leon Trust). Furthermore, each limited partner assumed liabilities of and to the partnership greatly in excess of their capital contributions. The appellant as general partner was to be in sole and complete charge of the partnership business. No partner was to carry on any other business. The appellant was to receive 10% of the profits, the five limited partners were to receive 18% each (it being agreed that the George Leon Family Trust and the George Leon Trust were to receive 18% between them; with the same situation applying to the Joseph M Leon Family Trust and the Joseph M Leon Trust—there was also a provision that the first $20,000 of the 18% share was to go to the personal trust with any excess going to the family trust).

It was also a term of the limited partnership agreement that the appellant, as general partner) could require any limited partner to lend back to the partnership any or all of its share of the profits for a period of up to 20 years at 6% interest.

Presumably, in an attempt to meet the capital contributions referred to supra, Marjorie Leon borrowed $50,000 on her own security from the bank for which she gave a promissory note, said note being endorsed by Marjorie Leon and T G Spencer as guarantors. Said amount of $50,000 was, seemingly, sufficient to satisfy the capital contributions set out in the limited partnership agreement without utilizing any of the amounts remitted by Mr Egnatios to the trustees and referred to supra. The interest payable on said loan was charged to Ablan Leon Distributors. Said $50,000 which was borrowed by Marjorie Leon appeared in the accounts of the corporate partnership according to bank documents and certified financial statements of the corporate partnership. It also appears in the statement of assets and liabilities attached to the sale agreement between the corporate partnership and the limited partnership. In the limited partnership accounts, it is shown as an asset purchased and a liability assumed. In her evidence, Marjorie Leon stated this recording of the $50,000 to be in error.

The agreement and the certificate of limited partnership both stated that the partnership was to carry on business under the name of Ablan Leon Distributors. In fact, the Leon furniture business had Stores doing business under the names New Era, Regal, Times and Leon’s. It also appears that the appellant had registered Declarations of Business pursuant to The Partnerships Registration Act certifying that it had carried on business without partners under the name “Regal” since June 30, 1964 and under the name “Leon’s Furniture Market” since June 1, 1966.

During the period in which it carried on the Leon furniture business, the appellant paid out most of the profits to the primary trusts who then distributed most of the profits so received to the beneficiaries thereof, the secondary trusts. The secondary trusts paid income tax as envisaged by the scheme and paid some moneys out on behaif of the individual beneficiaries, frequently for items normally supplied by a husband and father. The money not paid by the secondary trusts to the individual beneficiaries was lent back to the primary trusts on the security of two promissory notes in equal amounts, each for half of the amount lent back, one in favour of the secondary trust and the other in favour of the individual beneficiary. Most of the money so lent to the primary trusts was in turn lent back to the business by the primary trusts.

Based on the oral and documentary evidence before him, the learned trial judge made a number of findings of fact, the most important of which are as follows:

1. That Marjorie Leon, Anthony Leon and Eddie Egnatios were unimpressive witnesses and the documentation relied on by the appellant is not such as to inspire confidence in the appellant's position.

2. That the Leon brothers, through the corporate general partner, controlled the Leon enterprise trading under the name Ablan Leon Distributors.

3. That the built-in financial benefits for the brothers through indirect control of remuneration and the use of the secondary trusts to pay for things ordinarily supplied by them negated any suggestion that the brothers were making sacrifices for the benefit of their wives and children.

4. That the chief purpose of the reorganization in issue was avoidance of a large amount of income tax and there would have been no attempt to adopt the device if the brothers did not hope thereby to greatly reduce income tax.

9. That most of the secondary trust agreements were not in the form as executed by the settlor, Egnatios, there having been a substitution of pages in the secondary trusts.

6. That there was no indication on the settlor’s cheques as to which trust each cheque was to be applied.

7. That there is good reason to believe that the limited partnership agreement was not executed on the date which it bears, namely, April 28, 1964.

8. That much which surrounds the capital contribution of $50,000 takes the pian further away from reality and that it is difficult to imagine such a situation in a real business transaction.

9. That nearly all of the business earnings distributed to the trusts went back full circle to the appellant.

10. That the primary trust documents were not signed until a considerable and significant period of time after May 1, 1964 (likely later than October 1964) and after registration of the certificate of limited partnership and after cessation of business by the corporation’s partnership and after the commencement of business by the corporation’s successor organization, whatever it may have been.

11. That at May 1, 1964 and for a significant period of time thereafter, no trusts existed, no trustees were appointed and Marjorie Leon and Spencer were without authority to sign the partnership agreement and thus the acts of Marjorie Leon and Spencer on May 1, 1964 were nullities which could not affect third parties.

12. That the documentation to support the existence of the alleged trusts is inadequate.

13. That the elaborate design and planning of the trust documents negate an intention on the part of anyone to establish trusts by anything except instruments in writing.

14. That the conversations with Egnatios were inadequate to establish the trusts relied upon and his participation in the plan was brought about at the instance of the five Leon brothers, his brothers-in-law, and that none of the planning or imposition of the terms in the settlement trusts were developed by Egnatios but rather by the Leons and/or their consultants and that Egnatios was merely an instrument of the Leon brothers in a tax avoidance scheme, his function being more aptly described as a nominee than as a settlor.

15. That the attitude of the appellant towards the “partnership” alleged to have been created was indicated by its filing Declarations of Business concerning “Regal” and “Leon’s Furniture Market” stating therein that no other person was associated with ii in those partnerships.

16. That none of the trusts ever came into existence and accordingly the appellant had no partners in Ablan Leon Distributors.

A careful review of the transcript of oral testimony heard by the learned trial judge satisfies me that his findings of fact, enumerated supra, were based on ample evidence and were not made on any wrong principle. The learned trial judge heard all of the witnesses, assessed their credibility, and drew inferences from their testimony which should be accepted by this Court unless he was manifestly in error. After studying the transcript, I can find no such manifest errors and it is therefore my view that this Court should accept the findings of fact of the learned trial judge.

