De Mond v. R., 99 DTC 893, [1999] 4 CTC 2007 (TCC)

Lamarre T.C.J.:

This is an appeal from an assessment issued in accordance with the Income Tax Act (the “Act”) in respect of the appellant’s 1990 taxation year. In assessing the appellant, the Minister of National Revenue (the “Minister”) disallowed a deduction for a claimed business loss from Gorton’s Emporium for Children Limited Partnership (the “Partnership”) in the amount of $426,655.86. In her written submissions, counsel for the appellant now admits that the $426,655.86 figure was in error and submits that the exact amount of the appellant’s loss is $358,703. The respondent still disallows that loss on the basis that the appellant is not entitled to any business loss incurred by the Partnership.

Facts

The Partnership was created on August I, 1989 for the purpose of operating a retail children’s department store in Richmond, British Columbia. The general partner of the Partnership was Kemixis Enterprises Ltd., a Canadian company controlled by the appellant and his wife. The sole limited partner, according to the Limited Partnership Agreement (the “Partnership Agreement”) and the testimony of the appellant, was the Gorton and Joyce De Mond Family Trust (the “Family Trust”). Pursuant to the Partnership Agreement, profits and losses of the Partnership for tax purposes were allocated 89.99 per cent to the Family Trust and the remainder to the general partner. According to the same agreement, the general partner had full power and authority to manage and carry on the business of the Partnership (including dealing with the Partnership assets for the use and benefit of the Partnership). The Partnership Agreement specifically provided that the limited partner had neither the right to take part in the control and management of any business of the Partnership or to execute any documents on behalf of the Partnership, nor the authority to bind the Partnership.

The Family Trust was created by the appellant and his wife on March 7, 1985 by means of a document titled Declaration of Gorton and Joyce De Mond Family Trust (the “Declaration of Trust”) under the laws of the United States (Appendix B of the Declaration of Trust). the purpose and intention of the Declaration of Trust is stated in paragraph 1.01.1 thereof which reads:

Article 1

Declaration of Intention; Nature of Property

1.01 Declaration of Intention

.01.] Creation of Trust

The purpose and intention of this Declaration of Trust is to establish present and existing trusts as to the property contributed hereto and to provide for the creation of other separate and distinct trusts upon the occurrence of certain specified events. In addition, other property may be added hereto in the manner described in Paragraph B.21.1 of Appendix B.

The appellant testified that he set up a trust for inheritance purposes in the United States. He currently lives in the U.S. and was resident in Canada from 1987 to 1991 only. He explained that the existence of a trust ensures that property is rolled over easily into separate trusts for the benefit of others upon his or his wife’s death without going through probate.

Three separate trusts were created by the appellant and his wife under the terms of the Declaration of Trust. These three separate trusts are known as the husband’s separate property trust (the “husband’s trust”), the wife’s separate property trust (the “wife’s trust”) and the joint property trust (the “joint trust”). The Declaration of Trust allowed the assets that were to be listed in “exhibits” attached to the Declaration of Trust filed in evidence lists on assets in those exhibits. The appellant explained that at the time the Declaration of Trust was signed, he and his wife had not actually transferred anything into the trusts. Afterwards, they never prepared exhibits that listed the property held in each trust, but the appellant knows as the settlor what he transferred into his trust. Paragraph 1.02.4 of the Declaration of Trust indicates that a failure to so describe such property (in the exhibits) will not invalidate the transfer.

According to the appellant, the Family Trust does not hold any property but is merely an instrument created to hold the three sub-trusts. The only contributions are from the appellant and his wife into their own trusts.

The appellant said that he transferred his own property to the husband’s trust. Said property included a rental property in Laguna Niguel in California that he purchased personally in 1983 and transferred to his trust in 1985. The evidence revealed that the appellant reported the gross rental income from that property in his personal tax return. This had no impact in 1987 as the net rental income was nil. In 1988 and 1989, the appellant reported a rental loss from that property and deducted it from his other income. This property was sold in 1992 and the appellant testified that he received the proceeds of that sale personally as the beneficiary of his trust.

