Citation: 2011 TCC 212
Date: 20110513
Docket: 2007-2583(IT)G
BETWEEN:
PETER SOMMERER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
C. Miller J.
[1]
Mr. Sommerer is one of
those energetic individuals whose mind is so full of business ideas,
specifically connected to the hi-tech industry, that he cannot seem to actuate
them fast enough. He left me with the impression of someone who cannot sit
still for long, evidenced by standing throughout his three and a half days of
testimony. He sees one project up and going and is on to the next, be it a
business venture or a Phd. With his strong Austrian roots he, with his father,
took advantage of the newly minted Private Foundation legislation in Austria,
and in 1996, the Sommerer Private Foundation ("SPF") was founded by
Mr. Sommerer’s father. It is the tax treatment in Canada of the subsequent
gains on the sale of shares held by the SPF, having purchased those shares from
Mr. Sommerer at fair market value, that is the issue before me. The Government
assessed on the basis there was a trust in Austria
and that the attribution rules (subsection 75(2) of the Income Tax Act
(the "Act")) attributed the gains on the sale of shares to
Mr. Sommerer, or to his wife. The Appellant argues that there was no
trust, and in any event if there was, subsection 75(2) of the Act was
still not applicable. Further, even if subsection 75(2) of the Act was
applicable, the Canada-Austria Income Tax Convention (the "Convention")
precluded Canada from taxing the gains on the disposition
of the shares. In the alternative, the Respondent argues that the SPF acted as
agent for Mr. Sommerer on the disposition of the shares, triggering the tax on
the gain from the sale of shares in Mr. Sommerer’s hands. Finally, there is an
issue with respect to the timing of the sale of shares by Mr. Sommerer to the
SPF, although this was not the Respondent’s initial assessing position. There
is a smorgasbord of issues regarding trusts, corporations, agency, the
definition of shares, Treaty interpretation and Austrian law all flowing into
the determination of the correctness of the assessments before me.
Facts
[2]
Mr. Sommerer grew up in
Austria, the oldest of six children. He obtained an engineering designation and
in the late 1960s went to work for IT&T in Austria. While working, he
studied towards the equivalent of an MBA, which he obtained from the University
of World Trade in 1975. In 1974, he married a United Kingdom citizen, who had one child, and together they had two
children born in Austria in 1975 and 1977. The Sommerers lived in
an apartment initially but moved to a larger co-op housing arrangement as the
family expanded.
[3]
While working in Austria with IT&T, Mr. Sommerer heard of Nortel. His
interest was piqued in the North American way of business. In 1977, he applied
to emigrate to Canada as a Landed Immigrant and, in 1978, the Sommerer family
moved to Canada. According to Mr. Sommerer, they sold
everything though kept the right to live in the co-op housing in Austria for a
year, just in case he was unable to find work in Canada. This right was given
up after a year. Mr. Sommerer kept a bank account in Austria to cover vacation expenses. He also kept his Austrian
driver’s licence which is issued for life. Though he retained his Austrian citizenship,
Mr. Sommerer took out Canadian citizenship in 1993.
[4]
Mr. Sommerer did find
work in Kanata working for Mr. Terry Matthews at Mitel. He eventually became project
manager of a switching system that skyrocketed Mitel’s fortunes. He was asked
to go to Germany to set up a Mitel subsidiary which he did for the period 1981
to 1984. He kept his home in Ottawa, simply renting it out. During this period
of working for Mitel both in Canada and in Germany, Mr. Sommerer would
occasionally visit Austria.
[5]
On his return to Ottawa
in 1984, Mr. Sommerer described the bloom being off the rose for Mitel, and he
happily joined Mr. Matthews in a new venture, Newbridge. Again, being in charge
of product management, revenues for Newbridge soared. Mr. Sommerer suggested
that Newbridge get into internet products in the late 1980s. Upon Newbridge
going public it faced some technical issues, and Mr. Sommerer was put in charge
of solving them. He became chief operating officer in 1990. Over the next few
years, revenues reached the billion dollar mark.
[6]
In the late 1990s, a
number of Newbridge affiliated companies were established, one of them being
Vienna Systems Corporation ("Vienna"),
positioned to operate voice over networks on the internet. It was incorporated
in August 1995. Mr. Sommerer acquired 25% of the common shares of Vienna
(1,770,000). Mr. Sommerer divided his time between Newbridge and Vienna.
He hired a CEO for Vienna. Mr. Sommerer left Newbridge in 1998 and looked for
something new, which he found in another internet type venture, Coventus.
[7]
From 2004 to 2007, Mr.
Sommerer studied and obtained a Phd from a University in Vienna. He acquired an apartment in Vienna where he would
spend time while studying. He also acquired a house in the mountains in Austria
in 1995. He owned his Ottawa residence as well as a cottage in Pakenham,
Ontario and a MURB in Kingston. He expressed no interest to return to live in Austria.
The Sommerer
Private Foundation ("SPF")
[8]
In 1996, Mr. Sommerer
and his father discussed the establishment of a Private Foundation in Austria.
Such foundations had only recently been introduced by the Austrian Private
Foundation Act of 1993 (APFA). On October 3, 1996, a Foundation Declaration
was signed by Mr. Sommerer’s father, Mr. Herbert Sommerer, who paid 1,000,000
Austrian shillings of his own money into a foundation account. The Foundation Declaration
is not lengthy and is worth reproducing in its entirety:
§ 1 Name and Registered Headquarters
(1) The foundation is a private foundation
under Austrian law with the name ----
Sommerer Privatstiftung
(2)
The foundation’s registered headquarters is
located in Mitterbach ----
(3)
Founder of the foundation is Mr. Herbert
SOMMERER ----
§
2 Purpose, Beneficiaries
The purpose of the foundation is to promote the interests of those
individuals indicated in the supplementary deed from the income generated by
the foundation funds.
Engaging in investment activities, in particular the purchase of
shares on credit, is also in line with this purpose.
Beneficiairies and those who may become beneficiaries based on the
purpose of the foundation have no legal claim to grants from the foundation.
§ 3 Assets
(1) Foundation assets at the time the
foundation was set up consist of a cash amount of ATS 1,000,000 (one million Austrian
shillings). This is recorded as capital in the opening balance of the
foundation. The rules of the Companies Act on capital stock apply to these
foundation assets. ----
(2) The foundation is authorized to acquire
and hold movable and immovable assets and rights of any kind (including
securities), both domestically and abroad, to engage in legal transactions of
any kind, and to accept any contributions and incur any debt that may be
necessary of useful in maintaining or administering the foundation assets. ----
§ 4 Corporate Bodies
Corporate bodies of the foundation include the: ----
a)
Executive
Board---------------------------------------------------------------
b)
Foundation
Auditor-----------------------------------------------------------
c)
Advisory
Board----------------------------------------------------------------
§ 5 Executive Board
(1)
The Executive Board shall consist of three
members.----
(2)
Members of the Executive Board are appointed and
dismissed by the founder of the foundation as long as he is alive and capable
of conducting business. Otherwise, in the event that a member leaves, the
Executive Board decides on his/her successor. Re-appointment is permitted.----
(3)
The Executive Board shall conduct the business
of the foundation with the due care of a proper and conscientious business
manager in accordance with the foundation declaration, any supplementary deeds,
and rules of procedure that it decides upon. It represents the foundation
externally in all matters; two representatives are authorized to act jointly
for representational purposes.----
(4)
Members of the Executive Board will leave the
Board:----
-
once the term of office, to be determined, has
expired;----
-
due to resignation, which shall be submitted in
writing to the Chair of the Board or his/her deputy without requiring any
reasons to be stated;
-
due to death, incapacitation, or bankruptcy;
-
due to dismissal by the founder or the Executive
Board itself; the Executive Board shall decide by secret vote on dismissal for
significant cause; the member to be dismissed has not right to vote in this
case;----
-
due to a decision of the court in accordance
with § 27 (paragraph twenty‑seven) of the PSG (Private Foundation Act).
§ 6 Principles of Asset Administration
(1) The corporate bodies of the foundation
shall always strive to maintain the value of the foundation assets. The
Executive Board, with the consent of the Advisory Board, decides upon the level
and allocation of the grants and upon the beneficiaries, with the consent of
the Advisory Board.----
(2) Members of the foundation bodies are
entitled to compensation commensurate with their activities and in line with
foundation income. Moreover, they have a claim to reimbursement of any
necessary cash outlays. The foundation auditor is required to provide an
opinion on the appropriateness of the compensation annually in his/her
report.----
§ 7 Accounting, Reporting, and Audit
(1) The Executive Board shall determine the
foundation’s fiscal year.----
(2) The Executive Board shall prepare the
annual financial statements and the management report and submit them to the
foundation auditor within five months of the end of the fiscal year. The
Executive Board shall report on the foundation’s performance and beneficiaries,
as well as the activities and grants planned for the following year, in the
management report.
(4)
The foundation auditor is appointed by the court
upon recommendation of the Executive Board for a period of three years.
Re-appointment is permissible.
§ 8 Amendments to the Foundation Declaration
(1) The founder is entitled to revoke the
foundation during his lifetime and to amend any points in the foundation
declaration with the consent of the Advisory Board.----
(2) Upon the death or incapacitation of the
foundation founder, the Executive Board is authorized to decide on an amendment
of the statutes contingent upon a two-thirds majority and to submit such
amendment to the court. An opinion of the Advisory Board shall be obtained in
advance. A change in the original purpose of the foundation is permissible only
if, due to a change in circumstances (changed economic or social circumstances
or a shift in general moral concepts or a change in the legal situation,
particularly related to tax law), the pursuit of the purpose of the foundation
without change would no longer reflect the presumed intention of the founder.
An adjustment for the purpose of more advantageous taxation is permissible in
the interest of the maintaining the value of the foundation assets.----
§ 9 Supplementary Deed
The foundation founder may set up a supplementary
deed.----
§ 10 Term, Liquidation
(1) The
foundation is set up for an indefinite period.----
(2) The Executive Board may decide to
liquidate the foundation based on a unanimous resolution and an endorsement by
the Advisory Board in the event that it can no longer fulfill the foundation’s
purpose as intended by the founder, and it does not appear that this purpose
can be achieved by means of a change in the foundation declaration.----
[9]
On October 4, 1996, Mr.
Herbert Sommerer signed a supplementary deed, also worth producing in its
entirety:
§ 1 Allocation of Assets
Mr. Herbert SOMMERER established the Sommerer Privatstiftung today
by notarial deed.----
§ 2 Beneficiaries
The beneficiaries are Mr. Peter SOMMERER, his wife, Mrs. Dawn Elizabeth
SOMMERER, as well as the children from their marriage, but only as of their
eighteenth birthdays and, in the event of their death, their offspring,
provided they are resident in Austria.----
§ 3 Ultimate Beneficiaries
(1) In case of liquidation under § 34
(paragraph thirty-four) of the Privatstiftungsgesetz (Private Foundation Act),
Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are the ultimate
beneficiaries as interpreted under § 36 (paragraph thirty‑six),
Section 4, (four) of the Private Foundation Act. ----
(2) In all other cases of liquidation, the
offspring of Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are
the ultimate beneficiaries. In the event of multiple offspring, distribution
should occur per head; offspring of still living offspring, however, will not
participate. In the event that no children or grandchildren of the founder
exist or can be identifies, the remaining assets are to be transferred in equal
parts to the communities of St. Sebastian, Styria, and Wootton Basset,
Wiltshire, England, on condition that the transferred assets are utilized to
finance infrastructure accessible to the general public.----
§ 4 Revocation, Modification of the
Supplementary Deed
The supplementary deed may be revoked by the Executive Board with
unanimous approval by the Advisory Board, and all items may be modified or
supplemented.--
§ Advisory Board
An Advisory Board consisting of three members shall advise the
Executive Board in determining grants to beneficiaries and has the right to
supervise the activities of the Executive Board.----
Members consist of the oldest two beneficiaries and the founder.----
[10]
In accordance with the
terms of the SPF Declaration Mr. Hebert Sommerer appointed Mr. Ketzer, a
colleague of Mr. Peter Sommerer’s from college, Mr. Krammer, who Mr. Peter
Sommerer did not know, though expressed confidence in his credentials and Mr.
Grossbacher, a banker known well by Mr. Peter Sommerer, as the members of
the Executive Board of the SPF.
[11]
Mr. Sommerer explained
that the reasons the SPF was established were:
a) he agreed fully
with the concept of the Private Foundation in that it was to stem the flow of
capital out of Austria to other European countries and to attract foreign
capital, thus shifting capital stocks (shares of Vienna for example) into
Austria;
b) from Mr. Herbert
Sommerer’s perspective to establish family ties through the SPF in Austria with
the hope that the family might return;
c) to make it easier
to leverage financing from Austria;
d) to provide a safe
haven for investments;
e) from his
perspective, to, in some way, compensate Austria for the education he received,
to make capital available for new start-ups, to create something for his
children and use the income for charitable purposes.
[12]
Coincidentally with the
establishment of the SPF, Mr. Sommerer, as Seller, entered into a Sales Agreement
with the SPF, as Buyer, dated October 4, 1996. It stipulated in part:
1. Object of the Agreement
1. The Seller owns registered shares in Vienna
Systems Corporation, Kanata, Ontario, Canada (hereinafter termed the
"Company").
2. The Seller hereby sells 1,770,000 of the
shares detailed above to the Buyer. It is noted that voting, dividend and any
subscription rights will remain to the Seller.
2. Purchase Price
1. The purchase price for the shares covered
by this agreement is $1,177,050 CDN. …
3. Transfer and Guarantee
1. The Buyer acquires the shares covered by
this agreement without voting, dividend and subscription rights. …
4. General Terms and Conditions
…
2. In the event that individual provisions of
this contract are or become unenforceable, this does not affect the
enforceability of the remaining provisions. In this event, the parties to the
agreement will replace such provision with a new one that reflects the business
purpose of the original provision.
[13]
The SPF paid Mr.
Sommerer cash of $117,705, with the balance of the purchase price of $1,059,345
remaining an amount owing on which interest accrued. Excerpts of the Vienna
Board of Director’s meeting of September 20, 1996, indicate:
Upon motion duly made, seconded and carried, the following
resolution was passed: Resolved that the transfer of 1,770,001 common shares of
the Corporation from Peter Sommerer to Sommerer Privatstiftung be and the same
is hereby approved.
Further, share certificates were ultimately issued in
the name of the SPF, albeit some considerable time after October 1996.