Turning now to the appellant’s submissions, its first submission was to the effect that the trusts were brought into existence in April of 1964. This submission is based on the evidence that there was a setilor (Eddie Egnatios) who delivered to two trustees (Marjorie Leon and T G Spencer) the trust property (the cheques) which were received by the trustees for the beneficiaries (the wives and children) of the settlements. in order to consider this submission it is necessary to recali the findings of fact made by the learned trial judge in this regard. He found firstly that the primary trust documents were not signed until a considerable and significant period of time after May 1, 1964 (likely later than October of 1964); that at May 1, 1964, and for a significant period of time thereafter, no trusts existed and no trustees were appointed; that the documentation to support the existence of the alleged trusts is inadequate; that the elaborate design and planning of the trust documents negate an intention on the part of anyone to establish trusts by anything except instruments in writing and that, accordingly, none of the trusts ever came into existence. He also held that the conversations with Egnatios were inadequate to establish the trusts relied on and found that Egnatios’ participation in the plan was at the instance of his five brothers-in-law, that all of the planning or terms of the trusts were developed not by Egnatios but by the Leons and their advisers and that Egnatios was merely an instrument of the Leon brothers in a tax avoidance scheme, his function being more aptly described as a nominee than as a settlor.

A similar submission was made to the Federal Court of Appeal by the taxpayer in the case of Kingsdale Securities Co Ltd v MNR, [1975] CTC 10; 74 DTC 6674. In dealing with that submission, my brother Urie, J said at pages 16 and 17 [6679-80] of the judgment:

It seems to me that in advancing the argument that the deeds of trust, after execution thereof, should be given retrospective or retroactive effect, the appellant is saying that the oral agreements allegedly made in December to become settlors or the opening of the bank accounts, constituted agreements to create trusts in the future. In Underhill’s Law of Trusts and Trustees, 12th ed, the author of this authoritative work discusses the validity of that kind of agreement at page 47, where he says:

“The rule that a valid agreement to create a trust in futuro, is sufficient to create a trust in praesenti, so as to bind the property in the hands of the parties, or those having notice of the agreement, depends on the maxim that

‘Equity regards that as done which ought to be done.’

It follows, therefore, that where a trust is alleged to have been created by an agreement to do something, its validity depends on the question whether the agreement is one of which courts of equity would decree specific performance(s). If it was merely a voluntary promise (or even a covenant under seal, not supported by valuable consideration), no trust will be created; for equity gives no assistance to volunteers, and consequently there Is nothing which can, under the foregoing maxim, be regarded by the court as done.”

In the case at bar, the alleged settlor made a mere voluntary promise and thus no trust was created thereby.

This appellant also submitted that executory trusts were created through the delivery of the trust property to the trustees. This same argument was advanced in the Kingsdale case (supra). In dealing with this argument, Mr Justice Urie said, at page 17 [6680] of the judgment:

While executory trusts can be created using fewer formalities than are required in bringing executed trusts into existence, they cannot be created unless the intention of the settlors can be ascertained. Since the earliest at which their intention could have been ascertained was, as found by the learned trial judge, not until March or April 1964, no executory trusts could have come into existence prior to that time.

In the case at bar, the learned trial judge found that there was no intention on the part of anyone to establish trusts by anything except instruments in writing. He also found that the primary trust documents were not executed until some time after October 1964. Thus, this period is the earliest time at which the settlor’s intention could have been ascertained. Accordingly, no executory trusts could have come into existence prior to that time.

In this connection it is instructive to consider the comments of my brother Ryan, J at page 22 [6683] of the Kingsdale case (supra) relative to a settled trust. Mr Justice Ryan said:

The role of the settlor is, of course, vital in the creation of a settled trust. It is the settlor who transfers to the trustee the property which constitutes the trust fund or res; . . . it is the settlor who vests powers in the trustee. Only the settlor can do these things. Once the trust is established, the participation of the settlor may come to an end, as was contemplated in this case, but only he can bring the trust into existence.

and again, at page 24 [6685]:

. . . the family trusts were created, if they were created at all, by execution of the trust indentures. Each of these trusts came into being (if at all) as a result of the execution of the indenture containing a declaration by the settlor of an intention to create the trust and a designation of objects, and by a vesting in the trustees of the trust res. The trust came into being, if it did come into being, when the constitutive acts were done.

These comments from the Kingsdale case (supra) apply equally to the case at bar because the determining facts are indistinguishable. Certainly the discussions with Egnatios prior to May 1, 1964 were not conclusive of an intention to create a trust on his part in view of the learned trial judge’s finding that Egnatios was a nominee rather than a settlor. It is equally certain that the objects of the trust were not determined before the trust documents were executed. It is also certain that the vesting of powers in the trustee and the extent of those powers was not determined until the trust documents were executed.

My comments thus far have applied to the primary trusts generally. There is, however, an additional defect in respect of two of the primary trusts, namely the George Leon Trust and the Joseph M Leon Trust. According to the evidence of Marjorie Leon, the beneficiaries named therein were not those intended by the Leon brothers and in making payments to the beneficiaries under those trusts, the provisions thereof were ignored. Thus it can hardly be argued that there was at any time the necessary certainty of beneficiaries in those two trusts. For the foregoing reasons, I have concluded that no trusts were brought into existence in April of 1964, as submitted by the appellant.

The appellant submitted further that the appellant and the seven primary trusts formed a limited partnership on April 28, 1964 since a certificate of limited partnership bearing that date was executed by all of the partners and was registered in each of the counties wherein the partnership business was to be carried on. It was the appellant’s submission that all material terms of the partnership were set forth in said certificates. The appellant also submitted that a trustee could become a partner.

This identical argument was also made in the Kingsdale case (supra). Urie, J deals with this submission at pages 19 and 20 [6681-2] of his judgment and after examining the partnership agreement, concludes that the signing trustees executed the agreement in their respective capacities as trustees and not as partners. While not all of the covenants present in the Kingsdale partnership agreement are oresent in subject partnership agreement, the agreement is essentially the same and after a perusal thereof I am satisfied that the trustees who signed the limited partnership agreement in this case signed qua trustee and not qua partner. The appellant submitted further that, in any event, a valid general partnership was in existence not only as regards third parties but also inter se the partners and that such partnership remains in effect until dissolved as provided under The Limited Partnerships Act. That argument was also advanced in the Kingsdale case (supra) and in concluding his judgment therein, Mr Justice Urie stated at pages 20 and 21 [6682] of his judgment:

On consideration of the whole of the documentation, therefore, it is abundantly clear that the appellant’s argument that either a limited or general partnership was ever entered into cannot prevail, because there is, in my opinion, in that documentation ample evidence that it was assumed that the five trusts were and could properly be parties. This is, in my opinion, an untenable assumption on the evidence and there was never in fact or in law a legal, binding limited or general partnership brought into existence, the trustees having signed the partnership agreement not as partners but in their capacities as trustees. That being the case, the appellant did not carry on the family business on behalf of the trusts in partnership and the net income therefrom was properly taxed in its hands by the respondent. Whether or not by their conduct the parties to the various documents have created legal rights and obligations inter se is a question which I need not consider since as I have found vis-à-vis the respondent, the appellant has failed to demonstrate the validity of the documentation upon which it relied to support its propositions.