The appellant also transferred some stocks to the husband’s trust. He cashed in some of those stocks in 1993 and 1994 but said that the remaining stocks in the portfolio were just sitting there. There were no transactions involving them.

Clause 3.01 of the Declaration of Trust deals with the rules applicable to the different trusts’ assets while the appellant and his wife are alive. Paragraph 3.01.1, which addresses the husband’s separate assets, reads:

Article 3

Trusts Created Hereunder

3.01 Prior to and upon the Demise of a Trustor

3.01.1 Husband’s Separate Assets

While Husband and Wife are both living, Husband’s Separate Assets shall be held in a separate trust, which trust may be known and is sometimes herein referred to as “HUSBAND’S SEPARATE PROPERTY TRUST”. Husband shall act alone as Trustee of HUSBAND’S SEPARATE PROPERTY TRUST. Trustee shall make actual Physical segregation of the assets and the income of said Trust, including cash (which cash shall be deposited in and disbursed from bank or savings and loan accounts separate from any other cash held by Trustee), and Trustee shall administer said Trust separately from any other held by it hereunder. Trustee shall hold, administer, invest and reinvest the assets of said Trust, and the net income and principal thereof shall be accumulated or distributed by Trustee as Husband shall direct from time to time; provided, however, that during any period when Husband shall be or become incompetent, unavailable or so disabled as to interfere with the furnishing of directions to Trustee, then so much of said net income and principal shall be distributed to or for the benefit of Husband as Trustee, in its sole discretion, determines to be necessary to provide for his reasonable care, maintenance, support and happiness.

There are similar provisions in relation to the wife’s trust (the appellant’s wife having the same rights under her own trust) and the joint trust (both the appellant and his wife having the same rights under that trust).

Paragraph 8.01.1 of the Declaration of Trust limits the power to revoke the husband’s trust to the appellant. It reads:

Article 8

Revocation and Amendment

8.01 Revocation

8.01.1 While both Trustors are living, either Trustor shall have the power to revoke this Declaration of Trust in whole or in part as to the JOINT PROPERTY TRUST, but only Husband shall have the power to revoke in whole or part HUSBAND’S SEPARATE PROPERTY TRUST, and only Wife shall have the power to revoke in whole or in part WIFE’S SEPARATE PROPERTY TRUST. In the event of any such revocation, Trustee shall pay over and deliver to Husband and Wife any Joint Assets described in the notice of revocation (which assets after such payment and delivery shall be and continue to be the joint property of Trustors as described in Paragraph B.25 of Appendix B attached hereto), or to Husband or Wife any separate Property of such Trustor, respectively, described in the notice of revocation (which property after such payment and delivery shall be the separate property of the Trustor receiving it).

Clause 3.02 of the Declaration of Trust deals with the situation upon the demise of one or both trustors (1.e. the appellant and his wife). Upon the death of the appellant or his wife, three separate new trusts will be created and an independent trustee appointed, and once the property has been transferred to these new trusts, the husband’s trust, the wife’s trust and the joint trust will be terminated. Clause 5.01 provides for the appointment of a successor trustee.

The beneficiaries of a trust held under the Declaration of Trust are defined in Appendix B thereof. During such time as both trustors are living and competent both of them are beneficiaries.

The powers of the trustees during the lifetime of the trustors and after their death are set out in Article 6 and in Appendix A of the Declaration of Trust. They include among others the powers to deal with trust property, advance funds to any of the trusts created, borrow money for any trust purpose, deal with securities, and budget annual income and expenses. The trustees also have the power to enter into any general or limited partnership or joint venture.