[14]
Mr. Sommerer indicated
that he wanted to keep the vote to influence the future of Vienna. He believed
the shares, without the voting, dividend, and subscription rights should be
valued at half their value of $1.33 per share (the Appellant and Respondent
agree that fair market value at that time was $1.33 per share), thus the price worked
out to .665 cents per share. Mr. Sommerer had suggested in his examination for
discovery that another possible reason to keep the vote was to avoid the
possibility of Vienna losing its Canadian control private corporation (CCPC) status,
as, if the non‑resident SPF and the public company Newbridge held greater
than 50% of the shares there was a risk. Mr. Sommerer’s testimony in this
regard is worth reproducing:
…
Q. You also acknowledged that the reasons why
you sold the shares to the Foundation back in 1996 without the voting rights as
to maintain the status of Vienna Systems as a CCPS?
A. I didn’t. Where did I say that? I think I
indicated that I wanted to maintain the voting rights in order to continue
to have a way when it came down to set the direction of the company.
Q. I’ll re-read the passage in the discovery. It’s volume 1
of the transcript. Page 152, you said in answer to question on page 152, line
2:
"Q: Private Corporation?
A: Private Corporation. Yes, Vienna Systems was
a private corporation.
Q: But you acknowledge certain tax advantages
flow from that?
A: Clearly, I am aware of the tax advantages of
CCPC status.
Q: Which you did not want to lose?
A: Definitely, the company would not want to
lose them, given the R&D.
Q: Yes. Is this the reason why you wanted to
retain the voting rights to the shares?
A: That could very well have been one of the
reasons."
This is the answer you gave us?
A.
It says it could have been one of the reasons.
Q.
But it wasn’t now?
A.
Pardon?
Q.
It wasn’t?
A.
In 1996, no.
…
[15]
On Canadian professional
advice that it was not possible to split the rights in shares,
Mr. Sommerer and the SPF entered an Addendum, dated March 3, 1997 that
stated:
Addendum to the Purchase Agreement
dated October 4, 1996
Based on a purchase agreement dated October 4, 1996, Sommerer
Privatstiftung, Waldrandsiedlung 5, 3224 Mitterbach, has acquired 1,770,000
shares of Vienna Systems Corporation from Mr. Peter Sommerer, 8 Murphy Court, Kanata, Ontario, Canada, without voting, dividend, or
subscription rights.
Both contracting parties hereby agree that the aforementioned rights
have in principle been transferred.
The Sommerer Privatstiftung explicitly transfers all of these rights
(voting, dividend, and subscription rights) to Mr. Peter Sommerer.
Mr. Peter Sommerer grants the Sommerer Privatstiftung the right to
transfer the voting, dividend, and subscription rights against payment of a
consideration of CAD 0.66 per share.
Vienna, March 3, 1997
[16]
It is unclear why this
document is dated the 3rd of March 1997 as Minutes of the Executive Board of
the SPF suggest that it was sometime after June 1998 and, perhaps, even as late
as November 1998 that this Addendum was finally put in place. Indeed, the
Minutes of the meeting of November 27, 1998 indicated a couple of things:
5. Voting, Dividend, and Subscription Rights of the Vienna
Shares
Mr. Krammer explained that an amendment of the agreement regarding
the purchase of shares in Vienna Systems Corporation has not yet been
implemented and noted that he will soon send a respective suggestion for an
agreement amendment to Mr. Peter Sommerer for signing.
…
10. Vienna
Systems Takeover Offer
Mr. Sommerer informed the attendees that the company Nokia has
approached the company Vienna
in order to purchase all of the outstanding shares of the company Vienna. He gave the Executive Board a copy
of a decision from the Advisory Board to recommend to the Executive Board that
it comply with a possible offer from Nokia and offer for sale all of the shares
in Vienna Systems that are in the possession of the Foundation, provided the
price per share is approximately CAD 9 (Attachment G).
The Executive Board unanimously agreed to comply with this
recommendation.
Mr. Peter Sommerer further explained that it is anticipated that
Nokia will request a signed sales offer from the Executive Board of the Private
Foundation before December 18 in order to complete the purchase before year-end
1998.
The Executive Board further unanimously agreed to buy back the
voting, dividend, and subscription rights of the Vienna Systems shares still
remaining with Mr. Peter Sommerer if Nokia accepts the sales offer.
…
[17]
The parties are agreed
that the fair market value of the Vienna shares in October 1996 was $1.33 per
share.
[18]
In April 1997, Mr. Sommerer,
as a member of the Advisory Board of the SPF recommended to the Executive Board
to sell 150,000 Vienna shares, but the Executive Board determined not to do so
at that point, as Mr. Krammer believed, according to the Executive Board
minutes that the shares "still have price increase potential". In
December 1997, the Executive Board, again on recommendation of Mr. Sommerer as
a member of the Advisory Board, resolved to sell 150,000 Vienna shares to Mr.
Mikutta, 33,333 to Mr. Jenkins and 33,333 to Mr. Madsen at a price of $4.50 Cdn
per share. It is interesting to note Mr. Sommerer’s correspondence of November
30, 1997 to Mr. Jenkins in connection with this sale of Vienna shares:
I will transfer to you upon issuance of the share certificate in
your name any dividend and share allocation rights. Only the voting rights for
these shares shall remain with me. These voting rights shall extend to any
shares obtained by you through any share dividends, share splits and to any
shares acquired subject to any pro rata allocation rights for newly
issued shares. Immediately prior to an initial public offering, I will transfer
to you the voting rights for any shares owned by you for which I hold the
voting rights.
[19]
On November 23, 1998,
the directors of Vienna considered a proposal from Nokia to purchase Vienna for $134,000,000. Four days later, the Advisory Board
of the SPF recommended to the Executive Board that the Nokia proposal be
accepted at $9.00 Cdn per share. (see excerpt of Minutes in paragraph 16 of
these Reasons) The Share Sale Agreement with Nokia was signed by Mr. Grossbacher
on behalf of the SPF on December 18, 1998.
[20]
Mr. Sommerer had, on
December 21, 1998, responded to the SPF’s request for the transfer-back of the
voting, dividend, and subscription rights to the 1,770,000 Vienna shares, by
assigning such rights back to the SPF effective immediately at .665 cents per
share. This appears to be in accord with the last paragraph in the Addendum of
October 4, 1996.
Cambrian Shares
[21]
With respect to the
Cambrian Systems shares, on September 30, 1997, Mr. Sommerer entered into
a written Subscription Agreement with Cambrian Systems Corporation for the
purchase of 57,143 common shares of that company for $100,000.
[22]
In a letter dated March
26, 1998, from Mr. Grossbacher, the chairman of the Executive Board of the SPF,
to Mr. Sommerer, Mr. Grossbacher stated:
I am sending you a decision that indicates we have followed the
request of the Advisory Board to acquire 57,143 pieces of the company Cambrian
Systems Corp. at a price of Cdn $100,000. I request that you initiate the
following:
- Establishment of the Acquisition Contract;
- Definition of the account number into
which the money shall be transferred.
Mr. Sommerer delivered the stock certificate for the
57,143 shares of Cambrian Systems Corp. on April 5, 1998, to Mr.
Grossbacher.
[23]
Notwithstanding an
earlier position of the Appellant, the Appellant conceded at trial that there
was a transfer of the Cambrian shares from Mr. Sommerer to the SPF in
1998.
[24]
On December 4, 1998,
Nortel made an offer to the shareholders of Cambrian to acquire their shares at
$14.97 US per share at closing with an additional $4.12 per share if certain
milestones were met in 1999. The SPF received two cheques in the amounts of
$316,584 and $539,007 in connection with this sale.
Changes to the SPF
[25]
There were a number of
changes to the SPF after 1998. Although these are not applicable to the
relevant time period in the case before me, it does show a subsequent history
that gives some insight into the individuals’ intentions and purpose of the SPF.
I am, therefore, going to go over some of these changes briefly.
[26]
At the June 17, 1998,
meeting of the Executive Board of the SPF, attended by all three members of the
Advisory Board, being Mr. Sommerer, Mr. Herbert Sommerer and Mrs. Sommerer, changes to the Supplementary
Deed were discussed. The minutes indicate:
8. Amendment
of the Supplementary Foundation Deed
…
Mr. Krammer
expressed his willingness to work out a suggestion for an amended Supplementary
Foundation Deed, present it to the Advisory Board and Executive Board as soon
as possible for approval, and implement the necessary notary revision. It was
agreed that a new Supplementary Foundation Deed (STD) should include the
following changes:
·
Adding of nonprofit organizations as beneficiaries in § 2 of the
STD as unanimously suggested by the Advisory Board
·
Changing the condition of an Austrian place of residence in § 2
of the STD to a condition of a place of residence in a country to be designated
by the Advisory Board, with the designation of Canada as such a country being
irrevocably excluded
·
Adding the same domicile condition in Para. 1 and Para. 2 of § 3
of the STD in order to apply them analogously for the determination of the
final beneficiaries
·
Eliminating the explicit right of the Advisory Board expressed in
the first paragraph of § 5 of the STD to monitor the activities of the
Executive Board.
[27]
On January 22, 1999,
the Supplemental Deed was in fact amended to accomplish this. There was no
longer any mention of the supervisory role of the Advisory Board.
[28]
On December 6, 1999,
after having received some professional advice, and having been contacted by
the Canada Revenue Agency (CRA) with respect to his 1998 returns, Mr. Sommerer
wrote to Mr. Krammer as follows:
…
The changes are targeted to avoid any specific names of
beneficiaries. The new addendum certificate should only consist of three
paragraphs:
§ 1. Benefited persons must be not-for-profit organizations
determined by the Advisory Board.
§ 2. This addendum certificate can be revoked by the Executive
Board and unanimous approval by the Advisory Board, and can be changed and
amended on all points.
§ 3. An Advisory Board herewith assigned consists of three
members and must advise the Executive Board for the determination of donations
to the beneficiaries. At any given time, the membership consists of the oldest
of the following persons: the founder, Mrs. Dawn E. Sommerer,
Mr. Peter Sommerer, and the children and grandchildren of Peter Sommerer
and Dawn E. Sommerer.
[29]
This resulted in a
further Amended Supplemental Deed dated January 7, 2000. In particular, I note:
Second:
The beneficiaries are specific charitable organizations;
Third:
1. In case of liquidation under § 34
of the Privatstiftungsgesetz (Private Foundation Act), Mrs. Dawn Elizabeth
SOMMERER is the ultimate beneficiary as interpreted under § 36, Section 4, of
the Private Foundation Act, provided she resides in one of the countries named
by the Advisory Board, with the exclusion of Canada. The residence clause is
irrevocable.
[30]
Later in 2000, Mr.
Sommerer felt that given the issues arising surrounding the Foundation
Declaration and Supplemental Deed, and how the SPF conducted its business, he
drafted some rules of procedure for both the Executive Board and the Advisory
Board. This also led to some changes to the Foundation Declaration, which were
effective July 24, 2000, primarily to add a provision that the SPF "shall
promote the establishment or expansion of companies of individuals who may be
considered for the function of members of the Advisory Board…".
[31]
The Supplemental Deed
was also amended at the same time to make a number of changes:
a) beneficiaries to be appointed by the Executive
Board now included charitable organizations as well as groups of persons
considered for the Advisory Board, provided there will be no such appointment
if it would "give rise to a fiscal (taxable) position for the Private Foundation
or such persons without contributions having been made".
b) With respect to the ultimate
beneficiaries, this too was changed to persons being considered as members of
the Advisory Board…in equal shares, again subject to a residency requirement.
[32]
The provision dealing
with the Advisory Board underwent a substantial overhaul providing more of a
complete code for the Advisory Board. The Advisory Board’s purpose remained
"to advise the Executive Board in certain matters and/or approve of
certain decisions of the Executive Board or deny such approvals".
[33]
There were further
amendments in 2007, when Dr. Torggler became involved. This is long past the
relevant time period and is of no consequence.
Executive Board – Advisory Board interactions
[34]
Both parties spent
considerable time reviewing the minutes of the Executive Board to give me a
flavour of where control of the SPF rested. I do not intend to go through this
in extensive detail but simply make a number of observations:
a) Apart from the
minutes of February 22, 2000, where it was indicated Mr. Sommerer was contacted
by phone, he attended all 25 Executive Board meetings, for which minutes were
presented at trial; in many cases all members of the Advisory Board attended.
b) Mr. Sommerer acted
as secretary of the Executive Board at the meetings and prepared the minutes.
c) Mr. Sommerer
frequently presented investment strategies and recommendations. A good example
are the minutes of the meeting of November 27, 1998, of the Executive Board
where Mr. Sommerer recommended the acquisition of the Bridgewater stock options,
as well as the sale to Nokia of the Vienna shares. The Board agreed unanimously
with both recommendations.
d) Especially after the
SPF came into funds from the sale of the Vienna shares, the Executive Board
needed guidance on investments. For example, the Advisory Board communicated
the following decision to the Executive Board in the fall of 1999:
Decision by the Advisory Board of the Sommerer Private Foundation
relative to the Management of the Foundation Assets
The Advisory Board herewith communicates its concept relative to the
management of the assets of the Sommerer Private Foundation as follows:
1. All proceeds earned from the sale of
Foundation assets in the course of the year, including possible profits from
speculation, must be reinvested as soon as possible while respecting the
planned structure of the Foundation assets.
2. All interest or cash dividend earnings
received in the course of the year must be kept as short-term cash assets. The
total amount received from interest and dividends must be determined within
three months after the end of a fiscal year.
3. The Executive Board shall, in coordination
with the Advisory Board, put aside from this total amount a corresponding
amount as cash reserve for payment of obligations of any type (taxes, other
costs).
4. The remaining amount is to be paid to the
beneficiaries in coordination with the Advisory Board.
5. A possible remaining amount must be
reinvested in a way that it corresponds as closely as possible to the target
structure of the Foundation assets.
6. The Advisory Board shall inform the
Executive Board before the beginning of each fiscal year of the target
structure of the Foundation assets and, if necessary or desired, propose any
restructuring of specific investments.
e) It was the Advisory
Board that proposed the distributions. Mr. Sommerer indicated he would
value the Foundation’s capital each year to bring to the Executive Board’s
attention the amounts available for distributions. This was in fact a two-prong
test looking at both income and the inflationary value of the SPFs assets.
f) The Executive Board
minutes indicate that the Executive Board, in conjunction with the Erste Bank,
was involved in managing the portfolio investment.
Experts
[35]
Before reviewing the
testimony of the two experts, Dr. Torggler and Dr. Plesser, it is
important to keep in mind the relevant provisions of the APFA, as
published in October 1993. This legislation can be found in Appendix A to these
Reasons.