These comments apply equally to the facts in the case at bar. Accordingly, I have concluded on the facts here present, that, as in Kingsdale (supra), this appellant did not carry on the family furniture business on behalf of itself and the family trusts in partnership. In Kingsdale (supra) there is no indication that the results which legally flow from this consequence were seriously questioned nor does it appear to have been seriously argued that a consequence other than taxation of the total net income in the hands of the appellant was a possibility. in the case at bar, however, counse! for both parties fully argued the oossible consequences from a taxation point of view in the event the Court found a failure in the impugned transactions. Appellant’s counsel submitted that, on all the evidence, there is no basis upon which the appellant should be singled out as the partner to which is to be attributed the ownership of the whole of the business and be charged with the whole of the income therefrom. He put it in this manner in his memorandum:

If no trust ever came into existence at any time, the effect of the transaction is that it is a nullity and the business must be taken to have continued to be the business of the vendors, the companies forming the Corporate partnership. The vendors were intending to contract with the Primary Trusts to the extent of 90% of the assets and property transferred, and the appellant could not appropriate that 90% of the assets and property for its own account.

The respondent submits, on the other hand, that from and after May 1, 1964 this appellant ran the Ablan Leon family furniture business on its own account, earned the profits beneficially and that any payments made by it were payments to others of moneys which it had earned and for which it was liable to tax. It is the position of the respondent that this appellant went into possession of the Ablan Leon furniture business pursuant to a certificate of limited partnership registered on April 30, 1964, that the partnership never came into existence at any time, being, in effect, a sham and while the sale was effective, it was effective only so far as the appellant is concerned. Put another way, the respondent submits that what was accomplished here was a sale of a business owned by a corporate partnership, which was paid for the business, to a group of people as purchasers who assumed a joint obligation to the vendors, but of this group of purchasers only one, this appellant, survives. The respondeni further submits that this is a case of a non-arm’s length transaction where the same parties, sitting on both sides of the bargaining table have misconceived the legal effect of what they were doing; that if there was a mistake here, it was a mistake of law for which there is no legal remedy and that it is only if legal remedies are available that the transfer to this appellant is void.

In reaching a conclusion on this difficult question, I have found helpful the decision of the Ontario Court of Appeal in Regina v Poynton, [1972] 3 OR 727. The headnote to that case commences as follows:

The word “income” in the Income Tax Act, RSC 1952, c 148 is sufficiently wide to include money received other than from bona fide transactions. In deciding whether or not something is income, all the circumstances must be considered: the manner of receipt, the control over what is received, the liabilities and restrictions attached and the use made of what is received. . . .

In delivering the judgment of the Court, Evans, JA cited with approval the case of Curlett v MNR, 62 DTC 1320, dismissing an appeal from the Exchequer Court ([1961] Ex CR 427; [1961] CTC 338; 61 DTC 1210) and stated at page 736:

The principle to be elicited from the judgment, as -l apprehend it, is that strict legal ownership is not the exclusive sets of taxability but that a Court in determining what is income for taxation purposes must have regard to the circumstances surrounding the actual receipt of the money and the manner in which it is held.

This statement of principle becames important on the facts of this case because appellant’s counsel submitted very forcibly that it is the owner and not the operator of a business who is taxable on the income therefrom; that the mere fact this appellant operated the Ablan Leon furniture business did not make it the proprietor of 190% thereof and taxable thereon. In the case at bar, the appellant used the profits from the business to pay the vendors thereof the purchase price thereof in full. Many years have passed and there was no suggestion, on the evidence, that anyone ever treated the transactions as void, or, for that matter, voidable.

Throughout the whole series of transactions, there have arisen innumerable irregularities and deficiencies which I have detailed supra. Appellant’s counsel seeks to dismiss same as mere errors by the accountants and lawyers. I am not prepared to so characterize them in their entirety. Viewed globally, what they signify to me is that the learned trial judge was correct in his finding that the chief purpose of the reorganization in issue was avoidance of very large amounts of income tax and that there would have been no attempt to adopt the device if the Leon brothers did not hope thereby to greatly reduce income tax. Once this premise is accepted, the fact that the “Perlmutter Plan” became accident-prone becomes explicable. It seems ciear to me that the Leon brothers attached little importance to the documentation and the agreements, being solely concerned with income tax minimization. The business was run the same after May 1, 1964 as before. The same management, ie, the Leon brothers, was running the business. This perhaps explains why, after May 1, 1964, this appellant filed Declarations of Business certifying that, in respect of certain portions of the Leon family furniture business, they were carrying on business alone, and not in business with any other partners. Accordingly, having regard to all the circumstances of this case, ! am satisfied that all of the net income herein was the income of this appellant vis-a-vis this respondent.

The appellant also complained about the conduct of the trial stating that it was “conducted in such a manner that it made a trial of the issues impossible”. The appellant submitted further that “the disputed facts did not receive from the learned Trial Judge a dispassionate and impartial consideration in order to arrive at the truth of the matters in controversy and that the trial was protracted by unwarranted interventions in the proceedings by the learned Trial Judge”.

I have perused the trial transcript and as a result of such perusal 1 am not prepared to accept these submissions. The learned trial judge did, indeed, ask a great many questions both of witnesses and of counsel but, in my view, his purpose in so doing was to ensure that he understood the many varied and complex issues implicit in this action. The “plan” sought to be established by this appellant was sophisticated and complicated, involving a great deal. of documentation and a number of rather difficult legal concepts. The appellant and his highly qualified accounting and legal advisers were the architects of that plan, thus the appellant cannot now be heard to complain when the learned trial judge found it necessary to question every facet of this “plan” the better to understand the issues upon which ne was being asked to adjudicate. As it seems to me, the learned trial judge would have properly been the subject of criticism by an appellate tribunal, had he allowed the evidence to be introduced without ensuring that he properly understood the effect thereof, thus enabling him to properly consider the true issues in the action.