It was under this last power that the Family Trust entered into the Partnership. The Partnership was created on August 1, 1989 and the same day, the trustees of the Family Trust (the appellant and his wife) signed a separate declaration of trust whereby they declared that the Family Trust held the Partnership interest in trust for the husband’s trust and the wife’s trust. This declaration reads as follows:

DeMond Family Trust hereby declares that 100% of the Partnership Interest (the “Interest”) in Gorton’s Emporium for Children Limited Partnership (the “Partnership”) which is registered in its name is held by it in trust for The Husband’s Separate Property Trust under the Gorton and Joyce DeMond Family Trust (the “Husband’s Trust”) as to 90% and for the Wife’s Separate Property Trust under the Gorton and Joyce DeMond Family Trust (the “Wife’s Trust”) as to 10% or their nominee or nominees in writing and that it has no interest whatsoever in the said Interest other than that of a bare trustee and that any distribution, whether of income or capital and whether in cash or otherwise, and any rights in respect of the said Interest as well as any proceeds arising from the sale thereof, do not in any manner belong to it but are the property of the Husband’s Trust as to 90% and the Wife’s Trust as to 10% and it hereby waives any such preemptive rights in favour of the said beneficiaries.

The Gorton and Joyce DeMond Family Trust hereby irrevocably directs and requests the Partnership to make any distribution whether of income or capital and whether in cash or otherwise in respect of the said Interest, directly to the said beneficiaries in their proportionate shares.

The Gorton and Joyce DeMond Family Trust hereby irrevocably directs and requests the Partnership to transfer the said Interest to the said beneficiaries as and when either of them shall so demand.

IN WITNESS WHEREOF The Gorton and Joyce DeMond Family Trust has executed this Declaration of Trust this 1st day of August, 1989.

Trustees of The Gorton and Joyce DeMond Family Trust

The appellant testified that he never exercised any power as a trustee to deal with trust property. He said that, as a trustee, he basically acted as an administrator and that while wearing that hat, he never advanced funds to the trusts or borrowed money on property belonging to the trust. He said that he took out a mortgage on a house he owned personally in Hollywood to borrow a sum of $300,000 that he invested in the business operated by the Partnership. He said that he later transferred the house into his trust. He said he put approximately $600,000 into the Partnership.

The appellant, who is now an investment banker, said that at the time of the Partnership, he devoted all of his time to that business. He had a background in that kind of business as his parents operated a chain of clothing stores in Southern California. He started the business in the summer of 1989 and the store actually opened in Richmond, B.C. in November 1989. His wife worked part-time in the business. It was carried on until January 1991, when a receiver was appointed and the business shut down. The appellant explained that the business’s failure was due largely to an economic downturn in the area and to the fact that the store was too big.

The appellant took his accountant’s advice and reported the Partnership’s loss as his own loss in his 1990 Canadian tax return. He treated both the Family Trust and the husband’s trust as bare trusts in relation to the Partnership for both Canadian and American tax purposes. In cross-examination, the appellant stated that there was no need to specify in writing that the income or loss would actually be attributable to him or his wife personally through the husband’s trust or the wife’s trust. He said that the whole trust was just a flow-through vehicle for inheritance tax purposes. In fact, he and his wife did not differentiate between the roles each of them played as settlor, trustee and beneficiary of his or her own trust, as they both acted in all three of these capacities for their respective trusts. They always considered the property in their respective trusts as their own and dealt with it as their own.

The Partnership’s financial statements for the year ended August 31, 1990 indicate that the Family Trust contributed $742,016 in capital to the Partnership up to the end date of the Partnership’s 1990 fiscal year. The appellant personally contributed 80.99 per cent of that capital contribution, or $601,039.74, out of his own assets. The Partnership’s net loss for the fiscal year ended August 31, 1990 was $442,892. The Family Trust’s loss for the same fiscal year was $398,559, or 89.99 per cent of the Partnership’s net loss. Under the separate trust declaration of August 1, 1989, the loss flows through to the husband’s trust and the wife’s trust in a proportion of 90 per cent and 10 per cent respectively. The loss therefore attributable to the husband’s trust is $358,703, which is the amount in issue in the present appeal.

Appellant’s submissions

Counsel for the appellant first submitted that the Family Trust is a bare trust in relation to the Partnership. Her argument is based on the fact that the Family Trust does not hold property. In fact, all it did was to establish three separate trusts, enter into a partnership and hold the Partnership interest in trust for the husband’s trust as to 90 per cent and for the wife’s trust as to 10 per cent. The separate declaration of trust clearly indicates that the Family Trust had no interest in the Partnership other than that of a bare trustee.