[36]
There are a number of
elements of APFA that I wish to specifically note:
a) The Private Foundation is a legal
entity;
b) The Foundation
Declaration in the form of Deed must be recorded in the Register of
Corporations;
c) A supplementary
document need not be registered though the dates of the Deed and amendments
must be;
d) Beneficiaries may be
named in the Foundation Declaration or by a person or institution (Stelle)
named for this purpose by the founder, or, if no Stelle, by the board of
directors (Executive Board);
e) Ultimate
beneficiaries are entitled to all assets remaining on dissolution;
f) There is provision
for a supervisory board in specific circumstances (these circumstances are not
met in the case before me);
g) The Foundation
Declaration can provide for other Foundation organs;
h) The Executive Board
ensures the purpose of the Foundation is achieved and must perform its duties
frugally and prudently;
i) The founder may
reserve the right to change the Foundation Declaration or revoke it; the
founder in this case did reserve the right to revoke;
j) The beneficiaries
have rights to information and inspection.
[37]
Both Dr. Torggler and
Dr. Plesser were well qualified to assist me in understanding the Austrian laws
regarding the Austrian Private Foundation.
[38]
Dr. Torggler not only
acted as an expert witness, but he had also been retained by the SPF in 2007 to
revise the Foundation Declaration. Before commenting specifically on the SPF,
he opined as follows:
a) The Private Foundation is a
"person";
b) The Executive Board
owes a duty only to the Private Foundation and no fiduciary duty to the
beneficiaries, unless provided in the Foundation Declaration;
c) An Advisory Board
which is an additional organ cannot, according to the Austrian Superior Court,
be dominated by beneficiaries if the rights and duties of such organ are
similar to a supervisory board;
d) The legislation
distinguishes between beneficiaries and ultimate beneficiaries. Austrian Courts
have also distinguished actual from potential beneficiaries. Beneficiaries are
considered actual beneficiaries only from the time of entitlement to endowments.
Ultimate beneficiaries are considered actual beneficiaries only from the time
of adoption of a resolution by the Executive Board to dissolve the
Private Foundation;
e) An Austrian Private
Foundation is subject to Austrian corporate income tax as a separate legal
person, including a speculation tax on the disposition of shares held for less
than a year.
[39]
Dr. Plesser agreed with
the above comments.
[40]
With respect to the SPF,
Dr. Torggler opined:
a) Peter Sommerer (and
his wife and children) were potential beneficiaries only as they were not
residents of Austria and there was no resolution to dissolve the Foundation.
Dr. Plesser agrees.
b) Mr. Sommerer had no
rights of a beneficiary under sections 29, 30 or 31 of the APFA, given
he was only a potential beneficiary, but would have rights under subsection
35(3) and (4) regarding the dissolution of the Foundation. Dr. Plesser agrees.
c) Mr. Sommerer had no
ownership rights in the SPF property. Dr. Plesser agrees.
d) Mr. Sommerer cannot
transfer his position as a beneficiary to another person. Dr. Plesser agrees.
e) The SPF had no
supervisory board as an organ.
f) The Advisory Board
was not validly established in 1998 and had therefore no powers, as it was not
provided for in the Foundation Declaration, only mentioned; only after a later
amendment was it validly established and constituted.
g) Distributions from
the SPF related to income from the property only and not the capital of the
property. Although there was some considerable discussion in this regard, I
conclude that distributions were income distributions.
[41]
Dr. Plesser’s major disagreement
with Dr. Torggler surrounded the powers of the Advisory Board. While he agreed
it was not established as an organ as such of the SPF, he opined that it could
either be a Stelle (authority named for the purpose of naming beneficiaries
found in section 5 of the APFA), though only in conjunction with the Executive
Board, or it could be a person to be given special responsibilities, in
accordance with subsection 9(2) and (4) of the APFA.
[42]
Dr. Plesser opined that
the powers of the Advisory Board were as follows:
- its consent was
required for determining the amount of grants and the beneficiaries (section 6
of the Foundation Declaration).
- its consent was
required for a Founder to revoke or amend (section 8(1) of the Foundation
Declaration).
- its opinion was
required for amendments in event of the death of the founder (section 8(2) of
the Foundation Declaration).
- its endorsement was
required for liquidation (section 10 of the Foundation Declaration).
[43]
Dr. Plesser also
suggested, based on a 2002 Austrian Superior Court decision, there can exist an
Advisory Board, though not an organ, that could have influence. In that case,
the Superior Court stated:
… As such, the grantors established a "secret" board that
is not subject to any organizational status with respect to § 14 Section 2 PSG.
A board established by the grantors (such as the Advisory Board), at any rate,
is not a body of the foundation with respect to § 14 Section 2 PSG if the
foundation deed, as in this case, merely contains the reserve for the
establishment of further bodies and due to the total lack of information
regarding the organizational structure and tasks of the board there are no
points of reference that a body should be established for the protection of the
purpose of the foundation. As such, the grantors have created a board in the
present case that can influence the board of the foundation within the scope of
the approval authorization; however, this board is not granted a status as a
body …
[44]
Dr. Torggler, while
denying the Advisory Board was an organ, or part of a Stelle, or an authority
with special tasks, did agree there could be a non-organ Advisory Board with
approval or consent functions, which he differentiated from rights of
determination. I accept Dr. Torggler’s position that the SPF Advisory Board is
neither the Stelle or part of a Stelle, nor is it an authority appointed with
special tasks. I conclude it is simply an Advisory Board that does not have the
status of an organ, though has influence.
Reassessments
[45]
Without going into
detail for each of the five years under assessment, it is clear that the
Appellant’s taxable position hinges on the treatment of the disposition of the
Vienna and Cambrian shares in 1998. The Respondent reassessed Mr. Sommerer
on the basis that subsection 75(2) of the Act applied, on the assumption
there was a trust in Austria. In the Reply to the Notice of Appeal, the
Minister raised a new primary argument that Mr. Sommerer did not sell his
shares in Vienna to the SPF until shortly before the sale on to Nokia in 1998,
consequently realizing a gain on the basis of a non‑arm’s length
disposition at fair market value (being the value Nokia was prepared to pay).
The Respondent acknowledged this approach would lead to a greater tax burden on
Mr. Sommerer, but that the Respondent was limited to the result of the
assessment based on subsection 75(2) of the Act.
[46]
Issues
1. When were the
Vienna shares sold by Mr. Sommerer to the SPF – 1996 or 1998?
2. Can the arrangement
whereby Mr. Herbert Sommerer endowed the SPF with funds for the purpose set
forth in the SPF Deeds be viewed as a trust for purposes of the application of
the Income Tax Act? I note both parties framed this issue as whether the
SPF was a corporation or a trust. I suggest this is an inappropriate way of
framing it. The SPF is a separate legal entity: a trust under Canadian law is
not; it is a relationship describing how property is held. The SPF could be a
trustee. The question is simply whether a trust existed, not whether the SPF is
a trust or a corporation. Further, notwithstanding argument as to the
characterization of the SPF as a corporation, this is not an issue. If I find
there is a trust, it is immaterial to determine whether the SPF is a
corporation. If I find there is no trust, the parties are agreed the SPF can be
viewed as a corporation, although they disagree on the application of the Foreign
Accrual Property Income (FAPI) regime.
3. If a trust existed,
does subsection 75(2) of the Act apply to attribute the gains on the
disposition shares of Vienna and Cambrian by the SPF to Mr. Sommerer?
4. If there is a trust
and subsection 75(2) of the Act applies, do the provisions of the Convention
prevent the Respondent from taxing capital gains realized by the SPF on the
disposition of the Vienna and Cambrian shares?
5. Was the SPF Mr.
Sommerer’s agent for disposing of the Vienna and Cambrian shares?
1. When were the Vienna shares sold by Mr. Sommerer to SPF?
[47]
The Respondent argues
that because it is not legally possible to split the rights attached to the
common shares, that the October 1996 agreement between Mr. Sommerer and the SPF
was made under a common mistake, which went to the very essence of the
agreement and the agreement is, therefore, void. The shares were not, according
to the Respondent, transferred by Mr. Sommerer to the SPF until December 1998,
at the time of the sale by the SPF to Nokia, as only then did Mr. Sommerer
transfer all his inseparable rights constituting shares to the SPF. As this was
a non‑arm’s length transfer, it took place at fair market value which was
established by the price offered and paid by Nokia.
[48]
The Appellant, also
relying on the Supreme Court of Canada’s comments in the case of Sparling v.
Québec (Caisse de depot et placement du Québec),
agrees about the inseparability of the rights constituting shares, in that it
is not legally possible to transfer shares excluding certain rights that attach
to those shares, but argues that the contract can be interpreted in a way that
does not offend the inseparability concept. Also, relying on the concept of
severance, and the intention of the parties as set out in the severance clause
in the October 1996 agreement itself, the Appellant suggests I should sever the
offside elements of the agreement (the exclusion of the dividend, voting, and
subscription rights) and leave in the place the agreement for the sale of
shares.
[49]
In the original Sale
Agreement of October 1996, the severance clause invites the parties to amend,
in writing, unenforceable parts of the agreement. I find this is exactly what
they attempted to do in the Addendum dated March 21, 1997. Notwithstanding it
was actually signed sometime after that date, the fact is, a written Addendum
was signed making it clear that the October 1996 agreement was an agreement for
the sale of shares. It then clumsily attempts to still get the voting,
dividend, and subscription rights back to Mr. Sommerer, but now it is in the
context of the shares having passed to the SPF, rather than trying to pass
shares with less than all their rights to the SPF. The problem is now SPF’s
attempt to pass the voting, dividend, and subscription rights back to Mr.
Sommerer, without transferring shares. This is more easily interpreted. Nothing
precludes a shareholder, while retaining ownership in shares, to have someone
else vote its shares or to assign the dividend income it receives
from the shares. I agree with the Federal Court of Appeal’s view in this regard
expressed as follows in Sedona Networks Corporation v The Queen:
… I see no reason why the same principle should not apply where the
owner of voting shares enters into a contract with another person that grants
that person a contractual right to vote the shares but not the other incidents
of share ownership.
This is the only sensible and legally comprehensible
way to interpret the Addendum dated March 21, 1997. This approach is also
in accord with the concept expressed by the Ontario Court of Appeal in Maschinenfabrik
Seydelmann K-G v. Presswood Brothers Ltd.:
… With much deference to the opinion of the learned trial Judge who
decided against the plaintiff with some reluctance, he had failed to take into
account the well-settled presumption of law in favour of the legality of a
contract; that if a contract can be reasonably susceptible of two meanings or
modes of performance, one legal and the other not, that interpretation is to be
put upon it which will support it and give it operation.
When interpreting the October 1996 Sale Agreement and
Addendum dated March 21, 1999 together, there is a clear and legal
interpretation that fully accords with the intention of the parties to the
agreement to transfer the shares.
[50]
The Respondent argues
that the facts do not support this interpretation, given Mr. Sommerer’s
evidence regarding voting the shares. In the examination for discovery, there
was the following exchange, which Mr. Sommerer confirmed at trial:
Q. The meeting was advised that the company
was required (that is Vienna Systems Corporation) under the Canada Business
Corporations Act to hold an annual meeting of its shareholders before
February 14, 1997. Did such a meeting in fact take place before February 14,
1997?
A. I do not know but I assume that such
meetings took place.
Q. Yes. And at that meeting, I presume that
you voted the shares of the Foundation that were acquired from you in your own
right?
A. I would assume so.
[51]
Two things to note
about this exchange. First, Mr. Sommerer only assumes he voted the shares in
his own right. He is not a lawyer and cannot be expected to unravel the legal
niceties of ownership of shares. Second, what else was he to assume in February
1997, given how the Sale Agreement was written: Mr. Sommerer’s assumption
that he voted the shares in his own right is of little weight in my
determination of who owned the shares. Further, I view this evidence in light
of many other statements made by Mr. Sommerer at trial; for example:
… What I, in essence, did in my part of the deal in terms of selling
the shares to the foundation was to give away the prospect of personal benefit
if those shares would become of some value.
[52]
The Respondent also
points to a list of shareholders of Vienna dated December 31, 1996, which shows
the shares still in the name of Mr. Sommerer. Yet, this should be weighed
against the following:
a) the SPF’s financial
statements indicating the shares were acquired by the SPF in 1996;
b) share certificates
issued in the name of the SPF;
c) Director’s
Resolution of the directors of Vienna of September 20, 1996 approving the
transfer of 1,770,000 shares from Mr. Sommerer to the SPF;
d) an undated Vienna shareholders’
register indicating SPF acquired the shares on October 4, 1996.
[53]
Based on these facts
and the terms of the October 4, 1996 agreement, along with the March 1997
Addendum, I find as a fact that the Vienna shares were transferred from Mr.
Sommerer to the SPF on October 4, 1996, at $1.33 per share. I reach this
conclusion without the need to rely on the concept of severance argued by the
Appellant. Mr. Sommerer and the SPF, in accordance with the terms of the
October 4, 1996 agreement, amended that agreement in writing to clarify there
was a transfer of the ownership of shares. The directors of Vienna had already
approved the transfer and share certificates were issued. That is sufficient.
[54]
Although having reached
this conclusion on the interpretation of the Sale Agreement, I still wish to
address the Respondent’s approach that the Sale Agreement is void because there
is such a fundamental mutual mistake by the parties as to the nature of the
asset being transferred. This ignores the contractual right to amend embedded
in the October 4, 1996 agreement, and Mr. Sommerer’s and the SPF’s reliance on
that to amend the agreement by the Addendum of March 21, 1997. The
Respondent invites me to simply brush that aside and concentrate only on the
October 4, 1996 agreement and, specifically, that shares without voting,
dividend, or subscription rights are non‑existent – there simply cannot
be such a thing, and, therefore, either on the basis of common mistake, or on
the basis of failure to meet a condition precedent (the existence of the assets),
the contract is void. What is interesting in this case is that neither party to
the contract seeks to void the contract, in fact quite the opposite. It is the
Government who has asked that the Court void the contract. The Government
argues the asset about which the parties are contracting does not exist. Yet,
there are the Vienna common shares. This is quite different from cases cited by
the Respondent of goods not actually existing (see for example Courturier v
Hastie)
or an endorsement of an insurance policy that had already been cancelled (see Re
Judgment Recovery (N.S.) Ltd. and Dominion Insurance Corp),
or sale of land from a vendor to a purchaser where the same land had already
been sold to another purchaser (see Centurion Investments Ltd. v N.M. Skalbania
Ltd.).