For the foregoing reasons, I have concluded that this appeal should be dismissed with costs.

Ryan, J (concurring):—The facts of the case and the issues are fully set out in the reasons for judgment of Mr Justice Heald. I shall, however, supplement his statement of facts and issues so far as may be necessary for purposes of my judgment. I may also follow a somewhat different sequence.

The object of the elaborate plan developed by the legal and accounting advisers of the Leon brothers* [1] was to avoid the expected impact of the 1963 amendment to the Income Tax Act, RSC 1952, c 148, as amended, in respect of associated corporations. The amendment was effected by subsection 138A(2), which became applicable in 1964. The plan also presented certain estate planning features.

The basic thrust of the plan was that the business of the corporate partnership which was in operation in 1963 was to be taken over by another partnership that was to be formed. The partnership was to consist of a newly organized corporation, the appellant in this case, and seven primary trusts which were to be brought into existence. All of the shares of the appellant, which was in fact incorporated, were owned by the five corporate partners; the shares of each of the corporate partners, except one, were beneficially owned by a different Leon brother; 75% of the common shares of the fifth corporation were owned by a Leon brother, the remaining 25% by his wife. The other members of the partnership to be organized were to be five family trusts and two personal trusts. The appellant was to receive 10% of the profits of the partnership business; the Anthony Leon Family Trust, the Edward Leon Family Trust, and the Lewie Leon Family Trust were each to receive 18%; and 18% was allotted to the George Leon Family Trust and the George Leon Personal Trust; with the remaining 18% to the Joseph M Leon Family Trust and the Joseph M Leon Personal Trust. As a consequence of the transfer, only one corporation would be involved in the new partnership, thus avoiding the possible application of subsection 138A(2). The settlor of each of the new trusts was to be a non-resident of Canada, thus avoiding possible uncomfortable application to the trusts of other sections of the Act.

From the point of view of the skilled advisers of the Leon brothers, the plan had other tax advantages. Each of the family trusts would have as its beneficiaries the wife of one of the Leons and their children and grandchildren. But not exactly, because a distinct secondary trust was to be set up for the wife and for each child and grandchild, and these secondary trusts were to be the true beneficiaries of the primary trust. Profits received from the partnership by the primary trust could be distributed to the secondary trusts, each of which in turn could distribute to its beneficiary. The income-splitting advantages of the plan were fully explained by Mr Perlmutter in his letter of March 5, 1964, and by Mr Goodman in his letter of April 10, 1964, to Mr Spencer.

Another feature of the plan was that the bulk of the funds generated by the business was to be effectively retained in the business for the purpose of financing its activities. The learned trial judge described the flow of moneys out from and back to the partnership in this way [p 626]:

The “profit” flow and its intricacies is not without relevant interest. According to Miss Leon it was something to the following effect:

1. Each primary trust received its percentage of the profits of the partnership which it was decided to distribute.

2. A direction would be given to distribute nearly all of the share of the profits paid into a primary trust among the secondary trusts.

3. Some of the money paid into the secondary trusts would be used for the requirements of the respective beneficiaries of the secondary trusts and income taxes attributable to it.

4. Nearly all the money in the secondary trusts not used for those requirements of the beneficiaries of the secondary trusts and such taxes would be lent to the respective primary trust whence it came. The primary trust would give the secondary trust two promissory notes for it payable in twenty years with interest at 6% per annum. The sum of the amounts of the two notes would be the amount lent. One note would be endorsed over to the beneficiary of the secondary trust which had lent the money represented by it to the primary trust.

5. The primary trust would lend nearly all the money it received from its secondary trusts to the partnership retaining something for possible needs of the beneficiaries of the secondary trusts. There would be a note from the partnership to the primary trust payable in twenty years at 6% per annum.

The objectives of the plan were to be accomplished without sacrifice by the Leon brothers of control over the business. Mr Perimutter referred to this added advantage.

The new partnership was not to be an ordinary partnership. It was to be a limited partnership in which the appellant was to be the general partner. The general partner was to have the exclusive rights of management of the business, and, of course, the Leon brothers, through their control of the corporations which were the shareholders of the new corporation, the appellant, controlled the general partner. Not only that, but under the limited partnership agreement, as it was in course drafted, the general partner was empowered to require a limited partner to lend to the partnership an amount not in excess of the amount of the profits distributed to the partner in a year on such terms as the general partner might determine, provided only that such a loan should bear 6% interest and that the term should not exceed twenty years.

The control that the Leon brothers would assert over the trusts was also pervasive. The primary family trusts were in substantially similar terms. The Anthony Leon Family Trust, as it was ultimately drafted and executed, may serve as an example. As in the other family trusts, Mariorie Leon, a sister of the Leon brothers, and Mr Spencer, the Windsor solicitor who served as what I would describe as the general solicitor of the family, were the trustees. Under the trust indenture, however, Anthony Leon, though he was not the seitlor, was empowered to fill a vacancy should a trustee die or refuse to aci or become unable to act. If for any reason whatever, Anthony Leon desired the retirement of a trustee, he was authorized to implement his wish and to substitute a new trustee.

The trust indenture vested other important powers in Anthony Leon. He was to have the power, in his absolute discretion, to direct the trustees to pay the whole or any part of the income of the trust estate for any year to ail or such of the beneficiaries in such shares and in such manner as he should think fit, and to accumulate the income not so paid. He was also empowered to direct the trustees to apply income of capital of the trust for a beneficiary by settling funds of the trust for his or her benefit, or for the benefit of his or her widow or widower or issue.

Implementation of the plan required that the trusts should be constituted first and then that the limited partnership agreement should be executed and the registration requirements under The Limited Partnerships Act of Ontario, RSO 1960, c 215, compiled with.

The potential threat of subsection 138A(2) was to be obviated as soon as possible. In his letter of March 5, 1964 Mr Perimutter warned:

When the form of re-organization has been adopted by the “Leon family” it is important that the effective date of the re-organization be set as early as possible in order to minimize the profits of the existing partnership of corporations which will be subject to the 52% tax rate pursuant to Section 138A(2) , . . .