Counsel further submitted that the husband’s trust is also a bare trust which should be ignored for Canadian tax purposes such that the husband’s trust loss of $358,703.00 in the 1990 taxation year is the appellant’s loss for tax purposes. Counsel pointed out that a “bare trust” is not defined in the Act. However, Revenue Canada’s policy on bare trusts is that, where property is held by such a trust, it will ignore the trust for income tax purposes and will consider the settlor to be the owner of the property for all purposes of the Act. Revenue Canada’s policy on what constitutes a bare trust is that it is One where:

(a) the trustee has no significant powers or responsibilities and can take no action without instructions from the settlor;

(b) the trustee’s only function is to hold legal title to property; and

(c) the settlor is the sole beneficiary and can cause the property to revert to him or her at any time (see Revenue Canada, Income Tax Technical News, No. 7, February 21, 1996)

Counsel also referred to the definitions of “bare trust” given by two authors Professor Waters defines a bare trust as follows:

The usually accepted meaning of the term “bare,” “naked” or simple trust is a trust where the trustee or trustees hold property without any further duty to perform except to convey it to the beneficiary or beneficiaries upon demand. 44 It is of course true that so long as a trustee holds property on trust he always retains his legal duties, namely, to exercise reasonable care over the property, either by maintaining it or by investing it; he cannot divest himself of these duties. The reference, however, is to duties which the settlor has enumerated. For example, the settlor may have required that the beneficiary be maintained until he reaches the age of majority, when he is entitled to call for capital and income. The trustee is then bare or naked of these active duties decreed by the settlor. If the trustee possesses his legal duties only for the purpose of guarding the property, prior to conveyance to the beneficiary, those duties are said to be passive.

44 Or as directed by the beneficiaries, i.e., in favour of a third party. Every fiduciary, which includes an agent holding the title to property for a principal, is a bare trustee of the property he holds for another.

• Waters, Law of Trusts in Canada (1984), at p. 27.

In the same vein, Professor Oosterhoff defines the bare trust concept as follows:

The bare trust: A trust exists whenever title to property is vested in one person to be held for the benefit of another. The trustee is subjected to a variety of duties, some imposed by equity, such as making the property productive and exercising reasonable care over it; other duties are imposed by the creator of the trust, such as applying the income for the maintenance of minors. When the trustee no longer has active duties to perform (that is, duties imposed by the creator of the trust), except to convey the trust property to the beneficiaries upon demand, the trust is said to be a bare, naked, simple or dry trust. At that point the duties imposed upon the trustee by equity are regarded as passive duties.

• A.H. Oosterhoff, Text Commentary and Cases on Trusts (1992), at p. 13.

Counsel stated that the appellant, as the beneficiary, could call on himself in his capacity as trustee to convey the property to himself at any time, and she therefore concluded that his trust is a bare trust. Further, the Declaration of Trust does not provide that the trustee of the husband’s trust has powers or obligations which are beyond what the normal legal duties of a trustee would be. The appellant’s only function as a trustee was to hold legal title to the property for himself as a beneficiary. Finally, it is clear from the Declaration of Trust that the appellant is the sole beneficiary of the husband’s trust and that he has the power of revocation at any time.

Respondent’s submissions

Counsel for the respondent submitted that none of the trusts are bare trusts, or at least that one of either the Family Trust or the husband’s trust is not a bare trust. She referred to the three requirements stated in Revenue Canada’s Technical News, supra, for a trust to be considered a bare trust.

Counsel submitted that the first requirement is not met, as the trustees have very significant powers and responsibilities under the Declaration of Trust.

Counsel submitted that the second test is not met either as the Family Trust entered into a partnership to carry on a children’s clothing and toy business. According to counsel, this clearly goes beyond just holding legal title to property.