These are not analogous, as in none of those cases could either party retrieve
the subject matter so that it could effectively be transferred to the
transferee. With respect to the Vienna shares, there was no mistake that
Mr. Sommerer owned the Vienna shares, and that he could transfer them; he
simply could not carve out certain rights. But the parties could easily rectify
the situation, which they did. The shares existed and ownership in the shares
could be transferred. It was then open to the new owner of the shares, the SPF,
to privately assign certain of its rights, without relinquishing its ownership
of the shares. This was a misunderstanding of the law, perhaps, but that is not
the same as non‑existent subject matter, or a failure to meet a condition
precedent. In McLeod et al v. The Queen,
Justice Bowie of this Court adopted the approach of Justice Steyn in Associated
Japanese Bank v. Crédit du Nord,
who was commenting on the originator of the doctrine of mistake, Bell v.
Lever Brothers Ltd:
The first imperative must be that the law ought to uphold rather
than destroy apparent contracts. Second, the common law rules as to a mistake
regarding the quality of the subject matter, like the common law rules
regarding commercial frustration, are designed to cope with the impact of
unexpected and wholly exceptional circumstances on apparent contracts. Third,
such a mistake in order to attract legal consequences must substantially be
shared by both parties, and must relate to facts as they existed at the time
the contract was made. Fourth, and this is the point established by Bell v.
Lever Bros Ltd, the mistake must render the subject matter of the contract
essentially and radically different from the subject matter which the parties
believed to exist. …
Applying this criteria confirms my view that the
doctrine of mistake is not applicable, as:
1. The contract is capable of being
upheld;
2. There are no exceptional or
unexpected circumstances; and
3. The subject matter
is shares, which did exist and were owned by Mr. Sommerer.
The Respondent’s argument has not dissuaded me from a
practical, legally acceptable view of what transpired.
[55]
I also wish to address
the Respondent’s argument that Mr. Sommerer did not simply want to vote the Vienna
shares in place of the SPF, but he wanted to be seen as controlling or owning
the shares to ensure that Vienna did not lose its status as a CCPC, and,
therefore, an interpretation of the contracts concluding that he transferred
ownership of the shares in October 1996 is incorrect. I disagree with the
Respondent’s view of the facts. The Respondent based this argument on the
passage from Mr. Sommerer’s testimony reproduced at paragraph 14 of these
Reasons. My understanding of Mr. Sommerer’s testimony is that in October 1996,
in transferring the shares to the SPF, and attempting to hang on to the vote,
he was not motivated by the CCPC issue.
[56]
Even if I concluded
otherwise, that he wanted to somehow "own" the shares for maintaining
CCPC status, that does not impact my finding that the legal effect of the
October 4, 1996, plus the March 1997 Addendum, was to transfer the shares on
October 1996 to the SPF. He explicitly, in the Addendum, agreed that the
voting, dividend, and subscription rights had been transferred from him to the
SPF: the intent is clear. He will simply have to accept the consequence of that
as far as Vienna’s CCPC status is concerned. If his object was to maintain CCPC
status, he may have failed in that regard.
[57]
Finally, the Respondent
argued that finding there was a sale of the Vienna shares by Mr. Sommerer to
the SPF in 1996 is such a fundamental departure from the parties’ intention,
that it is not open to me to reach that conclusion. I disagree. Indeed, it
would be far more drastic and contrary to the parties’ intention to adopt the
Respondent’s position that the contract was void, that the SPF agreed to pay
over $1,000,000 for nothing. No, a finding that shares were sold, with an
awkward assignment back of some rights, is far closer to maintaining the
integrity of the deal struck than to suggest there was no deal at all.
2. Can the
arrangement whereby Mr. Herbert Sommerer endowed the SPF with funds for the
purpose set forth in the SPF Deeds be viewed as a trust for purposes of the
application of the Income Tax Act?
[58]
As already indicated, I
reframed the issue in a manner that is more readily open to analysis. This
should not be an issue of whether an Austrian Private Foundation under the APFA
is a trust, let alone whether the SPF is a trust. That is the wrong question.
The Appellant says it is a company: the Respondent says it is a trust. I have
concluded that, depending on the terms of the Foundation Declaration and
Supplemental Declaration, an Austrian Private Foundation could be considered a
trust company, acting as a trustee, and with respect to the SPF, I find that
that is as good a label as can be attached, when looking at it through the eyes
of Canadian laws.
[59]
What needs to be
analyzed, however, is not what the SPF is, but what relationship exists amongst
the SPF (a separate legal person), Mr. Herbert Sommerer, and Mr.
Peter Sommerer and the Sommerer family. Is there a trust relationship? Can Mr.
Herbert Sommerer be seen as a settlor? Can the SPF be seen as a trustee,
perhaps a corporate trustee? Can Mr. Sommerer be seen as a beneficiary? Do the
three certainties, certainty of intention, certainty of subject matter, and
certainty of objects exist? Are there any other characteristics of the Canadian
trust that are missing in the Sommerer arrangement?
[60]
I agree with the
Appellant’s suggestion that, in characterizing a foreign arrangement, I rely on
the Supreme Court of Canada’s comments in Backman v. The Queen
to look at the private law in Canada to determine the essential elements of a
trust, and then compare the elements of the foreign arrangement to determine if
it can be treated as its correlate under Canadian law. So, what are the
essential elements of a trust under Canada law? I note, with some concern,
Professor Waters’ opening comments in this regard in his article "The
Concept Called "the Trust":
It is agreed among text writers of the common law tradition – an
opinion adopted by the Courts – that "the trust" cannot be defined.
It can only be described. That means you can point to its characteristics or
elements, but you cannot put into a sentence what it is.
[61]
The Appellant’s counsel
referred me to a number of comments from authorities such as Oosterhoff on
Trusts
and Waters Law of Trusts in Canada.
Notwithstanding Professor Waters’ heads-up, I have found the following excerpts
helpful:
From Oosterhoff:
An equitable obligation, binding a person (called a trustee) to deal
with property (called trust property) owned by him as a separate fund, distinct
from his own property, for the benefit of persons (called beneficiaries or, in
all cases, cestuis que trust) of whom he may himself be one, and anyone
of whom may enforce the obligation.
From Waters:
The hallmarks, the essential characteristics of the common law
trust, are heavily reflective of a peculiar legal history. The foremost of
these is the fiduciary relationship which exists between trustee and
beneficiary. The following elements are surely essential. From the moment of
the creation of the trust, there must be an ability of the beneficiary to
secure an accounting or, to put it another way, a power in the beneficiary to
enforce the discharge of its duties by the trustee.
[62]
The Respondent, in his
argument, puts the essential features more generally:
In broad terms, a trust is a means of managing wealth for the
benefit of one or more persons. The essential features of a trust are specified
property, a person or persons as the objects of the trust with the exclusive
right to its enjoyment or dedication, and person holding title to the property
and administering it on behalf of the objects. In simplified terms, a trust is
an arrangement whereby a person who holds title to property is under an
obligation to administer it for the benefit of another person or persons.
[63]
There is no disagreement
as to the need for the three certainties to create a trust, though in a
somewhat circuitous, though logical, fashion, the Appellant argues that if an
essential element is missing for the arrangement to be considered a trust, then
there cannot have been the requisite intention to create a trust. The missing
element in the SPF arrangement, according to the Appellant, is the lack of the
right of the beneficiaries to enforce an obligation owed to them by the
trustee. Professor Waters’ attempts to address this when he states:
As necessary conditions, if any of the three certainties are not
present, the courts will not recognize the existence of a trust. The presence
of the three certainties are not, however, sufficient conditions to the
creation of a trust; they are evidentiary in nature and represent the factual
threshold at which the law will recognize as enforceable the obligations of a
trustee towards the beneficiary with respect to the designated trust property.
[64]
This is something of a
chicken and egg statement: do the beneficiaries’ rights of enforcement arise in
law because there is a trust, or must the beneficiaries’ rights of enforcement
exist by the Trust Deed, for example, for there to be considered a trust. The
Appellant suggests the latter.
[65]
It is this element of
accountability owed by the trustee to the beneficiaries, enforceable by the
beneficiaries, that is at the crux of the dispute between the parties on this
issue; in essence, the nature and extent of the required fiduciary obligation.
[66]
In summary, the
essential ingredients of a trust under Canadian law that I wish to address
are:
a) segregated property;
b) owned by a person (trustee) having
control of the property;
c) for the benefit of persons
(beneficiaries);
d) to whom the trustee
has a fiduciary duty enforceable by the beneficiaries.
If I find these essential features in the arrangement
by which the SPF held the Vienna shares, then I will have no difficulty finding
the three certainties were met to create the trust. It is absolutely clear to
me that there is certainty of subject matter and objects, and if the essential
features of a trust are evident, then the intention of Mr. Herbert
Sommerer to create a trust can be gleaned from the Foundation Declaration, the
Supplementary Deed and the application of APFA. All to say, the analysis
does not hinge on the three certainties.
[67]
Turning then to the SPF
and its holding of the Vienna shares, I readily find that the first two
essential features are apparent in this arrangement. The property, the Vienna shares, substituted for the initial endowment to the
SPF from Mr. Herbert Sommerer, was subject to the provisions of the APFA,
which at the very outset in section 1, refer to "an endowment for
achieving a permissible purpose determined by the founder". No purpose was
for the SPF to use the endowment to its own account. Secondly, the property was
owned by the SPF, which, as a legal person, held title to the Vienna shares,
and held control over the property.
[68]
Third, was the property
held for the benefit of persons? In this regard, the experts testified that
Austrian law distinguishes between actual and potential beneficiaries. There is
also the distinction under the APFA between beneficiaries and ultimate
beneficiaries. The Foundation Declaration and Supplementary Declaration are not
expansive in their descriptions of the beneficiaries, but I take from the
experts’ views that the beneficiaries (Mr. Peter Sommerer, Mrs. Dawn Sommerer
and children and their offspring, provided they are resident of Austria) are
income beneficiaries only, and even then only potential beneficiaries, as none
were resident in Austria and none were named to receive any grant. Similarly,
Mr. & Mrs. Sommerer, in the event of the founders’
revocation, are ultimate capital beneficiaries, though, again only potential
beneficiaries until there is a revocation. This classification of actual versus
potential beneficiary is of no consequence in answering the question of whether
the property was held for the benefit of persons. Of course it was; that was
the raison d’être of the SPF. The difference between actual and potential
beneficiaries becomes a factor only when considering the fiduciary duty of the
SPF.
[69]
With respect to the
income beneficiaries, the class of beneficiary was clear; it was also clear
from the Foundation documents how it was to be determined who within the class
might receive a grant from the SPF. The potential beneficiaries are clearly
ascertainable.
[70]
With respect to the
ultimate beneficiaries, it is even clearer. If Mr. Herbert Sommerer decides to revoke the SPF,
Mr. Peter Sommerer and Mrs. Dawn Sommerer receive the capital. They are
persons who will benefit. The third essential ingredient exists.
[71]
So, the penultimate question is
whether the SPF had any fiduciary obligations to any of these beneficiaries,
enforceable by the beneficiaries.
[72]
The Appellant points to several
factors in support of his position that the beneficiaries had no enforceable
right to call the SPF to account. I will deal with those items, but first want
to make an overriding observation regarding this essential feature. The right
of the beneficiary is the flip side of the fiduciary duty of the trustee; in
this case, the duty of the SPF, if any, is at issue. If there is no duty
enforceable by the beneficiaries, is the SPF simply under some moral obligation
and the Sommerers simply hopeful they might get something from the SPF? This
would more resemble a power of appointment. My impression is that the SPF was
not founded on the shifting sands of moral obligation: there were no
beneficiaries other than the Sommerers; there were no ultimate beneficiaries in
the case of revocation other than Mr. & Mrs. Sommerer; there
are no ultimate beneficiaries in any other case other than those set out in 3.2
of the Supplementary Deed. This is not designed for the SPF to exercise any
moral obligation. So, in the context of attempting to determine whether an
arrangement in Austria, whose laws do not contemplate the concept of a North
American trust, is akin to a trust under Canadian law, it is my overriding view
that there is something well beyond moral obligation going on here. And
certainly close enough to the Canadian fiduciary duty to find this final
essential element for a trust exists in the SPF arrangement.
[73]
I will now address those
factors raised by the Appellant to suggest my impression is misplaced.
[74]
First, the Appellant
relies on Dr. Torggler’s evidence that there is no fiduciary duty owed by the
Executive Board to the beneficiaries or by the SPF itself. This, though, must
be viewed in the context of Dr. Torggler’s opinion that, in Austrian law, there
is no literal translation of the fiduciary duty. He testified, in answer to the
question whether there are any duties owed to beneficiaries as follows:
Not from the outset, but at the moment a beneficiary has been
appointed an endowment, usually the beneficiaries have been resolved upon and
from that point in time, there was obligation on the part of the Board to
fulfil this commitment.
He also stated:
There is a provision that the Board of Directors’ owes fulfillment
of the purpose of the Foundation, and as the purpose of the Foundation,
generally, is in favour of the beneficiaries, in that respect indirectly
there is a duty, but there is no direct duty prescribed in the law.
[75]
These opinions do not
go as far as the Appellant suggests. The Foundation itself is implicitly
obliged to fulfill the purpose for which it is established. Further, one of its
primary organs, the Executive Board, "must perform his/her responsibilities
frugally and with the prudence of a conscientious manager"
(section 17(2) APFA). Also, the Executive Board must keep the books
(section 18 APFA). If there is any disagreement between the
auditor and the Executive Board, regarding the application of the Foundation
Declaration, the Court shall decide (section 21(4) APFA). Every member
of the Executive Board is liable for damages as a result of negligent neglect
of duties (section 29(1) APFA). For a jurisdiction that does not
recognize a fiduciary duty concept, what is to be made of the above? What
I make of it is that Austria has legislated obligations, and when
combined with a requirement to fulfill the purposes of the Foundation, which
with respect to the SPF is to benefit the Sommerer family, I conclude
Dr. Torggler’s opinion of no fiduciary duty is overstated. There are
sufficient parallels between the Canadian concept of fiduciary duty and the combination
of the provisions of the APFA and the wording of the Foundation
Declaration to find that some requisite duty exists.
