Dockets: 2005-2287(IT)G,
2005-2285(IT)G,
2005-2286(IT)G, 2005-2288(IT)G,
2005-2289(IT)G, 2005-2290(IT)G,
2005-2291(IT)G, 2005-2292(IT)G,
2005-2294(IT)I, 2005-2295(IT)I,
2005-2296(IT)I, 2005-2297(IT)I,
2005-2298(IT)I, 2005-2299(IT)I,
2005-2305(IT)I, 2005-2306(IT)I,
2005-2307(IT)I, 2005-2310(IT)I,
2005-2311(IT)I, 2005-2312(IT)I,
2005-2313(IT)I.
BETWEEN:
SCOTT DAVIS, KARL J. BEAGRIE,
THOMAS A. CURTIS, RICHARD GRONVALL,
AUSTIN L. HEARN, CLAUDE KENDALL,
JOHN McELROY, DARCY S. RAMSAY,
DARRELL WOLTER, GREGORY B. VENUS,
DOUGLAS K. TOLCHARD, DAVE McCORMICK,
BLAIN McCALLUM, COLIN MacPHERSON,
DANIEL R. MacNEIL, KENNETH LESLIE,
BILL G. JENKINS, DOUG HUNTER,
ARTHUR L. HOLMWOOD, HAROLD FITZ,
BRAD G. BOLES
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on September 20, 2007, at Edmonton, Alberta
Before: The Honourable Justice L.M.
Little
Appearances:
|
Counsel for the Appellants:
|
Gordon
D. Beck
|
|
|
|
|
Counsel for the Respondent:
|
Margaret A. Irving
|
____________________________________________________________________
JUDGMENT
The
appeals from the assessments made under the Income Tax Act for the 2000
taxation year are allowed, with costs, and the assessments are referred back to
the Minister of National Revenue for reconsideration and reassessment in
accordance with the attached Reasons for Judgment.
Signed at Vancouver, British
Columbia, this 16th day of January 2008.
“L.M. Little”
Citation: 2008TCC31
Date: 20080116
Dockets: 2005-2287(IT)G, 2005-2285(IT)G,
2005-2286(IT)G, 2005-2288(IT)G,
2005-2289(IT)G, 2005-2290(IT)G,
2005-2291(IT)G, 2005-2292(IT)G,
2005-2294(IT)I, 2005-2295(IT)I,
2005-2296(IT)I, 2005-2297(IT)I,
2005-2298(IT)I, 2005-2299(IT)I,
2005-2305(IT)I, 2005-2306(IT)I,
2005-2307(IT)I, 2005-2310(IT)I,
2005-2311(IT)I, 2005-2312(IT)I,
2005-2313(IT)I.
BETWEEN:
SCOTT DAVIS, KARL J. BEAGRIE,
THOMAS A. CURTIS, RICHARD GRONVALL,
AUSTIN L. HEARN, CLAUDE KENDALL,
JOHN McELROY, DARCY S. RAMSAY,
DARRELL WOLTER, GREGORY B. VENUS,
DOUGLAS K. TOLCHARD, DAVE McCORMICK,
BLAIN McCALLUM, COLIN MacPHERSON,
DANIEL R. MacNEIL, KENNETH LESLIE,
BILL G. JENKINS, DOUG HUNTER,
ARTHUR L. HOLMWOOD, HAROLD FITZ,
BRAD G. BOLES
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Little J.
A. Facts
[1] The above appeals
were heard on common evidence in the City of Edmonton.
[2] Canfish Services
Inc. (“Canfish”) was established in the spring of 1996 at the instigation of
Scott Davis, Karl Beagrie and Darcy Ramsay.
[3] Canfish was a
company that was engaged in providing services to the oil and gas exploration
industry in the Province of Alberta.
[4] During the 2000
taxation year, the Appellants were employees of Canfish.
[5] In March, 2000 the
shareholders of Canfish sold their shares to an arm’s length purchaser – NQL
Drilling Tools Inc. (“NQL”) for the sum of $16,500,000.
[6] Canfish was a Canadian-Controlled
Private Corporation immediately before the sale of its shares to NQL.
[7] The parties agree that
the shares of Canfish represented “qualified small business corporation” shares
(hereinafter “QSBC”) as that term is defined in the Income Tax Act (the
“Act”).