Edward Egnaiios, a resident of the United States, had been picked to serve as the non-resident seitlor. Mr Egnatios had married a sister of the Leons and one of the Leons had married his sister. Mr Egnatios had become successful in the furniture business in Michigan. He had received at least part of his training in the furniture business with the Leons. He testified that he knew personally the wives and the children of the Leon brothers. He had discussed with Marjorie Leon and Anthony Leon, and, according to his evidence, with Mr Perlmutter and Mr Spencer, aspects of the plan. His evidence is that he knew that a partnership was to be formed of which trusts were to be members, which parinership was to take over the Leon business. The trusts were, he said, to be for the benefit of the wife and the children and grandchildren of each of the Leon brothers, and there was to be a personal trust for Joseph and another for George. Whether he knew that there was to be a new corporation owned and controlled by the corporations that were the partners in the then business, he did not say. Nor did he say that he knew that a new corporation was to be a partner or that he knew the ways in which the interests of the numerous beneficiaries were to be defined and allocated.

Mr Egnatios sent 43 cheques, accompanied by a letter dated April 24, 1964, to Marjorie Leon. Seven of the cheaues were in the amount cf $100 each and the rest in the amount of $25 each. Each cheque was made payabie to Miss M E Leon and Mr T G Spencer, Trustees. Each cheque was endorsed by the trustees and deposited in a separate named trust account. The letter accompanying the cheques read:

April 24, 1964

Marjorie Leon

65 State Street

Welland, Ontario, Canada

Dear Marge,

Enclosed you will find checks Nos. 176-218 inclusive. Also enclosed you will find Mr. Mark Perlmutter’s letter. I have taken the liberty of making one copy of this letter and I have retained the photo copy.

If you require any further cooperation on my part, please don’t hesitate to call on me.

Sincerely,

DOBBS FURNITURE

(signed) E. J. Egnatios

The letter of Mark Perlmutter, mentioned by Mr Egnatios, is not in evidence. Its contents are unknown. Mr Egnatios testified that it was not the letter of March 5, 1964 to Mr Spencer describing the plan in detail.

Despite the fact that the new partnership, which Mr Egnatios testified he knew was to come into existence, was to take over an extensive furniture business, he supplied each trust that was to be a partner with a capital of $100.

Counsel for the appellant submitted that the very fact that the capital contributed to each trust was so inconsequential in relation to the grand design supposedly in the settlor’s mind is in itself evidence that what he intended to do was to settle some 43 trusts, vesting in the trustees sweeping discretionary powers in respect of the selection of the specific beneficiaries, the allocation of capital and income among them, and, at least in connection with the primary trusts, in respect of embarking upon a large business undertaking involving a partnership. The inference I would draw, however, is that Mr Egnatios had no intention whatever on the matter of delegation of discretion, whatever other intentions he may have had. What he was doing was a favour for his relatives. His role was to drive in the pegs upon which the tax minimization scheme was to hang. From the point of view of the settlor, and it is his point of view that is significant, the transaction, up to and including the mailing of the cheques, remained indefinite, too indefinite to constitute the trusts. There is no real evidence that Mr Egnatios intended to vest in Miss Leon and Mr Spencer the very considerable discretionary powers it would be necessary to find delegated if the establishment of the trusts is to be supported by the transmission of the cheques and the deposit of their proceeds. It would be necessary to find substantial delegation in order to conclude that the terms of the establishment of the trusts were sufficiently certain, even if it be assumed that Mr Egnatios was intending to settle trusts by doing what he did.

There are, however, even more substantial grounds for holding that parol trusts were not created. It may be noted that the learned trial judge was of opinion that the pleadings of the taxpayer, and he referred particularly to paragraph 4 of the Reply to the Notice of Appeal, indicated “a position of reliance upon documentation, and nothing else for the establishment of the trusts” [p 630]. He went on, however, to analyze the evidence and to find that, in any event, there was nothing else in it to support the existence of the trusts. His findings are important, and I have decided to quote them [pp 630-31]:

As I construe the effect of Mr Egnatios’ evidence it is that formation of a partnership to acquire the Leon furniture business would be expected to have been a relatively simple, uncomplicated and normal matter, notwithstanding the size of the business. It would have been no more than the formation of a partnership in the usual manner with accompanying documents containing expected provisions when business people join forces and resources in a common effort for their common good. However the operation claimed to be in existence here is quite different from that.

The operation claimed to exist here is complex, sophisticated and not what would be expected in normal business transactions. Profit of the limited partners would flow one way and then back by an expedient termed loans. All partners except one would be in a situation where matters affecting their capital and profits would be under the control of that one. There was the acquisition of a business from Lewie Leon Limited in which liabilities exceeded assets by $77,454.09.

Inconsistent, too, with the establishment of trusts by anything except written instruments is the designing of an elaborate set of documents which their planners must have hoped would so mesh that their purpose in reducing liability to income tax would prevail. Those instruments and the design and planning of them negative an intention on the part of anyone to establish trusts by anything except instruments in writing.

In my finding, the conversations which were had with Mr Egnatios were inadequate to establish trusts such as the respondent submits existed during the relevant periods.

Relevant is the role of Mr Egnatios, the nominal settlor of the trusts. Here the situation was not one where the beneficiaries of what are claimed to be the trusts were in any real sense the objects of the settlor’s bounty. The totality of his gifting was never meant to be more than the 7 token payments of $100 (US) and 36 token payments of $25 (US). If any real benefits might have accrued to the beneficiaries under the scheme they would have come from the Leon brothers.

I find that it was only by or on behalf of his brothers-in-law, the five Leon brothers, that his participation was brought about and that he participated only to oblige them.

It seems to me that that participation was sought and obtained to meet one of the observations of Mr Perlmutter in his letter dated March 5, 1964 to Mr Spencer when he said:

“The trusts must be settled by a non-resident. If settled by a Canadian resident, we would have the problems referred to in a) arising out of transfers to minors, etc.”

Mr Egnatios was a resident of the United States.

'i find that none of the planning of the terms and conditions of the instruments of settlement was done by Mr Egnatios and 1! find that all of them were developed either by the Leon brothers or their advisers. Other. than furnishing. the token cheques totalling $1,600 all Mr Egnatios did, in my finding, was acquiesce except in connection with the alteration. of some of the secondary trust instruments, after he had signed them. It would seem that not even his acquiescence was sought for that.

Mr Egnatios was, in my finding, merely a selection of the Leon brothers as a convenient instrument in what they hoped would be a tax avoidance scheme. In my view his function would more aptly be described as a nominee than as a settlor.