[76]
Second, the Appellant
argues the rights of a beneficiary under the APFA are limited to section
30 rights, and in very limited circumstances, section 35(3) rights (application
by a beneficiary or ultimate beneficiary for dissolution). With respect to the
section 30 right of the beneficiary to information, the Appellant also argues
that because Mr. Sommerer was only a potential beneficiary (as he was not an
Austrian resident nor had been chosen for a grant) and potential ultimate
beneficiary (as there had been no call by the founder to revoke the Foundation),
he is not entitled to the section 30 rights for information. Dr. Torggler
testified that there has been a court decision in Austria that section 30 is
only available to actual beneficiaries. This raises the interesting situation
where the SPF is established to benefit the Sommerer family, and no one else,
yet they cannot be considered actual beneficiaries until certain conditions are
met: in effect there are no beneficiaries. When the condition is met, certain
rights kick in. Mr. Taylor acknowledged that only at that point might there be
a trust. Presumably, following that reasoning, if Mr. Sommerer became an
Austrian resident and the Executive Board determined to make a grant to him, at
that point there would be a trust, yet after the grant is paid, Mr. Sommerer
goes back to being a potential beneficiary only and there is again no trust.
This cements my view, apparently shared by eminent authors on this subject,
that the definition of a trust is illusory. But it also suggests to me that
this essential feature of enforcing a fiduciary duty should not be viewed in
isolation, nor rigidly adopted. Clearly, these rights could arise, and will
arise, in the very situation that the founder contemplated of benefiting the
Sommerer family. How different is this from the Canadian trust where property
is held for a minor until the age of majority when he/she is entitled to a
distribution of capital. What right does the minor have to enforce the trustee
to pay out before attaining the age of majority?
[77]
Also, it is noteworthy
that the founder, Mr. Herbert Sommerer, provided that the Advisory Board was to
be made up of Mr. & Mrs. Sommerer, the ultimate beneficiaries. Further, he
provides the Advisory Board was to play an important role in the SPF including
supervisory tasks. This confirms to me an explicit right to information given
by the founder to beneficiaries, notwithstanding the provisions of the APFA.
[78]
With respect to what
the Appellant calls the limited rights found in section 35(3) of the APFA,
of the ultimate beneficiary to apply to the court if the Executive Board does
not pass a resolution to dissolve, once the founder has sought revocation, I
view this as a significant right. This goes to the distribution of all of the
capital of the SPF to the Sommerers. This is no limited right. Mr. Herbert Sommerer decides to revoke and Mr. &
Mrs Sommerer take all: if the Executive Board does not pass the requisite
resolution to put this distribution into effect, the Sommerers can apply to court.
I find this right alone is sufficient to meet the requirement for an
enforceable right of beneficiaries to have the trustee, the SPF, act in their
best interests.
[79]
The Appellant goes on
to argue that the potential beneficiaries have no right in the property of the
SPF, as would all the beneficiaries of a common law discretionary trust, who
could call for the property by invoking the rule in Saunders v. Vautier. Again, Dr.
Torggler opined that even an actual beneficiary does not have a property right
in the Private Foundation property. I am concerned that because common law
treatment is not afforded the Austrian Private Foundation that it fails to
match the essential features of the common law trust. It is important to keep
in mind what process is being engaged here. The essential features of a common
law trust have been identified, and now the establishment of the SPF and
transfer of property into it for the benefit of the Sommerer family is being
examined to determine if it can be viewed as a common law trust,
notwithstanding its jurisdiction does not have such a concept. It should be no
surprise that the concept of beneficial ownership of property is not apparent.
I do not find that the lack of such right of beneficial ownership is fatal.
[80]
Finally, the Appellant
relies on the wording of the Foundation document itself to suggest the income
beneficiaries have no legal claim. The Foundation Declaration states:
"Beneficiaries and those who may become beneficiaries based on the purpose
of the Foundation have no legal claim to grants from the Foundation".
Firstly, I interpret this provision to be dealing with income
beneficiaries only, not the ultimate beneficiaries. This simply makes clear the
discretionary nature of income grants. They can only be to the Sommerer family,
but no individual family member can come knocking on the SPF’s door asking to
be paid a grant. This evidence is no more than that, and is not sufficient to
strip away the character of a discretionary trust.
[81]
On balance, I have not
been convinced that there is no fiduciary duty enforceable by the Sommerer
family. Certainly, the rights may not be as extensive as one might find in many
common law trusts, but for purposes of trying to determine if an arrangement involving
an Austrian Private Foundation has the elements of a common law trust, it is
unnecessary to find every possible right of a beneficiary against a trustee,
but more appropriately the question should be, are there sufficient rights that
reasonably resemble those found in the Canadian trust? I conclude there
are.
[82]
It should be clear that
in reaching this conclusion, I am not finding the SPF is a trust: I am finding
the relationship between Mr. Herbert Sommerer, the SPF and the beneficiaries
constitutes a trust, with the SPF as the trustee. Further, I do not make this
finding in any way as a generalization that all relationships involving an
Austrian Private Foundation are trust relationships. There may well be a
Foundation Declaration that is found to be more akin to a power of appointment,
for example, by stripping away any rights of enforceability a beneficiary might
have. Here, on balance, there are sufficient indices of the essential features
of a trust to find the arrangement can be considered a trust. Given that
conclusion, it is unnecessary for me to review the Quebec Civil Code concepts,
as well explained to me by Me Tassé, to determine if the Austrian arrangement
falls within any of the Quebec concepts of trust.
3. If a trust
existed, does subsection 75(2) of the Act apply to attribute to
Mr. Sommerer the gains on the disposition of the Vienna and Cambrian shares by the SPF?
[83]
Subsection 75(2) of the
Act provides:
Where, by a trust created in any
manner whatever since 1934, property is held on
condition
(a) that it or property substituted therefor
may
(i) revert to the person from whom the property or property for which it
was substituted was
directly or indirectly received (in this subsection referred to as "the person"), or
(ii) pass to persons to be determined by the person at a time
subsequent to the creation of the trust, or
(b) that,
during the existence of the person, the property shall not be
disposed of except with the person's consent or in
accordance with the person's direction,
any income or loss from the property or from property substituted for the property, and any taxable capital gain
or allowable capital loss from the
disposition of the property or of property substituted for the property, shall, during
the existence of the person while the person is resident in Canada, be
deemed to be income or a loss, as the case may be, or a taxable capital gain
or allowable capital loss, as the
case may be, of the person.
[84]
A number of issues flow
from the application of this provision to the facts before me:
(i) can the defined "person" in
75(2)(a)(i) apply to a beneficiary vendor who sells property to the
trust at fair market value (i.e. Mr. P. Sommerer);
(ii) if so, can such property revert to Mr.
Sommerer?
(iii) if not, can such property pass to such
persons determined by Mr. Sommerer? (see subparagraph 75(2)(a)(ii)
of the Act)
(iv) if not, can such property only be disposed
of with Mr. Sommerer’s consent or in accordance with his direction? (see paragraph
75(2)(b) of the Act)
(i) Who is the "person" as defined
in subparagraph 75(2)(a)(i) of the Act?
[85]
The Respondent argues
there is no requirement that the "person" be the settlor, but that it
could be any person, including a beneficiary vendor of property sold to the
trust at fair market value. The Respondent relies on IT369 which indicates that
it is the department’s view that a person, other than the settlor, may transfer
property to a trust and become subject to the attribution rules. With respect,
I disagree with the Respondent’s view of the definition of person.
[86]
It is well established
that income tax legislation is to be interpreted in a textual, contextual and
purposive manner. It is meant as no unkindness to the drafters of income tax
legislation, but they have at times made this task exceedingly difficult: subsection
75(2) of the Act is an example of (trying to put this fairly) awkward language.
Textual interpretation
[87]
The opening words are
significant - "by a trust created…property is held on condition". In
this case, one could insert the date and have the opening words: "where,
by a trust created on October 3, 1996, property is held on condition". The
provision does not say "where property is held in trust or in a trust on
condition". It specifically refers to a trust created and a time at which
the trust is created. I suggest it invites an interpretation to look at
the conditions on the creation of the trust, the creation in this case by Mr.
Herbert Sommerer, the settlor. The nature of the trust, and whether it is of a
type contemplated by subsection 75(2) of the Act, is to be discerned at
the time of creation. On the creation of the trust by a settlor, there can only
be one person from whom property is received – the settlor. There is no other
person. This does not however preclude the possibility of another person
settling property in trust with the same trustee and on the same terms, but in
such a case, I would suggest there is another trust created. In effect, by the
opening words of subsection 75(2) of the Act only a settlor, or a
contributor akin to a settlor is contemplated as being the defined person.
[88]
This interpretation is
confirmed by examining the two situations contemplated by subsection 75(2) of
the Act: first, what is the effect if the trust holds the original
property, and second, what is the effect if the trust holds "property
substituted therefor". In that regard, it is clear with respect to the SPF
that it could, as trustee, substitute property for the original endowment. And
indeed it did.
[89]
So let us look at the
wording of subsection 75(2) of the Act in the first situation, where the
trust simply holds the original property endowed by
Mr. Hebert Sommerer. The text of subsection 75(2) of the Act
would read:
Where, by a trust created in October 1996, property is held on
condition that it may revert to the person from whom the property was directly
or indirectly received.
That seems straightforward and requires no acrobatic
semantics to discern what the provision means. The property would be the
Austrian shillings and the person could only be the settlor, Mr. Herbert
Sommerer.
[90]
Let us now look at the
wording of subsection 75(2) of the Act in the second situation where the
trust holds substituted property. The text of subsection 75(2) of the Act
would then read:
Where a trust created in October 1996, property (shillings) is held
in on condition that the property (shillings) or property substituted therefor
(shares) may revert to the person from whom the property for which the shares
were substituted (i.e. shillings) was directly or indirectly received.
Again, this can only be the settlor of the trust. This
is a logical, textual, grammatical reading of subsection 75(2) of the Act,
when one notes the difference between "property substituted therefor"
in subsection (a) and "property for which it was substituted"
in subsection (a)(i).
[91]
While I would not go so
far as to suggest it is perfectly clear, it is, I would suggest, a correct
textual reading. Any other reading gives an artificial interpretation to the
term "property for which it was substituted". The "it" in
that phrase can only mean the "property substituted therefor". The Respondent
would have me read "property for which it was substituted" as
"property substituted therefor". It cannot and should not be read
that way. In "property for which it was substituted" the
"it" can only mean the shares, and therefore the "property for
which it was substituted" can only mean the shillings – only the settlor,
Mr. Herbert Sommerer endowed the shillings. If one attempted to read
the "it" in that phrase as referring to the shillings, the phrase
becomes meaningless as the shillings were not substituted for anything; it was
the shares that were substituted for the shillings. I recognize that this may
take the reader several readings of what at first might seem simple language.
It is not. But once properly unravelled and viewed grammatically and logically,
the only interpretation is that only a settlor, or a subsequent contributor who
could be seen as a settlor, can be the "the person" for purposes of subsection
75(2) of the Act.
[92]
The other possibility
from the Respondent is that the reference to "property" in the first
line of subsection 75(2) of the Act could refer to the substituted
property, in this case, the shares. In effect the section would have to be read
as follows:
Where, by a trust created on October 3, 1996, the Vienna shares are held
on condition that the Vienna shares may revert to the person from whom the
Vienna shares or property for which the Vienna shares were substituted, i.e.
the original shillings, were directly or indirectly received.
[93]
There are three flaws
in this approach. First, as previously discussed, by the trust created on
October 3, 1996 the only property held on condition was the original
endowment of the shillings. Second, this approach could result in more than one
"person" to whom the attribution rules might apply, in this case both
Mr. Sommerer and his father (were he Canadian) There is no mechanism for
an allocation in that case, obviously, I would suggest, because it is incorrect
to read the provision as resulting in more than one attributee. Third, because subsection 248(5)
of the Act deems subsequent substituted properties to be substituted for
the original property, there are only two types of property to which subsection
75(2) of the Act can refer: the original property and substituted
property. This is in line with the later attribution wording in subsection
75(2) of the Act which refers to income or loss from "the property
or from property substituted for the property". The income or loss can
derive from either, but can only be attributable to one person: the donor of
the original property. The opening words of subsection 75(2) of the Act
do not refer to substituted property being held on condition, just property,
the original property.
[94]
Does this mean that Mr.
Peter Sommerer could never be "the person" for purposes of this
section? No. If he settled the shares in the same trust, by contributing them to
the trust (that they be held on the same conditions), he could be seen as
creating a new trust and could, therefore, be a settlor and subject to the
application of subsection 75(2) of the Act. He would, however, had
to have been a contributor. But he did not do that. He did not transfer shares
into the SPF as a settlor or contributor creating a trust. He sold the shares
unconditionally to the SPF, who, as trustee of the property, held the property
on conditions created by Mr. Herbert Sommerer, substituting those shares for
the shillings endowed by Mr. Herbert Sommerer. In these circumstances,
Mr. Peter Sommerer could not be "the person" as defined.
[95]
Having reached this
conclusion on the textual interpretation of subsection 75(2) of the Act,
I was concerned that the wording of the French version differed with respect to
the expression "property for which it was substituted". The French version uses the same expression
"biens qui leur sont substitutés" in paragraph 75(2)(a) and
subparagraph 75(2)(a)(i), unlike the English version which uses "property
substituted therefor" in paragraph 75(2)(a) and "property for
which it was substituted" in subparagraph 75(2)(a)(i). I asked the
parties to provide further submissions, given this significant difference in
wording between the English and French versions.
[96]
The Appellant argues that the
French text does not derogate from their argument on the English
interpretation, which I have accepted. The Appellant makes two arguments:
first, the French phrase in subparagraph 75(2)(a)(i) was intended to
convey the same meaning as "property
for which it was substituted"; second, the two phrases are simply
irreconcilable and the English version better accords with the intention of
Parliament. Indeed, the Respondent agrees with the Appellant in this regard.
[97]
From a literal reading of the
French version, the Appellant concludes that it would enable the Government to
find more than one "person" for the purpose of applying subsection
75(2). The Appellant provided an example of how this could arise:
… Suppose A
settles $100 on a trust and reserves the right to revoke the trust. The trust
then uses the $100 to buy shares from B (at their fair market value at the time
of purchase). During the period that the trust owns the shares, it receives
dividends. The trust subsequently sells the shares to C for $200 (their fair
market value at the time of sale). Immediately thereafter, the trust uses the $200
proceeds to buy real estate from D which generates rental income during the
period it is owned by the trust. B and D are capital beneficiaries of the
trust.
There is no
dispute that all three subsequent properties – the shares, the $200 and the
real estate – are, by virtue of s. 248(5), property substituted for the
original $100. As the appellant has previously submitted, the intent of s.