[8] The Appellants
maintain that they received shares of NQL as part of the proceeds from the sale
of the Canfish shares.
[9] By Notice of Assessment
dated May 10, 2001, the Minister of National Revenue (the “Minister”)
assessed the Appellant (Mr. Davis) to include a capital gain of $49,994 and
allowed a capital gain deduction of $33,329.
[10] On December 31, 2003
the Appellant, Mr. Davis, was reassessed by the Minister to include an
employment benefit in the amount of $49,994 pursuant to paragraph 6(1)(a) of
the Act deleting the capital gain and capital gain deduction originally
assessed.
[11] Each of the other
Appellants were reassessed by the Minister to include an employment benefit
pursuant to paragraph 6(1)(a) of the Act and the capital gains and the
capital gains deduction previously claimed by them were deleted.
B. Issue
[12] The issue is whether
each of the Appellants received a share of the 5% of the net proceeds derived
from the sale of the Canfish shares as an employee benefit in the 2000 taxation
year.
C. Analysis and Decision
[13] The Appellants’
position is that they had each realized a capital gain resulting from the sale
of shares of a qualified small business corporation and that this capital gain
could be offset by claiming a portion of the $500,000 lifetime capital gains
exemption (if it was available to a particular Appellant) against the capital
gain that they each had received. Since the capital gain occurred in the 2000
taxation year, the taxable capital gain percentage was two-thirds of the
capital gain and the lifetime capital gains exemption on gains arising from the
sale of QSBC shares was $500,000.
[14] Counsel for the
Appellants said that each of the Appellants was a beneficiary of a Trust
established by the original principals of Canfish – i.e. Messrs. Davis,
Beagrie, Ramsay, plus Mr. Kusumoto (a financier) and Mr. Mullen (a lawyer)
– that set aside 5% of the issued and outstanding shares of Canfish for
employee equity participation. Counsel for the Appellants maintained that when
the shares of Canfish were sold to NQL, the proceeds that the Appellants
ultimately received were distributions out of that Trust that retained their
character as being capital gains resulting from the sale of QSBC shares.
[15] The Respondent’s
position is that no such Trust in favour of employees or future employees of
Canfish ever came into existence, and accordingly, the amounts that the Appellants
each received should be treated as additional employment remuneration that was fully
taxable in their hands.
[16] In the alternative,
if the Court determines that a Trust did not exist, counsel for the Appellants
argued that section 7 of the Act should apply in this appeal, in
particular subsection 7(1.1) and paragraph 110(1)(d.1) rather than paragraph
6(1)(a) as purported by the Respondent.
[17] Mr. Davis stated in
evidence that he and his associates, Messrs. Beagrie and Ramsay, wanted to
ensure that the employees of Canfish would benefit from the success of Canfish.
Messrs Davis, Beagrie and Ramsay therefore set aside 5% of the shares of
Canfish into a trust (hereinafter referred to as “Trust”).
[18] When the sale of the
Canfish shares to NQL was made, NQL paid the Trust the sum of $825,000 (5% of
the sale price of $16,500,000).
[19] The sum of $825,000
was distributed amongst the 21 Appellants.
[20] Each of the
Appellants treated their proceeds as capital gains that were eligible for the
capital gains exemption.
[21] In support of his
argument that a Trust was established for the employees of Canfish, counsel for
the Appellants referred to a letter dated March 15, 1996 that Mr. Davis wrote
to Mr. Mullen (their lawyer) (Exhibit A-1). The letter indicates that 6% of the
shares of Canfish should be held for “Key Personnel”. Counsel for the Appellants
maintained that this statement by Mr. Davis is evidence of the intention to
benefit employees of Canfish with equity in Canfish.
[22] Counsel for the
Appellants also referred to the Trust Declaration dated as of June 1, 1996
(Exhibit A-2).
[23] Exhibit A-2 reads as
follows:
Trust Declaration
1.
The undersigned,
representing all of the shareholders of Canfish Services Inc.
(“Canfish”) hereby declare that we hold 5% of our shareholdings in Canfish for
and on behalf of an employee pool for allocation on the sale, if any, of the
shares of Canfish subject to such conditions of release as shall be determined
in the sole discretion of the trustees thereof.
2.
The undersigned
hereby appoints Darcy Ramsay, Karl Beagrie and Scott Davis trustees in
respect of such shares with full right and authority to manage the allocation,
distribution and terms of release and allocation of such shares among employees
of Canfish in such manner as they in their absolute discretion consider
appropriate.