As to the third condition, counsel said that the settlor is not the sole beneficiary, as under the husband’s trust, the trustee has the power to make distribution to anyone. The Declaration of Trust states that “the net income and principal thereof shall be accumulated or distributed by Trustee as Husband shall direct from time to time...”. Counsel also suggested that the appellant was not in a position to call for the transfer of the Partnership interest to himself because the Partnership interest was not transferred to the Family Trust by the appellant. It is the Family Trust itself which declared that the Partnership interest was held in trust for the husband’s trust and the wife’s trust. There is no evidence in writing that the income from the Partnership would flow out to the husband and wife as individuals, or at least there is nothing to indicate that this was the intention.

Counsel also submitted that it is not true to say that the Family Trust has no property. It held the interest in the Partnership. There is no indication that this interest was held by the husband’s trust and the wife’s trust, only that the income was to flow through to them.

Analysis

The only issue is to determine whether the Family Trust and the husband’s trust are bare trusts in relation to the Partnership. If the trusts are not bare trusts, the parties do not question that the Partnership’s losses would have to remain in the trusts and could not flow through to the appellant (this assertion is based on an interpretation of section 104 of the Act adopted by the Federal Court - Trial Division in Fraser v. Minister of National Revenue (1991), 91 D.T.C. 5123 (Fed. T.D.)). If the trusts are bare trusts, Revenue Canada’s policy is to ignore the trusts for income tax purposes and to consider the settlor to be the owner of the trust property (see Income Tax Technical News, No. 7, February 21, 1996), with the consequence that the appellant would be entitled to claim his share of the losses incurred by the Partnership.

This approach has also been followed by the courts, as it has been held that losses incurred in a real estate transaction conducted in the name of a corporation as a bare trustee should be deducted by the person who has an absolute right to the profit. In Brookview Investment Ltd. v. Minister of National Revenue (1963), 63 D.T.C. 1205 (Can. Ex. Ct.), an arrangement had been devised under which a trust was constituted in order to purchase land as a bare trustee. Cattanach J. concluded that the sold function of the trust was to convey the property as directed by the group of investors. He therefore concluded that the investors could deduct the losses incurred due to the real estate transaction, which had turned bad. Cattanach J. affirmed that had a profit been realized, such profit would not have been taxed in the hands of the trust but rather in the hands of the person who had an absolute right to the profit. Mr. W.D. Goodman, in “The Character of the Bare Trust in Canadian Tax Legislation”, in D.W. Waters, ed., Equity, Fiduciaries and

Trusts (Toronto: Carswell, 1993), at p. 219, made the following comment on Brookview Investments, at p. 233:

... Unfortunately, the reasons for judgment do not clearly indicate the legal basis for this decision, but presumably it was based on the view that a bare trust may be totally ignored for tax purposes, so that the property held by the bare trustee and any income or loss flowing from such property held by the bare trustee and any income or loss flowing from such property had to be regarded as belonging to the beneficiaries of the bare trust.

In Pan American Trust Co. v. Minister of National Revenue (1949), 49 D.T.C. 672 (Can. Ex. Ct.), Thorson P. stated the following at p. 676:

...It also seems to me that the term “income received or accruing from a Canadian estate or trust” must mean something other than the income from property which a settlor has transferred to a trustee for himself and of which he has never ceased to be the beneficial owner.

In that case, a company was incorporated in Canada to hold the shares of a non-resident investment corporation in trust for Swiss shareholders. The issue before the court was whether the dividends received by the Canadian company on those shares and credited to its shareholders were dividends or income from a trust. It was held that the dividends paid on the shares did not lose their character in the Swiss shareholders’ hands, even though the dividends were paid to the shareholders through a Canadian trust company. Thorson P. found that although the Canadian trust company had become the legal owner of the shares, the Swiss shareholders were the beneficial owners of the dividends. Therefore the dividends were not to be treated in their hands as income received or accruing from a Canadian trust. The existence of the trust was in fact disregarded.

In “The Character of the Bare Trust in Canadian Tax Legislation”, supra, Mr. Goodman referred at page 222 to an article by Professor Hayton in which a bare trust was characterized as not being a true trust. Professor Hay ton wrote:

If, despite the form of the trust instrument, the trust is a sham, apparently having legal effects, but not really intended to have any legal effect, the settlor having real dispositive control over capital and income, then the trust is not a true trust but a bare trust where the whole equitable ownership remains in the settlor.