75(2) is to attribute to A the income (or loss) from, or capital gain (or
capital loss) from the disposition of the $100 and from the shares and from the
$200 and from the real estate. The rationale for s. 75(2) is that, in such
cases, A is not considered to have fully disposed of the $100 (because of the
right to revoke the trust) and therefore the income from that property or
property substituted for it, or the gain from the disposition of the property
or the property substituted for it, should be attributed to A. However, to give
effect to the literal French meaning of "ou les biens qui leur sont
substitués" in preference to the English meaning of "or
property for which it is substituted" would attribute the income or gain
from the shares and real estate to B and D as well as to A. As stated in our
earlier submission, such an interpretation should be avoided because it is
contrary to public policy to permit the Minister to choose to impute the income
(or gain) from the shares and the real estate amongst any or all of A, B and D
unless the language of the provision clearly made them jointly, or jointly and
severally, liable for a single charge to tax. Indeed, this interpretation would
permit the Minister to attribute the income from shares and the gain from the
disposition of the shares to D (because the real estate is substituted for the
shares) even though D did not transfer any property to the trust during the
period that the trust owned the shares. In other words, if the literal French
meaning of the phrase "ou les biens qui leur sont substitués"
were to determine the scope of s. 75(2)(a)(i), it would remove any temporal
connection between the transfer of property by a person to the trust and the
attribution of income from the trust property (including previously‑owned
trust property) to that person.
…
[98]
This reasoning makes eminent sense
to me. Subsection 75(2) of the Act is neither in the French nor English
versions drafted by any reference to persons (plural), only to a person. It
contemplates just the one person.
[99]
The Appellant brought to my
attention seven provisions of the Act where the English language version
refers to "the property…or…property for which it was substituted" and six provisions that
use the phrase with identical meaning "the property…or…property for which
the property was substituted".
The Appellant argues that all of these provisions concern a tax consequence or
tax attribute at a particular point in time and include conditions applicable
during a specified period before that time. Almost all of the provisions deal
with the tax consequences of disposition of a property, and the conditions that
must be met at the time of disposition and prior to the time of disposition.
According to the Appellant, it is clear from the text and purpose of all of
these provisions that the phrase in issue must refer to a previously held
property and not to a subsequently substituted property. Consequently, the use
of the phrase "un bien qui lui est substitué" is intelligible in
these contexts only if it is understood as referring back to previously owned
property. The Appellant suggests that the most obvious examples are paragraphs
110.6(1.2)(a), 110.6(1.3)(a) and 110.6(1.3)(c). In effect, the French phrase
should be taken as referring to the property for which the substituted property
was substituted, and not the substituted property itself.
[100]
Again, this makes sense: it
accords with my earlier view of how to properly parse subsection 75(2) of the Act
into the two situations, one, where the original property is held, and two,
where the substituted property is held. If I look to the French version in
applying the second situation where the trust holds substituted property,
subsection 75(2) of the Act would effectively read:
Soit que des biens qui leur sont substitutes puissant revenir à la
personne dont les biens leur sont substitutes…
[101]
It is apparent that
"leur" referred to in the latter phrase must reference the
substituted property, and therefore, the latter phrase can only mean, in
English, the property for which the substituted property was substituted.
[102]
All to say, that despite this
considerable head-spinning, a review of the French version has not altered my
view that subsection 75(2) of the Act is not meant to apply to more than
one person, that person being the settlor.
Contextual
[103]
Support for this
textual interpretation of "the person" can be found in the context of
the balance of subsection 75(2) of the Act. Specifically, subparagraph 75(2)(a)(ii)
refers to property passing to persons to be determined by "the
person" at a time subsequent to the creation of the trust. The only person
to whom the time of the creation of the trust holds any relevance is the
settlor, not a beneficiary vendor for value. It is implicit that if the settlor
retains any such authority, it is he or she who may be caught by subsection
75(2) of the Act.
[104]
This view has garnered
some favour amongst the academics. Maurice Cullity in Taxation and Estate
Planning indicates the usual object of subsection 75(2) attribution is the
settlor, though could apply to a subsequent transferor in the sense of a
contributor. In that regard, I concur with Justice Bowie’s comments in Greenberg
Estate v. The Queen
that "contributed" signifies a voluntary payment made to
increase the capital of the estate: a sale to the trust at fair market value
does no such thing. As I indicated earlier, if Mr. Peter Sommerer was
to contribute to the trust, he might be viewed as a settlor creating a new
trust. A fair market sale of property to a trust is not a contribution and the
vendor is not a contributor, nor therefore a settlor. The property sold to the
trust cannot, as argued by the Respondent, be viewed as "original
property"; it can only be substituted property, as consideration was given
for it by the trust.
Purposive
[105]
On its face, subsection
75(2) of the Act is an avoidance provision that denies the taxpayer the
use of a trust to defer and perhaps avoid tax. Counsel was unable to provide
any commentary from the Department of Finance or anywhere in the Government for
that matter, at the time of the introduction of this provision, to shed light
on the Government’s view of its purpose. Neither party was able to rely on this
tool of interpretation to assist me. Unlike other attribution provisions or
anti‑avoidance provisions, subsection 75(2) of the Act does not
appear to require any element of intent. It has been suggested that this
provision could be a trap for the unwary, who establish trusts for non-tax
purposes. I remain guided, therefore, by the textual and contextual view of subsection
75(2) of the Act.
(ii) If the
Respondent is correct that Mr. Sommerer can be the "person" as
defined in subsection 75(2) of the Act, can the property revert to him?
[106]
There is no question
that Mr. Sommerer is an ultimate beneficiary entitled to the property in the
event Mr. Herbert Sommerer revokes the SPF. The Appellant relies on the case of
Fraser v. The Queen
to argue that a reversionary interest must be an absolute reversionary interest
for subsection 75(2) of the Act to apply and that that is not the case
for Mr. Sommerer. I do not accept the Fraser decision as a strong
authority for that proposition. In Fraser, the parties agreed that if
the Court found a trust existed rather than an agency, then the trust was
taxable. Only on the last day of trial was it even suggested that subsection 75(2)
of the Act might apply to attribute losses to the investors.
Justice Reed gives this relatively short shrift:
In addition, it is argued that subsection 75(2) only applies when
the beneficiary has a reversionary right and that no such right exists in this
case. It is argued that while the GMS Agreement states that the plaintiff may
request a sale or redemption of her units, and the agreement goes on to state
that the syndicate will not continue making investments until redemption has
taken place, there is in fact no absolute right to redemption. It is argued
that the documentation does not give an absolute right of reversion. I accept
this as a correct interpretation of subsection 75(2) and the facts of the
present case. In my view, subsection 75(2) anticipates a situation in which the
whole corpus of the trust is capable of reverting to the settlor (75(2)(a)) or
where the corpus during the life of the trust remains under the control of the
settlor (75(2)(b)). …
[107]
If the investors in the
mortgage syndicate wanted out, they could seek to sell their interest or seek
redemption from the syndicate itself, if the syndicate was not in a loss
position. This is what Justice Reed likely meant when she referred to the
documentation not giving an absolute right of reversion. This is not at all
similar to the situation before me. If Mr. Herbert Sommerer revokes the Foundation,
Mr. Peter Sommerer gets half the corpus of the trust. Unlike the case
before Justice Reed, the Vienna and Cambrian shares were held subject to
an absolute condition as to how they, or substituted property, were to be
distributed in the event of a revocation. No, I do not see how the Fraser
case is of any assistance to Mr. Sommerer, if Mr. Sommerer is found to be the
"person" as defined in subsection 75(2) of the Act.
[108]
This does confirm for
me, however, that Mr. Sommerer, as a vendor beneficiary for fair market
value, should not be the "person", as a reversionary right implies
the right of the transferor, yet here the right vests in the settlor via his
right of revocation, not in Mr. Peter Sommerer. By applying subsection 75(2) of
the Act to Mr. Peter Sommerer as the "person", words such as
"revert" need to be stretched to accommodate an interpretation that,
I respectfully suggest, was never contemplated. In a trust, property can revert
to a settlor: a reversionary trust. Mr. Peter Sommerer did not settle a
reversionary trust but the property he sold to the trust, by operation of the
trust, can be distributed to him; again, Mr. Sommerer should not be considered
the "person".
[109]
Having said that I still
conclude that, if Mr. Peter Sommerer is the "person" from whom
property was received by the trust, and I am forced to look to how
"revert" applies to him, then I find the property "may
revert" to him, as it is enough that by the terms of the trust upon which
the property is held, the property shall be distributed to him in the event of
revocation. No technical meaning need be ascribed to "revert" in the
context of property distributed to a beneficiary that was previously owned by
the beneficiary. He owned it once: he could own it again without having to pay
for it.
(iii) and (iv) Subparagraphs 75(2)(a)(ii)
or 75(2)(b) of the Act
[110]
It is unnecessary to
consider subparagraph 75(2)(a)(ii) or 75(2)(b) of the Act
given this conclusion, but if I had to make those determinations, I would
conclude that it was not Mr. Sommerer who could determine to whom trust
property would pass, though the Advisory Board effectively had a veto power
with respect to income distributions (Foundation Declaration section 6(1)), nor
was his consent or direction required for a disposition of the trust property
as the Foundation Declaration was silent in this regard. That authority
ultimately vested with the Executive Board, notwithstanding Mr. Sommerer, as
the dominant member of the Advisory Board, had some considerable influence. I
will have more to say on this with respect to agency.
4. If there is a
trust, which I have found there is, and if Mr. Peter Sommerer is the
"person" for purposes of subsection 75(2) of the Act, which I
have concluded he is not, to whom property may revert, then is Mr.Peter Sommerer
saved by the provisions of the Convention? Given my conclusion thus
far it is unnecessary to deal with this issue, but for the sake of completeness
or, if my interpretation of "person" is incorrect, this issue should
be addressed.
[111]
Article XIII(5) of the Convention
reads as follows:
Gains from the alienation of any property, other than those
mentioned in paragraphs (1), (2) and (3) shall be taxable only in the
contracting state of which the alienator is a resident.
[112]
The Convention
was incorporated into domestic law of Canada pursuant to
the Canada-Austria Income Tax Convention Act, 1980, subsection 5(2) of
which states:
In the event of any inconsistency between the provisions of this
Part, or the Convention, and the provisions of any other law, the provisions of
this Part and the Convention prevail to the extent of the inconsistency.
[113]
The Appellant argues
that subsection 75(2) of the Act is inconsistent with Article XIII(5)
and therefore Article XIII(5) prevails, precluding the taxability in Canada of the gains from the SPF’s sale of the Vienna and Cambrian shares. The Respondent’s position is
that Article XIII(5) applies only to prevent juridical double taxation, that is
the same taxpayer being taxed on the same gain in two different jurisdictions,
but not applicable to economic double taxation where the same transaction is
taxed in two different persons’ hands in two jurisdictions. This could lead to
a discussion worthy of an extensive paper, but it is not a path I feel I need
to go down. What is before me is the interpretation of a Treaty provision,
which is unambiguous: gains from the alienation of property, in this case the
Vienna and Cambrian shares, shall be taxable only in the state of which the
alienator, the SPF, is a resident – Austria. Prima
facie this removes the very same gains on the sale of shares from the
Canadian taxing authorities.
[114]
Does subsection 75(2)
of the Act, however, deem Mr. Peter Sommerer to be the alienator?
No, it recognizes the trust is the alienator but that the gain could be Mr.
Sommerer’s. A fine distinction perhaps, but a distinction nonetheless, the
effect of which there is only one alienator – the SPF.
[115]
Had the drafters of the
Convention intended to make an exception that the general and clear
provision of Article XIII(5) was not to apply to the attribution rules
contained in subsection 75(2) of the Act, they
could have done so. In this regard, it is interesting to note Article XXVIII(2)
of the Convention which provides:
Nothing in this Convention shall be construed as preventing Canada from imposing its tax on amounts
included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act.
However, that section shall not apply to income from an active business carried
on in Austria by a foreign affiliate of a person resident in Canada or to income that pertains to or is
instant to an act of business carried in Austria.
[116]
It is clear that the
drafters wanted to ensure the terms of the Convention would not override
Canada’s FAPI legislation, which could tax income in Canada, that had also been subjected to tax in Austria in a different entity’s hands. No such provision is
to be found in the Convention referencing subsection 75(2) of the Act,
notwithstanding that 56 of the 88 Income Tax Conventions in force
in Canada have provisions such as found in the Canada-Germany
Income Tax Convention, Article 29(2)(a):
It is understood that nothing in the Agreement shall be construed as
preventing:
(a) Canada from imposing a tax on amounts
included in the income of a resident of Canada with respect to a partnership, trust or controlled foreign
affiliate, in which that resident has an interest;
[117]
The absence of a
similar saving provision in the Convention supports the position that Canada has not preserved the jurisdiction to tax residents
such as Mr. Sommerer, with respect to his interest in an Austrian trust.
[118]
The Respondent argues
that it is unnecessary to have these types of saving provisions in Conventions,
citing both a recent (2009) Japanese Superior Court decision in the
FAPI context, as well as recent (2003) OECD Commentary on Article 1 of
the OECD Model Tax Treaty. The Appellant takes exception with the Respondent’s
reliance on the 2003 OECD Commentary, which states in paragraphs 22 and
22.1 that domestic anti-avoidance rules like "substance over form",
"economic substance" and "General Anti-Avoidance Rules (GAAR)"
are "part of the basic domestic rules set by domestic tax laws for
determining which facts give rise to a tax liability; these rules are not
addressed in tax treaties and are, therefore, not affected by them." The
Appellant contends this Commentary is contrary to the 1977 OECD Commentary
coincident with the entering of the Convention, and it is only the
earlier OECD Commentary that is relevant. In 1977, the OECD Commentary
suggests that if a State intended that a domestic anti‑avoidance
provision remain applicable in the treaty context, it would have to incorporate
it into the treaty, similar to the FAPI rules. The Respondent’s view is
that since the 1977 Commentary did not go into great detail, the 2003
Commentary was simply an elaboration and, consequently, the two OECD
Commentaries are not in conflict, and it is therefore appropriate to rely on
the latter. I disagree. The Federal Court of Appeal in Her Majesty the Queen
v. Prévost Car Inc.
stated:
10. The worldwide recognition of the provisions
of Model Convention and their incorporation into a majority of bilateral Conventions
have made the Commentaries on the provisions of the OECD Model a
widely-accepted guide to the interpretation and application of the provisions
of existing bilateral Conventions …
11. The same may be
said with respect to later commentaries, when they represent a fair
interpretation of the words of the Model Convention and do not conflict with
Commentaries in existence at the time a specific treaty was entered and when,
of course, neither treaty partner has registered an objection to the new Commentaries.