3.
The above grant is
irrevocable.
4.
This deed may be
executed in counterparts.
All as agreed to and witnessed as of the
1st day of June 1996.
[24] It will be noted
that this Trust Declaration states that Messrs. Davis, Beagrie and Ramsay are
trustees of the Trust. Furthermore, the Trust Declaration states that the
Trustees are empowered to, among other things, determine the allocation of the
shares held in Trust amongst the employees of Canfish.
[25] Mr. Davis testified
that when the shares of Canfish were sold to NQL he met with Messrs. Beagrie
and Ramsay and they determined how the 5% of the shares would be allocated to
the Appellants.
[26] Counsel for the
Appellants filed Exhibit A-9 which is a summary of the allocation that was made
by Messrs. Davis, Beagrie and Ramsay to the various employees of Canfish.
[27] Exhibit A-9 reads as
follows:
|
Employee
|
|
No. of Canfish Shares
|
|
|
|
|
|
|
Greg Allen
|
|
30.5
|
|
|
Ross Avery
|
|
242
|
|
|
Brad Boles
|
|
242
|
|
|
Reid Conrad
|
|
30.5
|
|
|
Tom Curtis
|
|
363.5
|
|
|
Rob Doyle
|
|
30.5
|
|
|
Harold Fitz
|
|
182
|
|
|
Rick Gronvall
|
|
515
|
|
|
Lee Hearn
|
|
303
|
|
|
Layne Holmwood
|
|
106
|
|
|
Doug Hunter
|
|
91
|
|
|
Bill Jenkins
|
|
30.5
|
|
|
Claude Kendall
|
|
606
|
|
|
Matt Jordan
|
|
15
|
|
|
Chris LaFleur
|
|
30.5
|
|
|
Ken Leslie
|
|
72.5
|
|
|
Troy Leslie
|
|
48
|
|
|
Joe Marshall
|
|
30.5
|
|
|
Blain McCallum
|
|
30.5
|
|
|
Dave McCormick
|
|
151.5
|
|
|
John McElroy
|
|
606
|
|
|
Colin MacPherson
|
|
15
|
|
|
Dan MacNeil
|
|
60.5
|
|
|
Ed Malm
|
|
30.5
|
|
|
Glenn Schultz
|
|
30.5
|
|
|
Dave Shubert
|
|
30.5
|
|
|
Kim Tolchard
|
|
30.5
|
|
|
Greg Venus
|
|
91
|
|
|
Hazel Yates
|
|
30.5
|
|
|
Darrell Wolter
|
|
15
|
|
|
Karl Beagrie
|
|
303
|
|
|
Darcy Ramsay
|
|
303
|
|
|
Scott Davis
|
|
303
|
|
|
|
|
|
|
|
Total
|
|
5000
|
|
[28] Counsel for the
Appellants stated that the proceeds from the sale of the 5% of the Canfish
shares were paid to an entity called “SKD Holdings Inc.”. Cheques were then
issued to the various shareholders per the allocation as shown in Exhibit A-9.
[29] Mr. Ken Mullen testified
as a witness and confirmed the testimony of Mr. Scott Davis.
[30] I must now review
the evidence and jurisprudence to determine whether a Trust existed in this
situation.
[31] Counsel for the
Appellants referred to the text by Professor Donovan Waters – The
Law of Trusts in Canada, Chapter 5. Counsel for the Appellants quoted from
page 107:
For a trust to come into existence, it
must have three essential characteristics. As Lord Langdale M.R. remarked in Knight
v. Knight, in words adopted by Barker J. in Renehan v. Malone and
considered fundamental in common law Canada, first, the language of the alleged
settlor must be imperative; second, the subject matter or trust property must
be certain; third, the objects of the trust must be certain. This means that
the alleged settlor, whether he is giving the property on the terms of a trust
or is transferring property on trust in exchange for consideration, must employ
language which clearly shows his intention that the recipient should hold on
trust. No trust exists if the recipient is to take absolutely, but he is merely
put under a moral obligation as to what is to be done with the property. If
such imperative language exists, it must, secondly, be shown that the settlor has
so clearly described the property which is to be subject to the trust that it
can be definitively ascertained. Third, the objects of the trust must be
equally clearly delineated. There must be no uncertainty as to whether a person
is, in fact, a beneficiary. If any one of these three certainties does not
exist, the trust fails to come into existence or, to put it differently, is
void.