On behalf of the respondent, the issuing of the cheques by Mr Egnatios and his evidence in connection with an intention to form a partnership to acquire and operate the Leon furniture business were stressed in connection with the submission that the trusts were created even if the instruments of settlement were invalid. It seems to me that when these are considered together it becomes apparent that instead of supporting that theory, they are factors in its contradiction.

The statement of assets of Ablan Leon Distributors as at May 1, 1964, associated with the sale of Antomel Limited, Midgemar Limited, Geormar Limited, Timmyal Limited and Jomila Limited carrying on business as Ablan Leon Distributors shows gross assets of $1,859,459.06 and what is called a “net sale price” of $954,280.11. The concept of settlements of a total of $700 in trusts to join as partners (having a 90% interest in profits) in the purchase of a business of that magnitude takes the matter beyond reality and into fantasy.

In my opinion to establish a trust, which has for its purpose entering into a partnership, which in turn is to acquire a large and successful business, more is required than have someone make a token payment, call it a settlement, borrow other money, open a bank account and make a deposit in it.

These findings, in themselves, are fatal to the establishment of trusts by Mr Egnatios prior to May 1, 1964 Thus, it seems to me that the appellant fails in its main thrust, namely that a limited partnership came into existence on or about April 28, 1964, consisting of the appellant as the general partner and seven primary trusts as limited partners; and that the limited partnership operated the Leon business.

I am, however, concerned over an alternative submission made by the appellant. This is the submission that the trusts were brought into being when the trust instruments were actually executed (as they were) and that, subsequently, a general partnership was formed either on the terms of the executed limited partnership agreement or by course of conduct. It at first seemed to me that the appellant was precluded by the pleadings and by the course of the trial from reliance on this submission. Counsel argued, however, that although in the Reply to the Minister’s Notice of Appeal from the decision of the Tax Review Board, it was alleged that the primary trusts were created by deeds of settlement dated April 27, 1964, this did not necessarily involve an allegation that the trusts were created at that time and at no other time. He also argued that the time of execution of the settlements was placed in issue by the Minister’s Rejoinder to the Reply, particularly in paragraphs 4, 6, 8, 10, 12, 23 and 26 and by the Surrejoinder in its paragraphs 4 and 11. There is force in these submissions. It is also significant, in my view, that in the Surrejoinder it was submitted:

15, The Respondent [the appellant in this appeal] and the Trusts at all times relevant to this appeal were carrying on the business as a Limited Partnership as required by the provisions of The Limited Partnership Act, Revised Statutes of Ontario, 1960, Chapter 215.

16. In the alternative, in the event that the Court finds the Respondent and the Trusts were not carrying on business as a Limited Partnership, which is not admitted but denied, the Respondent and the Trusts were carrying on the business with a common view to sharing profits in the proportions aforementioned thereby forming a general partnership, pursuant to the provisions of The Partnership Act, Revised Statutes of Ontario, Chapter 288.

I am prepared to assume that in this case it is open to the appellant to submit that trusts were formed on execution of the trust instruments and that thereafter a general partnership came into existence.

The evidence does not establish with any degree of certainty when Mr Egnatios, Miss Leon, and Mr Spencer executed the primary trust instruments. The learned trial judge said [p 627]:

There is evidence which would indicate that the trust instruments were signed sometime later than October 1964 and I am inclined to the view that they were.

It is, however, clear that these instruments were signed by the end of the 1965 taxation year of the appellant.

It seems to me, however, that, whenever the indentures were signed, the findings of the learned trial judge, quoted above, are as fatal to the submission that the trusts were created by their execution as they were to the submission that the trusts were established by parol prior to May 1, 1964. I have in mind in particular the finding, and I quote the words of the learned trial judge again, that Mr Egnatios was not a seitior [p 631]:

Mr Egnatios was, in my finding, merely a selection of the Leon brothers as a convenient instrument in what they hoped would be a tax avoidance scheme. In my view his function would more aptly be described as a nominee than as a settlor.

There was evidence to support this finding. It was based, as I understand it, not only on analysis of documents, but also on an assessment of the testimony of Mr Egnatios and that of Miss Marjorie Leon and Mr Anthony Leon with whom Mr Egnatios had discussed arrangements. And it is significant that, in his letter to Miss Leon enclosing the cheques, Mr Egnatios wrote: “If you require any further cooperation on my part, please don’t hesitate to call on me.”

I must say that, as I listened to and then thought over the argument for the appellant, I seemed to detect a too facile equation, in relevant elements, of trusts and corporations, a too quick analogy between the signer of an application for a letters patent corporation and a settior of a trust This sense of inappropriate analogy also weighed in on me as I read the limited partnership agreement and detected the too ready attribution to a trust of the legal personality of a corporation. A trust is the creation of chancery, and it may not be Inappropriate to quote this passage from Professor D M W Waters’s Law of Trusts in Canada at page 981:

The trust is a concept which can be fertile in a number of business situations, as we have seen, and those situations will continue to be discovered and explored in the future. In the absence of clarifying and amending statute, however, the trust concept can only be imported into the commercial field in the form in which the courts have fashioned it over the centuries and largely in the context of family provision. This means that broadly stated principles of equity apply. . . .

Even if one were to assume that trusts were brought into being on execution of the trust documents, would there, thereafter, have been a partnership? The evidence does not establish the sequence of xecution of the limited partnership agreement and the trust instruments. The burden of proving the partnership was on the appellant. It follows, then, that the execution of the partnership agreement would not have established a partnership in the absence of proof of the prior execution of the trust instruments. It would therefore have been necessary to decide whether, subsequent to creation of the trusts, the trustees and the appellant had so conducted their affairs as to constitute them general partners either on the terms of the partnership agreement, presumably signed before the execution of the trust instruments, or on such terms as might be implied by the way in which they in fact conducted their affairs viewed in the light of the provision of The Partnerships Act, RSO 1960, c 288. If reliance were placed on the partnership agreement, it would also have been essential to decide whether the trusts or the trustees were conceived of as being the partners. If the former, the partnership would have failed of establishment because trusts cannot be partners. If the latter, there would have been a further problem of deciding whether the same persons who are trustees of several trusts can contract with themselves and another as partners.* [2]

There remains a question of some difficulty. The appellant submitted that if no trusts were created and no partnership came into being, the sale by the corporate partnership to the limited trust partnership was void.f [3] It would follow, it was submited, that the business from which the income was gained during the taxation years in question was in law the business of the corporate partnership. The income in fact received by the appellant during the taxation years was not, it was argued, its income; it was income for which it was accountable to the corporate partners.