…
[119]
A later OECD Commentary
should only be of assistance if not in conflict with the Commentary in
existence at the time of the Convention. I find the two Commentaries are
very much in conflict, and I restrict myself to looking to the 1977 Commentaries
for help. It supports the Appellant’s view that specific mention should have
been made in the Convention to permit the application of domestic
anti-avoidance rules such as subsection 75(2) of the Act to override the
effect of Article XIII(5) of the Convention. Failing that, Article
XIII(5) can only be interpreted in its ordinary sense, which would preclude the
application of subsection 75(2) of the Act to tax the gain in Mr.
Sommerer’s hands in Canada.
[120]
This is certainly a
view which found favour with Justice Woods in Garron et al v. The Queen
where she concluded that a similar provision of the Canada‑Barbados
Income Tax Convention took precedence over the application of subsection
75(2) of the Act.
[121]
The Respondent relied
on obiter comments I made in the case of Antle v. The Queen
where I discussed the application of GAAR to the interplay between the Act
and the Canada‑Barbados Income Tax Convention. That was an
entirely different situation decided on different grounds. It appears no
significance was attached to the differing OECD Commentaries, and that I may
have been applying the more recent OECD Commentary in suggesting GAAR applies
to find a Canadian resident taxable on gains of a Barbados trust, but it is
implicit in the reasoning in Antle that I looked on Mr. Antle as the
alienator of property – not a finding I have made with respect to Mr. Sommerer.
Also, in this case I am not dealing with the GAAR but a specifically worded
anti-avoidance provision, precluding the application of section 4.1 of the Income
Tax Convention Interpretation Act.
[122]
Based on the clear
wording of Article XIII(5), section 5(2) of the Canada‑Austria Income
Tax Convention Act 1980, the 1977 OECD Commentary, the lack of a provision
in the Convention similar to Article 29(2)(a) of the Canada‑Germany
Income Tax Convention, and the decision in Garron, I conclude
Article XIII(5) applies to preclude Canada from taxing Mr. Sommerer on the gain
on the disposition of the Vienna and Cambrian shares by the SPF.
5. Was the SPF an
agent of Mr. Sommerer’s for the purpose of disposing of the Vienna and Cambrian shares?
[123]
The Respondent relies
on the following Commentary of the American author, A.W. Scott in The Law of
Trusts
for the proposition that sufficient control by a beneficiary over a trustee
could render the trustee the beneficiary’s agent.
An agent acts for, and on behalf of, his principal and subject to
his control; a trustee as such is not subject to the control of his
beneficiary, although he is under a duty to deal with the trust property for
the latter’s benefit in accordance with the terms of the trust, and can be
compelled by the beneficiary to perform his duty. The agent owes a duty of
obedience to his principal; a trustee is under a duty to conform to the terms
of the trust.
A person may be both agent of an trustee for another. If he
undertakes to act on behalf of the other and subject to this control he is an
agent; but if he is vested with the title to the property that he holds for his
principal, he is also a trustee. In such a case, however, it is the agency
relation that predominates, and the principles of agency, rather than the
principles of trust, are applicable.
[124]
This approach must be
viewed with some caution, however, given Professor Waters’ statement:
Even where there is a very clearly expressed intention to form a
trust relationship there may be situations where the relationship could also be
characterized as one of agency. It has been argued that the greater degree of
control the beneficiaries of a trust have over the management of the trust
assets, the greater the likelihood that the relationship cold also be
characterized as agency. The consequence of this that the trustees will be
treated as agents and the beneficiaries will be treated principals. The
beneficiaries are then personally liable for the acts of the trustees in their
management of the trust property.
…
Professor Waters mentions Trident Holdings Ltd. V.
Danand Investments Ltd.
as well as Advanced Glazing Systems Ltd. v. Frydenlund,
concluding:
With the possible exception of Advanced Glazing Systems Ltd. v.
Frydenlund, courts in Canada have not clearly applied a control test to find trustees to be
agents for beneficiaries thereby making beneficiaries liable for the acts of
the trustees. However, the citation, with apparent approval, of a passage from
the American treaties on trusts by Scott dealing with the control test in Trident
Holdings Ltd., and the apparent acceptance of the control test in Advanced
Glazing Systems Ltd., suggest an increasing willingness to adopt the
control test in Canada.
If the control test were adopted it is unclear to what extent
beneficiary control would lead to the trustees being considered agents of the
beneficiaries. …
In a footnote Professor Waters goes on to comment on
Scott’s statement concluding that the possibility is perhaps greater in the United States.
[125]
The cases referred to
by Professor Waters are not tax cases but deal with the personal liability of
the principals. Are agency principles to predominate over trust principles for
purposes of determining liability under the Act, especially in light of
the extensive treatment afforded trusts under the Act’s legislation? It
is not as though applying agency principles, to follow Scott’s approach, means
there is no trust: there is still a trust. The question is whether the
Government of Canada, not being a party to the trust or agency relationship,
can choose that for tax purposes agency principles or trust principles apply.
The Government argues that even if I find a trust, that there is, in law,
an agency relationship, and it is on that basis Mr. Sommerer should be
taxed. This ignores the circumstances of the holding of the property for others’
benefit. Even if the SPF is agent and sells the property on the instructions of
the principal, the principal is not to receive the proceeds unless certain
conditions are met and even then not all the proceeds. What kind of agency is
that? It is tantamount to saying that you are my agent to sell my property but
it is up to you when and to whom you distribute the proceeds; surely the trust
conditions cannot be ignored for determining the correct tax liability. In
effect, it is not a full answer to conclude the SPF is Mr. Sommerer’s agent:
one must ask, agent with authority to do what? Does the authority include the
right to deliver all the proceeds from the sale of shares to Mr. Sommerer? This
is simply a different situation than those cases giving rise to the notion of
agency principles trumping trust principles. The finding in Trident was
based on the trustee being a bare nominee and trustee whose purpose was to hold
the legal title to the land and do the bidding of the beneficiaries. Advanced
Glazing Systems Ltd. dealt with a business trust whose investors were held
to be principals of the trust. In that case there were numerous documents which
explicitly indicated the existence of an agency relationship as well as a
finding that the investors had sufficient power. These are not similar to the
situation before me.
[126]
It should be noted that
this alternate position of the Respondent’s was not the basis for the
assessment. It was a subsequent position raised by the Attorney General in
the Amended Reply to the Notice of Appeal. The onus is on the Respondent to
prove the facts in support of the agency relationship. There is no agency
contract as such linking the alleged principal (Mr. Sommerer) and the SPF as
agent, that might put the principal in direct contractual relations with a
third party. It is clear the SPF held title to the Vienna
and Cambrian shares in its own right, and that the Foundation Declaration set the
parameters within which the Executive Board could deal with the property. Therefore,
even if I accept the proposition that some significant control by a beneficiary
over the actions of a trustee can effectively overlay an agency relationship
onto the trust relationship for tax purposes, the Respondent has to prove such
an implicit agency relationship "predominates and the principles of
agency, rather than principles trust are applicable". Proof of control
must be clear and unequivocal; influence of a principal or consultation with a
principal is not sufficient. The principal must control the property, and I
would suggest that, for tax purposes, also the disposition of the proceeds. The
agent must be found to be unable to act without the authority of the principal.
Indeed, the control should be in line with the level of control where a trustee
is merely a bare nominee or trustee, whose purpose was to hold legal title to
the property and do the bidding of the beneficiary.
[127]
While I find Mr.
Sommerer had considerable influence as a member of the Advisory Board, I do not
find the degree of control that causes me to displace trust principles with
agency principles for tax purposes. I will expand.
[128]
First, Mr. Sommerer’s
authority as a principal, if any, can only stem from his role as a member of
the Advisory Board. As I have already concluded, the Advisory Board was not an
organ of the SPF, neither was it a Stella or authority with special tasks: it
was simply an Advisory Board consisting of
Mr. & Mrs Sommerer and Mr. Herbert Sommerer. I find Mr. Sommerer
was the moving force on the Advisory Board, but that goes to his influence more
than his actual authority. What was Mr. Sommerer’s authority that gave him
control over the disposition of the corpus of the trust and the disposition of
the proceeds? The Foundation Declaration and Supplemental Deed are silent on
the Advisory Board’s role with respect to the disposition of the trust property
and its ultimate distribution. The Advisory Board’s consent was sought in
determining grants, but I have concluded the grants were not capital
distributions. No consent of the Advisory Board was required in disposing of
the trust fund itself, though in fact the Advisory Board did recommend
acquisitions and dispositions. In one case though, the Advisory Board’s
recommendation was not followed: at the Executive Board meeting of April 17,
1997, it was decided to defer the sale of some Vienna
shares to Mr. Mikutta, notwithstanding the Advisory Board’s recommendation.
Yes, the Foundation Declaration referred to a supervisory role of the Advisory
Board, but a review of the many minutes presented at trial left me with the
impression that the Advisory Board, and undoubtedly Mr. Sommerer as the
representative of that Board, did just that; it advised, not unlike management
providing guidance to a Board of Directors, but with the ultimate decision
resting with the Executive Board.
[129]
It is also helpful to
step back and look at the Foundation with a longer term view. There was the
obvious purpose of benefiting the Sommerer family but this should be put in
context of the other objectives cited by Mr. Sommerer to increase family ties
to Austria, return a pool of capital to Austria, provide that capital would be
available for family in emergencies, act as a capital investor for
beneficiaries’ business endeavours, and fulfill some charitable purposes. This
appears to have been a two-phase arrangement with the Foundation acquiring the
shares and realizing a significant gain on them to put itself in a position to
meet the above objectives. Once having achieved this level of capital, the
Foundation proceeded to make charitable donations. When examining the
Foundation from this perspective, it is apparent that it very much has
existence separate from Mr. Sommerer. He certainly had influence, but in these
circumstances the SPF was far from being his conduit to do his bidding.
[130]
In summary,
i) there was no
evidence suggesting Mr. Sommerer would be liable for any of the SPF’s actions;
ii) he had an advisory
role, albeit influential, but decisions with respect to the trust fund were
within the Executive Board’s discretion;
iii) the SPF, having a
separate existence with its own ongoing responsibilities, specifically
retaining income to fulfill its purposes, was not Mr. Sommerer’s conduit;
The SPF was not Mr. Sommerer’s agent.
Conclusion
[131]
It is not surprising
the Government would be interested in Mr. Sommerer’s activities, for, as acknowledged
by the Appellant, had Mr. Herbert Sommerer revoked the Foundation shortly after
the sale of the Vienna shares and distributed the funds to Mr.
Sommerer and his wife, there would have been no tax payable by the Sommerers in
Canada, if the distribution was considered to be from a non‑resident
trust. And indeed, I have found that the SPF was a trustee of a non‑resident
trust, but not a trust captured by the wording of subsection 75(2) of the Act.
It is regrettable neither side could provide more background and insight into
the purpose of subsection 75(2) of the Act notwithstanding their
excellent and extensive research in all aspects of this many-faceted case. I
have concluded subsection 75(2) of the Act does not apply to a
beneficiary vendor of property at fair market value to a trust, but only to a
settlor or subsequent contributor, who could be seen as a settlor. If this is
an incorrect reading of subsection 75(2) of the Act, and it is meant to
apply to beneficiaries such as Mr. Sommerer, then I find the Convention
overrides that application in Mr. Sommerer’s case.
[132]
The appeals are allowed
and the reassessments are referred
back to the Minister of National Revenue for reconsideration and reassessment on the basis that:
i) Mr.
Sommerer sold 1,770,000 Vienna Systems Corporation shares to the Sommerer
Private Foundation in October 1996;
ii) the
Sommerer Private Foundation was a trustee of a trust settled by Mr. Herbert
Sommerer in October 1996, but subsection 75(2) of the Act is not
applicable to attribute to Mr. Sommerer the gain on the sale of the Vienna
shares or the gain on the sale of the Cambrian shares, as Mr. Sommerer cannot
be considered "the person" as defined in subsection 75(2) of the Act;
and even if subsection 75(2) of the Act applied, Article XIII(5) of the Convention
precludes Canada from taxing Mr. Sommerer on the gains;
iii) the
Sommerer Private Foundation was not Mr. Sommerer’s agent in respect of the sale
by it of the Vienna and Cambrian shares.
Costs to the
Appellant.
Signed at Ottawa, Canada, this 13th day of May 2011.
"Campbell J. Miller"
APPENDIX A
OFFICIAL GAZETTE
of the Austrian Revenue Administration
Published by the Federal Minister of Revenue
[Bundesminister fьr Finanzen]
Article I
Private Foundations Act
Definition
Section 1. (1) In this Federal Act, a private
foundation is a legal entity to which the founder has dedicated an endowment
for achieving a permissible purpose determined by the founder through the use,
administration and utilization of the endowment; it has a legal personality and
must have its head office in Austria.
(2) A private foundation must not
1. perform any commercial activities other than
a mere
secondary activity;
2. assume the management of a commercial
corporation;
3. be registered as the personally liable
shareholder of a partnership company or an incorporated commercial company.
Name
Section 2 The name of a private foundation must be
distinctly different from the name of any private foundations recorded in the
registry of corporations; it must not be misleading, and it must contain the
word "Private Foundation" without abbreviation.
Founders
Section 3 (1) The founder of a private
foundation can be one or more individuals or corporate bodies. A mortis
causa private foundation can have only one founder.
(2) If a private foundation has
several founders, the right to which the founders are entitled or which are
reserved for them can be exercised only by all founders jointly, unless the
charter of foundation provides otherwise.
(3) The rights of founders to
develop the foundation are not transferred to their legal successors.
(4) Persons who dedicate assets
to a private foundation after its formation (subsequent donors) do not
automatically acquire the status of founder.
Endowment
Section 4 A private foundation must receive an
endowment in the value of at least one million shillings.
Beneficiary
Section 5 The beneficiary is the person named as
such in the Declaration of Foundation. If the beneficiary is not named in the
Declaration of Foundation, the beneficiary is the person determined as such by
the authority named for this purpose by the founder (section 9, subsection 1,
number 3), or otherwise determined as such by the directors of the foundation.
Ultimate beneficiary
Section 6 The ultimate beneficiary is the person
who is to receive any assets remaining after the private foundation is
dissolved.
Establishment and formation of a private foundation
Section 7 (1) A private foundation is
established by means of a declaration of foundation; it is formed by being
recorded in the register of corporations.
(2) Persons acting on behalf of
the foundation prior to its recording in the register of incorporations are
liable undividedly.
Declaration of foundation
Section 9 (1) The declaration of foundation
must definitely contain the following:
1. a dedication of the assets;
2. the purpose of the foundation;
3. the name of the beneficiary or an authority
that must designate the beneficiary; this does not apply if the purpose of the
foundation is for the benefit of the public at large;
4. the name and head office of the
foundation;
5. the founder's name and address (for serving
documents), in the case of individuals also the date of birth, in the case of
registered corporations, the registration number;
6. an indication whether the private foundation
is established for a definite or indefinite period.