I. Certainty of Intention
to Create a Trust
[32] Counsel for the
Appellants referred to the characteristics specified to by Professor Waters and
said:
Dealing with the first certainty, certainty of intention,
simply put, this means there has to be some evidence a settlor had in mind to
give another person the benefit of some property that is owned by the settlor.
[33] Counsel for the
Appellants again quoted from the text by Professor Waters at page 108:
There is no need for any technical words
or expressions for the creation of a trust.
[34] Counsel for the
Appellants noted that the evidence indicates that there was an intention
that a certain percentage of the shares of Canfish were to benefit Canfish
employees. Counsel for the Appellants said that the intention to hold the
shares for Canfish employees is satisfied by the evidence which established
that each principal took the position that they were holding 5% of the shares
in Trust for employees or future employees.
[35] Counsel for the
Appellants also noted that further evidence of the intention to create a trust is
the Trust Declaration (Exhibit A-2).
II. The Subject
Matter of the Trust Property must be Certain
[36] Counsel for the
Appellants said that the subject matter of the Trust property was 5% of the
issued and outstanding shares of Canfish.
[37] Counsel for the Appellants
also noted that the fact that the amount paid for the 5% of Canfish shares
flowed through SKD Holdings is an indication that there was Certainty of
Property concerning the Canfish employees.
III. Certainty of Objects
[38] Counsel for the
Appellants said that the “Certainty of Objects” is to be regarded to mean
certainty as to who is a beneficiary of the Trust.
[39] Counsel for the
Appellants said that the “objects” of the Trust have to be either existing
employees of Canfish or may include former employees of Canfish.
[40] Counsel for the
Appellants said that “it is sufficient to name a class or category of persons
as beneficiaries, as long as it is possible to ascertain that a particular person
is a member of the class” (Transcript p. 49).
[41] Counsel for the
Appellants said that in this situation it is sufficient that the Trust was
established for the benefit of employees of Canfish, i.e. an ascertainable
class.
[42] Counsel for the
Appellants admitted that while Davis, Beagrie and Ramsay looked at all of the
employees of Canfish (or former employees) and only selected some, this does
not change the situation from the point of view of the trust law.
[43] Counsel for the
Respondent said that the Crown’s position is that there was not a valid Trust.
[44] Counsel for the
Respondent agreed with counsel for the Appellants on the three “Certainties”.
However, counsel for the Respondent maintains that when we consider clause 1 of
the Trust Declaration, the description of the beneficiaries of the Trust is too
vague to meet the test of certainty.
[45] Counsel for the
Respondent maintains that the cash and the NQL shares were received by the
Canfish employees because of their employment with Canfish. Counsel for the
Respondent said that the cash and the value of the NQL shares are taxable as a
benefit under paragraph 6(1)(a) of the Act.
A. Creation of a Trust
[46] Both parties agree that
three certainties must exist for a trust to be established.
[47] Counsel for the
Respondent argued that there was an additional requirement for the effective
creation of a trust that being the “constitution of the trust” which is the
title transfer of property to the trustees. According to counsel for the
Respondent, without this transfer of property a trust would simply be declared
but not created.
[48] The certainty of
intention to create a Trust was spelled out in Exhibit A-1 which established
that from the onset of the creation of Canfish, shares were to be held in Trust
for the employees of the company. This intention was further evidenced by the
execution of a Trust Declaration in favour of the future Canfish employees
(Exhibit A-2). Collectively, these documents and the testimony of Mr. Davis
and Mr. Mullen support the certainty that the founders of Canfish intended to
establish a Trust on behalf of the Canfish employees.
[49] In the present
appeal, the certainty of subject matter is achieved through a review of the
Trust Declaration (Exhibit A-2), which states that 5% of the shareholdings of
Canfish would be held in Trust. Although a specific number of shares were not
provided in the Trust Declaration it is the discretionary power given to the trustees
that prevents this certainty from failing.
[50] The certainty of
objects requires that the beneficiaries of the trust are described in clear
terms such that the trustees can perform their duties when distributing
property of the trust.
[51] In the context of a
discretionary trust there is no need to individually identify all of the
members of the group. However, this certainty will fail if “the definition of
beneficiaries is so hopelessly wide as not to form ‘anything like a class’, so
that the trust is administratively unworkable”.