I have read and I agree with Mr Justice Heald’s reasons for rejecting the appellant’s submission and for holding that the income was, for income tax purposes, the income of the appellant during the taxation years in question and, as such, was properly taxable to it.

In reaching this conclusion, I have had in mind certain considerations that may seem rather trite. They did, however, serve to place the appellant’s submission on this point in a perspective that I found helpful The Income Tax Act, during the taxation years in question, taxed the income, for each of the taxation years, of every person, including the appellant, who was resident in Canada at any time in the year. In determining whether money or other benefits received by a person are income of that person, the courts must, of course, look to common law and civil law—whichever may be relevant— concepts and institutions, including such concepts and institutions as ownership, trust, partnership, and corporation. It is important, however, to bear in mind that what is involved is the interpretation of a statute, the Income Tax Act. In that Act, concepts which have their origin in and derive their meaning from the common law may be expressedly or impliedly changed or modified. And, in the last analysis, the question whether income, in any given case, is the income of the taxpayer must involve the interpretation and application of the statute. To whom income is to be taxed is a question that may not be answerable in every case merely by reference to traditional common law or equity concepts, however important such reference may be. By way of example, in Angle v MNR, [1975] SCR 248; 74 DTC 6278, Mr Justice Dickson, speaking with reference to the meaning for tax purposes of “benefit or advantage” as used in the then paragraph 8(1)(c) of the Income Tax Act, said at page 256 [6281]:

. . . A tax assessment in respect of a benefit or advantage received is not inconsistent with an obligation to pay for the benefit or advantage where, for example, there is no apparent intention to honour the obligation. The decision that a taxable benefit has been received can stand in an appropriate case with an alleged obligation to pay for that benefit. . . .

To extend somewhat—with great respect—the range of what Mr Justice Dickson said, it seems to me that money in fact received by a person in the conduct of a business may, in an appropriate case, be his income for tax purposes despite an alleged obligation to account in some way to other persons, and I agree with Mr Justice Heald that this is such a case. ! note, in particular, his observation: “Many years have passed and there was no suggestion, on the evidence, that anyone ever treated the transaction as void, or, for that matter, voidable.” I would also note that Mr Justice Dickson, in the Angle case, cited with approval Curlett v MNR, [1961] Ex CR 427; [1961] CTC 338; 61 DTC 1210, affirmed 62 DTC 1320, and R v Poynton, [1972] 3 OR 727, both relied on and, with respect, appropriately relied on. by Mr Justice Heald in this case.

The appellant also submitted in argument that “It is of note that the income did not come into the hands of the appellant as such. It was received in the partnership account and paid out to the trustees.” The income was, however, received by the appellant in the course of conducting the business. It is clear beyond question that the appellant is not accountable, in respect of any part of this income, to trustees of non-existent trusts. For tax purposes it was the appellant’s income.* [4]

Moreover, when one has regard to the factual situation in this case in respect of the flow of moneys out to the “trusts” and back to the business and the ways in which these moneys were actually used, one is much inclined to agree with the learned trial judge [p 617]:

I am not at all impressed with the suggestion, even the protestations, that the brothers were making sacrifices for the benefit of their wives and children. The built-in financial benefits for themselves through indirect control of remuneration and the attempt to use the secondary trusts for payment for those things which husbands and fathers in their financial position would ordinarily supply are two circumstances sufficient to negate such a suggestion.

In relation to the distribution, such as it was, of moneys to the supposed trusts, one must have regard, in determining whose moneys they were for tax purposes to the circumstances surrounding the aciual receipt of the money and the manner in which it is held . . .”* [5] or, I would add, used. There is nothing in the facts, realistically appraised, to cause one io modify one’s view that the income of the business was the income of the appellant, despite the bookkeeping and other documentary records that came into existence because of the view taken by the appellant and others that trusts had been formed.

It is also pertinent that in Kingsdale Securities Company Limited v MNR, [1974] 2 FC 760; [1975] CTC 10; 74 DTC 6674, the taxpayer was held taxable in respect of income allegedly distributed to the “trustees” of non-existent trusts.

This is, all too obviously, a difficult case. It is a case to which might well be applied this passage from the judgment of Mr Justice Dickson in Minister of Revenue for the Province of Ontario v McCreath et al, [1976] CTC 178 at 180, words written in connection with succession duties:

This case mirrors the ongoing struggle between taxing authorities, casting an ever wider net to garner succession duties or estate taxes [in our case, income tax], and taxpayers adopting ever more sophisticated means of escaping that net. One cannot reproach the taxpayer or his professional advisers for so arranging affairs as legitimately to minimize tax impact but there are times when the schemes devised introduce rather fine legal distinctions and the line determining tax liability becomes difficult to draw. The complexity is enhanced by the importation of concepts from traditional conveyancing law and the injection of fine subtleties form the law of trusts. . ..

In conclusion, I would asociate myself with the observations of Mr Justice Heald in respect of the submissions of the appellant relating to the conduct of the trial.

I agree that the appeal should be dismissed with costs.

MacKay, DJ (dissenting):—With the greatest respect I find myself unable to agree with the conclusions reached by my brothers Heald and Ryan. In their reasons they have fully set out the facts and I need only to refer to some aspects of them.

I am of the opinion that settled trusts were established when Egnatios sent seven $100 cheques (to cover the primary trusts) and thirty-six $25 cheques (to cover the secondary trusts) dated April 24, 1964, all payable to Marjorie Leon and T G Spencer as trustees and deposited by them on April 29, 1964 in separate bank accounts for each trust.

In the month preceding the issue and deposit of the cheques, the Leon brothers and Marjorie Leon had a number of consultations with their legal and financial advisers as a result of which they decided to adopt the scheme for reorganizing the Leon business as recommended by their advisers. There followed discussions between Marjorie Leon and Anthony Leon, acting for the Leon brothers, and on the advice of their advisers, with Egnatios. The uncontradicted evidence is that the result of these discussions was that Engatios agreed to act as settlor of the various trusts. He knew and agreed that Marjorie Leon and T G Spencer were to be the trustees for ail the trusts.

He also knew that the purpose for which the primary trusts were to be created was to form a partnership to purchase the furniture business carried on by the corporate partnership.