(2) In addition, the declaration of
foundation may include the following:
1. provisions about the appointment, dismissal,
term of office and authorized representation of the directors of the
foundation;
2. provisions about the appointment, dismissal
and term of office of the auditor for the foundation;
3. provisions about the election
of the auditor for the foundation;
4. the establishment of a supervisory board or other
organs to ensure that the purpose of the foundation is achieved (section 14,
subsection 2), and the appointment of persons who are to be given special
responsibilities;
5. in the case of a necessary or otherwise
intended appointment of a supervisory board, provisions about its appointment,
dismissal and term of office;
6. provisions about the amendment
of the declaration of foundation;
7. an indication that a supplementary foundation
document has been or can be set up;
8. making the private foundation subject to
countermand (section 34);
9. provisions regarding
remuneration for the foundation's organs;
10. more detailed definition of the beneficiary or
additional beneficiaries;
11. stipulation of a minimum of assets to be
maintained before funds can be paid to beneficiaries;
12. determination of an ultimate
beneficiary;
13. provisions about the internal
order of collegial foundation bodies;
14. dedication and description of other foundation
assets which exceed the minimum assets (section 4).
Foundation charter, supplementary foundation charter
Section 10 (1) The foundation declaration must
be recorded in the form of an official document (foundation charter,
supplementary foundation charter).
(2) If the foundation charter
contains the statement that a supplementary foundation charter has been or can
be established (section 9, subsection 2, number 6), provisions can be recorded
in a supplementary charter which exceed those of section 9, subsection 1,
except for a provision according to section 9, subsection 1, numbers 1 to 8.
The supplementary foundation charter does not have to be presented to the court
which maintains the Register of Corporations.
Auditing a foundation
(3) The audit report must be
presented to the founder and to the foundation directors. Disagreements between
the auditor of the foundation and the foundation directors are settled by the
Court at the request of the foundation directors or the auditor of the
foundation.
Application for entry in the Register of Corporations
Section 12 (1) The first board of directors of the
private foundation must apply for entry in the Register of Corporations.
Entry in the Register of Corporations
Section 13 (1) Private foundations must be
entered in the Register of Corporations.
(2) Local jurisdiction is with
the court (section 120, subsection 1, number 1, Jurisdiction Standards) in
whose district the private foundation has its head office.
(3) Section 3, Register of
Corporations Act, must be applied mutadis mutandis. In addition, the
following must be entered:
1. brief description of the foundation's
purpose;
2. date of the foundation charter, and each
amendment of this charter;
3. if applicable, the date of the supplementary
foundation charter and the date any amendments;
4. if applicable, names and dates of birth of
the chairman, vice chairman and the other members of the supervisory board.
Bodies of the private foundation
Section 14 (1) Organs of the private foundation
are the foundation's board of the directors, the foundation's auditor and, if
applicable, the supervisory board.
(2) The founders may provide for
further organs to achieve the purpose of the foundation.
The foundation's board of directors
Section 15 (1) The foundation's board of
directors must consist of at least three members; two members must have
permanent residence in Austria.
(2) A beneficiary or a
beneficiary's spouse as well as persons who are related to the beneficiary in
direct line or up to the third degree in indirect line, as well as corporate
bodies cannot be members of the foundation's board of directors.
(3) If the beneficiary is a
corporate body in which an individual as defined in section 244, subsection 2,
Commercial Code, has an interest, such individuals, their spouses or persons
who are related to the individual in direct line or up to the third degree in
indirect line, cannot be members of the foundation's board of directors.
(4) The foundation's first
board of directors must be appointed by the founder or the foundation curator
(section 8, subsection 2, number 1).
(5) The names of the members of
the foundation's board of directors and their authority to represent the
foundation as well as the termination of or change in their authority to
represent the foundation must be reported without delay for entry in the
register of corporations. Such a report must be accompanied by proof of
appointment or change in a publicly certified form. At the same time, the
members of the foundation's board of directors must present their publicly
certified signature.
Signatures
Section
16. The members of the board of directors must sign their name in
such a way that they add their signature to the name of the private foundation.
Responsibilities of the foundation's board of
directors,
representing the private foundation
Section 17 (1) The foundation's board of
directors administers and represents the foundation and ensures that the
purpose of the foundation is achieved. It is obligated to comply with the terms
of the foundation declaration.
(2) Every member of the
foundation's board of directors must perform his/her responsibilities frugally and
with the prudence of a conscientious manager. The board of directors may
provide services to beneficiaries in compliance with the purpose of the
foundation only when and if this does not reduce the claims of creditors of the
private foundation.
(3) Unless provided otherwise
by the foundation declaration, all members of the foundation's board of
directors are only authorized jointly to make declarations of intention and to
sign on behalf of the private foundation. The foundation's board of directors
may empower individual members of the foundation's board of directors to
perform certain business transactions or certain types of business
transactions. If a declaration of intention must be served on the private
foundation, service to one member of the board of directors is sufficient.
(4) Meetings of the
foundation's board of directors can be called within an appropriate period by
the chair, the deputy chair or a two-thirds majority of the directors.
(5) If the private foundation
does not have a supervisory board, legal transactions between the private
foundation and a member of the foundation's board of directors require the
approval of all other members of the board and of the court.
Accounting
Section 18 The foundation's
board of directors must keep the books of the private foundation, applying the
following provisions mutatis mutandis: sections 189 to
216, 222 to 226, subsection 1, section 226, subsection 3 to 234 and 236 to 239,
Commercial Code, section 243, Commercial Code, concerning the annual report,
and sections 244 to 267, Commercial Code, regarding the group annual statement
and the group annual report. The annual report must also indicate how the
purpose of the foundation has been achieved.
Auditors for the foundation
Section 20 (1) The auditor for the foundation
must be appointed by the court or, if applicable, by the board of directors.
Audit
Section 21 (1) The auditor for the foundation
must audit the annual statement including the bookkeeping and the annual report
within three months of presentation. Section 269, subsection 1, Commercial
Code, shall apply mutatis mutandis to the object and the extent of the
audit, and section 272, Commercial Code shall apply mutatis mutandis to
the right to information according to section 272.
(2) The auditor is not
obligated to maintain confidentiality toward other organs of the foundation and
toward the persons authorized in the foundation declaration to perform auditing
tasks. Section 275, Commercial Code shall apply mutadis mutandis to the
responsibility.
(3) Sections 273 and 274,
Commercial Code, regarding the audit report and the auditor's certification shall
be applied mutatis mutandis. The audit report must be presented to the
other bodies of the private foundation.
(4) In case of disagreements
between the foundation's auditor and the other foundation organs regarding the
interpretation and application of statutory provisions and of the foundation
declaration, the court shall decide upon request.
Supervisory board
Section 22 (1) A supervisory board
must be appointed if
1. the number of employees of the private
foundation exceeds three hundred, or
2. the private foundation uniformly manages
domestic capital corporations or domestic cooperatives (section 15, subsection
1, Corporations Act of 1965) or controls such corporations or cooperatives by
means of a direct interest of more than 50 percent, and if in both cases the
number of employees of these corporations or cooperatives exceeds an average of
three hundred, and if the activity of the private foundation is not limited
only to the administration of company shares of the controlled corporations.
(2) The average number of employees is determined
by the number of employees on the last day of each month during the preceding
calendar year.
(3) In case of subsection 1 and according to the
following provisions, the foundation's board of directors must determine by
January 1st the average number of employees working in the previous year. If
the average exceeds three hundred, this must be reported to the court; the next
determination of the number of employees must be made three years after the
January 1st deadline named in the first sentence. If the number of employees
changes within a three-year period, this does not affect the necessity of a
supervisory board. If it is determined that the average number exceeds three
hundred, the next determination must be repeated as of each January 1st of the
following years until the number three hundred is exceeded. The bodies
responsible to represent the corporations or cooperatives named in subsection
1, number 2, must upon request provide the information required for this
determination to the foundation's board of directors in due course.
(4) Section 110, Workers' Insurance Act [ArbVG]
applies mutadis mutandis to private foundations as it does to limited
liability companies.
Appointment and dismissal of foundation bodies
and their members by the court
Section 27 (1) If there are not enough members
of foundation bodies as required by law or on the basis of the foundation
declaration, the court must appoint them upon request or ex officio.
(2) The court must dismiss a
member of a foundation organ upon request or ex officio if this is provided by
the foundation declaration or for other important reasons. The following in
particular are considered important reasons:
1. gross neglect of duties;
2. inability to meet responsibilities properly;
3. opening of insolvency proceedings against the
member's assets, dismissal of such proceedings for lack of cost-covering assets
and repeated execution with regard to the member's assets.
Internal order of foundation bodies
Section 28 (1) A foundation body consisting of
at least three members,
1. elects a chairperson and at least one deputy
chair from among themselves;
2. unless provided otherwise in the foundation
declaration, and section 35, subsection 2 notwithstanding, a foundation passes
resolutions with a simple majority, whereby the chairperson's vote breaks a
tie;
3. can pass resolutions in writing if no member
objects.
Liability of members of foundation bodies
Section 29 (1) Section 21, subsection 2, last
sentence regarding the
liability of the foundation's auditor notwithstanding,
every member of a private foundation's body is liable for damage as the result
of negligent neglect of duties.
Beneficiary's entitlement to information
Section 30 (1) A beneficiary may request that
the private foundation provide information on whether the purpose of the
foundation is being achieved, and may request inspection of the annual
statement, the annual report, the auditor's report, the books, the foundation
declaration and the supplementary foundation declaration.
(2) If the private foundation
does not comply with this request within a reasonable time, the court may upon
application by the beneficiary order such inspection, if need be by a person
skilled in accounting. Sections 385 to 389, Code of Civil Procedure, applies to
this process mutatis mutandis.
Special audit
Section 31 (1) Every foundation body and each of
its members may ask the court to order a special audit to ensure that the
purpose of the foundation is achieved.
(2) The court must order the
special audit if it is convinced that dishonest acts or gross violations of the
law or of the foundation declaration have been committed.
Amendment of the foundation declaration
Section 33 (1) Prior to the establishment of a
private foundation, the foundation declaration can be cancelled or amended by
the founder; if one of several founders is eliminated, the foundation
declaration cannot be cancelled and can be amended only when the purpose of the
foundation is maintained. If the only or last founder is eliminated, the
foundation's board of directors may make amendments while maintaining the
purpose of the foundation, taking into account any obstacles to registration
and changed circumstances that may have occurred in the meantime.
(2) After the establishment of
a private foundation, the founder may amend the foundation declaration only if
he had made it subject to amendments. If an amendment is not possible because
of the elimination of a founder or a lack of agreement among several founders
or because the declaration had not been made subject to amendments, the board
of directors may, while achieving the purpose of the foundation, amend the
foundation declaration to adapt it to changed circumstances. The amendment
requires approval by the court.
(3) The foundation's board of
directors must apply to have the amendment of the foundation declaration
entered in the register of corporations of, accompanied by a publicly certified
copy of the amendment resolution, and stating the fact that the supplementary
foundation charter has been amended. The amendment becomes effective when the
entry in the register of corporations is recorded.
Revocation of a private foundation
Section 34 (1) A private foundation can be
revoked by the founder only if he has made the foundation declaration subject
to revocation. A founder who is a corporate body cannot be subject to
revocation.
Dissolution
Section 35 (1) The private foundation is
dissolved as soon as
1. the period provided for in the foundation
declaration has expired;
2. bankruptcy proceeding have begun against the
assets of the private foundation;
3. the decision denying an application for
bankruptcy protection for the lack of assets covering the expected costs of
bankruptcy proceedings has come into effect;
4. the foundation's board of directors has
passed a unanimous resolution to dissolve;
5. the court has decided to dissolve the
foundation.
(2) The foundation's board of directors must pass
a unanimous resolution to dissolve as soon as
1. it has received an admissible revocation from
the founder;
2. the purpose of the foundation has been
achieved or is no longer achievable;
3. a non-charitable private foundation whose
major purpose is for the benefit of individual persons, has lasted for 100
years, unless all ultimate beneficiaries resolve unanimously that the private
foundation should continue for another period, but no longer than for 100 years
at a time;
4. there are other reasons for this as stated in
the foundation declaration.
(3) If a resolution according to subsection 2 is
not passed although a reason for dissolution exists, each member of a
foundation body, each beneficiary or ultimate beneficiary, each founder and
each person thus authorized in the foundation declaration may apply to the court
for dissolution. Furthermore, the court must dissolve the private foundation if
it violated section 1, subsection 2 and has failed to comply within a
reasonable time with a legally binding order to cease and desist.
(4) If the foundation's board of directors has
passed a unanimous resolution although there is no reason for dissolution, any
person named under subsection 3 may apply to have this resolution revoked.
(5) In the cases of subsection 1, numbers 1 and 4,
the foundation's board of directors must apply to have the dissolution of the
private foundation entered in the register of corporations. The dissolution is
effective when it is entered in the register.
(6) If the private foundation is dissolved as the
result of a court order, the court must notify the court responsible for the
register of corporations. The dissolution must be entered in the register ex
officio.
Liquidation
Section 36 (1) The foundation's board of
directors must advise the creditors of the private foundation about the
dissolution and ask them to register their claims no later than one month after
publication of the request. This request to the creditors must be published
without delay in the Official Gazette in Vienna ["Amtsblatt zur Wiener Zeitung"].
(2) Section 213, Corporations
Act of 1965 must be applied with regard to creditor protection. The remaining
assets of the dissolved private foundation must be transferred to the ultimate
beneficiary.
(3) If there is no ultimate
beneficiary or if the ultimate beneficiary does not wish to receive the
remaining assets, and if there is no other provision in the foundation declaration,
the remaining assets shall become the property of the Republic of
Austria.
(4) If the private foundation
is dissolved and if there is no other provision in the foundation declaration,
the founder shall be the ultimate beneficiary.
(5) Unless otherwise provided
in the foundation declaration, several ultimate beneficiaries shall share the
remaining assets equally.
Deregistration
Section 37 (1) If the liquidation is finished
and a final accounting has been done, the foundation's board of directors must
apply to have the liquidation entered in the register of corporations.
Finalization of the liquidation must be entered, and the private foundation
must be deregistered.
(2) The books and documents of
the private foundation must be deposited and held for seven years in a safe
place to be determined by the court.
(3) If it is subsequently found
that other liquidation measures are necessary, the court must appoint the
foundation's previous board of directors or a liquidator for that purpose.
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