However, Mr. Goodman took care to suggest that Professor Hay ton’s statement should not be interpreted as implying that provisions in the Act regarding trusts are inapplicable to bare trusts.

In the Corporate Management Tax Conference 1989'. ” Creative Tax Planning for Real Estate Transactions — Beyond Tax Reform and into the 1990s”, Revenue Canada’s view of the bare trust concept is stated as follows at p. 8:1:

From Revenue Canada’s perspective, difficult income tax issues arise from the use of bare trusts for commercial purposes. The reason these issues are difficult is that in order to arrive at apparently equitable tax results, the existence of a trust, which is effective for commercial purposes, has to be ignored for income tax purposes.

Although a bare trust is not defined in the Income Tax Act, Revenue Canada generally views this to be a trust under common law where the trustee has no significant powers or responsibilities, and can take no action regarding the property held by the trust without instructions from the settlor. Normally the trustee’s only function is to hold legal title to the property. Furthermore, the settlor is also the sole beneficiary and can cause the property to revert to him at any time. Thus a bare trust does not include a blind trust or other trusts in which the trustee has established powers and responsibilities.

Aside from the definitions of bare trusts referred to by counsel for the appellant, supra, it has also been stated that a bare trustee is a person who holds property in trust at the absolute disposal and for the absolute benefit of the beneficiaries (see Halsbury’s Laws of England, 4th ed., volume 48, paragraph 641, and Adams v. R. (1998), 98 D.T.C. 6232 (Fed. C.A.)).

Bare trustees have also been compared to agents. The existence of a bare trust will be disregarded for income tax purposes where the bare trustee holds property as a mere agent or for the beneficial owner. In Trident Holdings Ltd. v. Danand Investments Ltd. (1988), 64 O.R. (2d) 65 (Ont. C.A.), Mr. Justice Morden, speaking for the Ontario Court of Appeal, made the distinction between an ordinary trust and a bare trust. He reproduced the following passages from Scott, The Law of Trusts, 4th ed. (1987):

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 this 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 [Vol. 1, p. 88].

A person may be both agent of and trustee for another. If he undertakes to act on behalf of the other and subject to his control he is an agent; but if he is vested with the title to 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 [Vol. 1, p. 95].

Mr. Justice Morden also quoted with approval from an article by M.C. Cullity, “Liability of Beneficiaries — A Rejoinder”, (1985-86), 7 Estates & Trusts Quarterly 35, at p. 36:

It is quite clear that in many situations trustees will also be agents. This occurs, for example, in the familiar case of investments held by an investment dealer as nominee or in the case of land held by a nominee corporation. In such cases, the trust relationship that arises by virtue of the separation of legal and equitable ownership is often described as a bare trust and for tax and some other purposes it is quite understandably ignored.

The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals — the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee.

In the case at bar, the appellant and his wife completed a Declaration of Trust, the purpose of which was to establish different trusts as to the property contributed thereto during their lifetime and to provide for the creation of other separate and distinct trusts upon the demise of one or the other of them. In the Declaration of Trust the appellant and his wife are referred to as the husband or the wife, or as the trustors.

Under the Declaration of Trust, the appellant and his wife have transferred to themselves as trustees all of their right, title and interest in and to their property. Said property was distributed into the husband’s trust with respect to the appellant’s separate assets, the wife’s trust with respect to his wife’s separate assets and the joint trust with respect to the joint assets of the appellant and his wife. Upon the death of the appellant or his wife, all the property will be divided into separate and distinct trusts and the husband’s trust, the wife’s trust and the joint trust will be terminated.

The Declaration of Trust specifically provides that the appellant is to act alone as trustee of the husband’s trust, his wife as trustee of the wife’s trust and both the appellant and his wife as trustees of the joint trust. The beneficiaries during such time as both trustors (the appellant and his wife) are living and competent are the trustors. Upon both trustors becoming incom- petent or upon the demise of both, the Declaration of Trust provides for other potential beneficiaries.