Draft trust documents to evidence the terms of the trusts, in much the same form as they were eventually executed by the settlor and the trustees, were in existence and were known to both of the trustees prior to the settlement of the trusts by the issuance and deposit of the cheques. The subsequently signed trust agreements while they gave extensive powers to the individual Leon brothers to direct the trustees as to the allocation of the trust funds of each family trust among the beneficiaries of the trust did not alter or change the settlor, the trustees, the beneficiaries or the purpose for which the trusts were established and had been agreed on in setting up the oral trusts.

Counsel for the respondent in his submission that no valid trust had been established, relied, in part, on the case of Kingsdale Securities Co Ltd v MNR, [1974] 2 FC 760; [1975] CTC 10; 74 DTC 6674. The facts in that case are different from the present case. In that case, Mr Justice Urie, at page 769 [16, 6679] said:

Accepting as I do the findings of fact of the learned trial judge, none of the settlors, with the possible exception of Jack Shnier, had evinced any intention to create a trust for ascertainable beneficiaries at least until the trust deeds were received in Oklahoma in March or April 1964. Moreover, no moneys were advanced by any settlor except Jack Shnier nor authorized to be advanced by him on their behalf even after the execution of the trust deeds. Neither had they appointed trustees nor did some know even the names of some of the trustees they purported to appoint.

To. implement the purposes for which the trusts had been created the appellant company was incorporated; the shareholders were the five corporations that, in partnership, owned and operated the Leon business, each of the corporations being equal owners of the shares of the new corporation.

A limited partnership was formed in which the appellant was the general partner and the primary trusts, represented by their trustees, were limited partners. An agreement was entered into whereby the corporate partnership that owned the Leon business sold the business to the limited partnership.

The capital of the limited partnership was $50,000 contributed by the limited partners, in cash, as follows:

These capital contributions were obtained by Marjorie Leon, borrowing from the bank on a note, payment of which was guaranteed by all the primary trusts. The appellant, the general partner, contributed nothing to the capital of the partnership but assumed responsibility for 10% of the liabilities of the business being purchased by the partnership and was to be entitled to 10% of the assets and profits of the business. The other 90% of the assets and profits and responsibility for 90% of the liabilities was apportioned among the limited partners in the ratio of their interest in the partnership.

The rights and obligations in respect thereof were not joint and several but rather each of the partners of the limited partnership restricted their acquisition to a rateable interest and limited its obligations by the execution and delivery of a separate promissory note covering its rateable liability.

The sale price was paid by the appellant and the primary trusts assuming the obligations of the five vendor companies to pay Davids Electric Ltd notes in the amount of $77,454.90 and to pay to Ablan Leon Ltd notes in the aggregate amount of $42,393.12. The balance of the purchase price, the sum of $450,432.90 was allocated among the primary trusts, and each of the primary trusts issued individual promissory notes to each of the corporate partners as evidence of their respective indebtedness for the balance of the purchase price.

In accordance with the terms of the agreement of sale, the business was taken over by the limited partnership on May 1, 1964 and operated under the terms of the partnership agreement until it was sold on March 1, 1969.

In each year during this period, cheques were issued to each of the partners for their share of the profits. The primary trusts in turn distributed the major portion to the beneficiaries of the secondary trusts who loaned most of the money received by them back to the primary trusts taking notes, bearing interest at 6%, as security. The primary trusts in turn loaned the money, again on the security of notes bearing interest at 6%, back to the partnership to be used in the business.

There was nothing illegal or improper in respect of these transactions. In 1964, 6% interest was presumably not an unreasonable rate. All of the trusts and the beneficiaries made returns and paid income taxes on the amounts received by them including the interest received by them, or credited to them, on the books of the partnership.

Whether the partnership, by reason of the defects referred to by my brothers, was not a valid limited partnership, it operated during the taxation years in question as a partnership. On the sale of the business in 1969, the sale price was allocated and paid to the partners in the ratio of their respective interests in the partnership.

While the individual Leon brothers, under the terms of their respective family trust agreements, retained the right to give directions to the trustees as to the allocation of the profits among the individual beneficiaries of their respective family trusts, by the terms of the sale to the limited partnership, the five corporate partners divested themselves of all legal and equitable interest in the assets and profits of the business and any action by them in the courts to claim any such interest would fail.

There was clearly never any intention by the corporate partnership to sell to the appellant nor was there any intention on the part of the appellant to buy more than a 10% interest in the Leon business and the subsequent conduct of the parties confirm this.

On the assumption that the appellant [sic] has failed to establish that the trusts never legally came into existence, it is my view that the agreement for sale did not operate as a sale to the general partnership alone. It was a nullity, in which case the appellant cannot be said to be the owner of and operating the business on its own account. It was acting as the agent of the five corporate partners. It would only be entitled to a management fee and would hold the profits on a resulting trust for the corporate partnership.

As to the question of whether the trustees on. behalf of their respective primary trusts could legally enter into the partnership I would adopt the statement in the case of Regina v Knapman, 123 CCC 262 at 265, as follows:

It is seen therefore that a trustee is considered to have a separate and distinct personality from that of the same person in his personal capacity. An executor or trustee under the laws of the Province of Ontario, as defined by the abovementioned statutes, has definite duties and liabilities in that capacity which he does not have in his personal or individual capacity. Thus it is clear that when the person is acting in his capacity as executor or trustee, his is not, in law the same person as he Is when acting in his personal and individual capacity. The separation of legal personality as between one acting in his personal capacity and the same person acting in his capacity qua executor or trustee is as distinct as that of an incorporated company and its chief shareholder: see Salomon v Salomon & Co.

As an example of the application of this principle, I am of the view that if the same trustees are trustees for separate trusts A and B, they are acting in a different legal capacity in respect of each trust and are entitled in their capacity as trustees of trust A to enter into a contract with trust B provided that the contract does not create a conflict of interest between trusts A and B. There is no conflict of interest between the primary trusts in the present case.

As to whether a trustee is a person within the definition of “person” in The Interpretation Act, Clute, J, in the case of In re Gibson and City of Hamilton (1919), 45 OLR 458, said:

In my opinion the definition of “person” in the Interpretation Act is broad enough to include the trustees in this case. They fall within the definition of the term “person” in The Interpretation Act.

For these reasons, the reasons of the Tax Appeal Board, with which I agree, and those parts of the reasons for judgment of Bastin, DJ in the Kingsdale Securities case that are applicable to the facts of this case, I would allow the appeal with costs in this Court and in the Trial Division, and restore the judgment of the Tax Review Board.