The Declaration of Trust also specifies that the appellant, as trustee, is to administer the husband’s trust separately from any other trust created thereunder and is to accumulate or distribute the net income and principal thereof as “husband” (the appellant) may direct from time to time.

The evidence revealed that the Family Trust held the Partnership interest as a bare trustee only, for the husband’s trust and the wife’s trust. The separate declaration of trust clearly specifies that the Family Trust has no interest in the Partnership other than that of a bare trustee. It also clearly provides that any distribution, whether of income or capital in respect of the Partnership interest is the property of the husband’s trust and the wife’s trust. By this separate declaration of trust, the Family Trust also directs the Partnership to transfer the Partnership interest to the said beneficiaries as and when either of them so demands.

It is therefore clear to me that the Family Trust held the Partnership interest for the absolute benefit and at the absolute disposal of the husband’s trust and the wife’s trust. The Family Trust was definitely acting as a bare trustee in respect of the Partnership interest. As such, according to Revenue Canada’s policy and the case law, the Partnership’s losses should not therefore be reported by the Family Trust for tax purposes.

The question now remains whether those losses should be reported by the husband’s trust and the wife’s trust or whether these trusts should be considered bare trusts in respect of the Partnership interest, thus allowing the losses to flow through to the appellant and his wife personally. In my view, the appellant and his wife have real dispositive control over capital and income accruing from the Partnership interest such that it can be said that the whole equitable ownership remains in the settlors.

The evidence revealed that the appellant personally contributed approximately $600,000 out of his own assets. According to the Declaration of Trust, the appellant, as trustee of the husband’s trust, is to accumulate or distribute the net income and principal there of as the husband may direct from time to time. Under that same Declaration of Trust, the beneficiaries are the trustors while both trustors are alive.

Furthermore, while both trustors are living, only the husband has the power to revoke the husband’s trust and, should he exercise it, the trustee must deliver to the husband any separate property in the husband’s trust (the same applies to the wife’s trust). It seems to me, therefore, that the appellant can cause the husband’s trust’s share of the Partnership interest to revert to him at any time. He can exercise his power to revoke his trust whenever he wants to and the trustee has no choice but to convey the property (the Partnership interest) to the appellant upon demand. This is provided in the Declaration of Trust and is also permitted under the common law rule laid down in Saunders v. Vautier (1841), 4 Beav. 115, 49 E.R. 282 (Eng. Ch. Div.), per Lord Langdale M.R. (affirmed (1841), 1 Cr. & Ph. 240, 41 E.R. 482 (Eng. Ch. Div.), per Lord Cottenham L.C.), which Professor Waters explains as follows at p. 963 of the Law of Trusts in Canada, supra: ...if there is only one beneficiary, or if there are several (whether entitled concurrently or successively), and they are all of one mind, and he or they are not under any disability, the specific performance of the trust may be arrested, and the trust modified or extinguished by him or them without reference to the wishes of the settlor or the trustees.

It is therefore difficult to say that the trustee has significant powers or responsibilities and can take action without instructions from the settlor, or that the trustee is not subject to the control of his beneficiary, since the appellant in fact plays the roles of all three of the constituent parties to the trust: he is the settlor, the trustee and the beneficiary of his own trust.

In summary, the existence of the husband’s trust does not preclude the appellant in the present case from enjoying both beneficial ownership and legal ownership of the Partnership interest. In this respect, I find that the appellant is the true owner of the Partnership interest even though the said interest appears to have been legally conveyed to a trust. In that sense, it is correct to say that the absolute right to the husband’s trust property remains with the appellant. Accordingly, as Cattanach J. suggested in Brookview Investments, if the Partnership had made any profits, these would have been taxed in the hands of the appellant. It follows that the losses incurred by the Partnership may be deducted from the appellant’s income.

The appeal is therefore allowed with costs and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the appellant is entitled to claim a business loss from the Partnership in the amount of $358,703 in computing his income for the 1990 taxation year.

Appeal allowed.