[52] In the present
appeal a discretionary Trust was established and the beneficiaries of the Trust
were referred to as the employee pool of Canfish, i.e. an identifiable group
easily ascertained.
[53] As discussed above,
constitution of a trust occurs when there is a transfer of property to the
trustee after a declaration has been prepared. This particular requirement for
the creation of trust is contained in section 1260 of the Civil Code of
Québec
and as such would have no application in the present appeal.
[54] Since the three
certainties have been established by the Appellants and the constitution of the
Trust has application only in a civil law context, I have concluded that a
Trust was legally established to hold a 5% share interest in Canfish, on behalf
of Canfish employees.
B. Taxation of Proceeds –
Disposition of the Canfish Shares
[55] Due to the
establishment of the Trust, the Appellants would be regarded as shareholders of
Canfish and as such would not be subject to the application of paragraph
6(1)(a) of the Act, which deals with the taxation of employment
benefits.
[56] Additionally,
section 7 and consequently paragraph 110(1)(d.1) of the Act would have
no application in the present appeal, as this was not a circumstance in which
there was a stock option agreement in place for shares to be purchased by or
issued to employees.
[57] Although the
Appellants could not avail themselves of section 7 or paragraph 110(1)(d.1) of
the Act, they should be able to benefit from the application of section
110.6 of the Act, to the extent that their $500,000 deduction is
still available.
[58] Section 110.6 of the
Act provides a lifetime $500,000 exemption for capital gains realized on
the disposition of qualified small business corporation shares. Since both
parties have agreed that the shares of Canfish were qualified small business
corporation shares, the lifetime exemption should be applicable to the
Appellants.
C. Timing of Income
Inclusion – NQL Shares
[59] Counsel for the
Appellants argued that the Minister erred in including the value of the NQL
shares as partial consideration for the sale of his Canfish shares, when full
title of the shares was not received until several years following the sale.
[60] Neither party argued
this issue before the Court. Furthermore there was no evidence or argument
provided to the Court with respect to the value of the NQL shares.
[61] In my opinion, the
Minister correctly included the value of the NQL shares as partial consideration,
since this amount was receivable by the Appellants.
[62] The appeals are
allowed, with costs, and the Appellants are considered to have realized a
capital gain when they received net proceeds from the Trust due to the sale of
the Canfish shares. As noted above, whether each of the Appellants may claim a
lifetime capital gain exemption with respect to the shares will depend on
whether the Appellant has already claimed his or her lifetime capital gain
exemption.
Signed at Vancouver, British
Columbia, this 16th
day of January 2008.
“L.M. Little”
CITATION: 2008TCC31
COURT FILE NO’S.: 2005-2287(IT)G, 2005-2285(IT)G,
2005-2286(IT)G,
2005-2288(IT)G,
2005-2289(IT)G,
2005-2290(IT)G,
2005-2291(IT)G,
2005-2292(IT)G,
2005-2294(IT)I, 2005-2295(IT)I,
2005-2296(IT)I, 2005-2297(IT)I,
2005-2298(IT)I, 2005-2299(IT)I,
2005-2305(IT)I, 2005-2306(IT)I,
2005-2307(IT)I, 2005-2310(IT)I,
2005-2311(IT)I, 2005-2312(IT)I,
2005-2313(IT)I.
STYLE OF CAUSE: Scott Davis, Karl J. Beagrie,
Thomas
A. Curtis, Richard Gronvall,
Austin
L. Hearn, Claude Kendall,
John
McElroy, Darcy S. Ramsay,
Darrell
Wolter, Gregory B. Venus,
Douglas
K. Tolchard, Dave McCormick,
Blain
McCallum, Colin MacPherson,
Daniel
R. MacNeil, Kenneth Leslie,
Bill
G. Jenkins, Doug Hunter,
Arthur
L. Holmwood, Harold Fitz,
Brad
G. Boles and Her Majesty the Queen
PLACE OF HEARING: Edmonton, Alberta
DATE OF HEARING: September 20, 2007
REASONS FOR JUDGMENT BY: The
Honourable Justice L.M. Little
DATE OF JUDGMENT: January 16, 2008
APPEARANCES:
|
Counsel for the
Appellants:
|
Gordon D. Beck
|
|
|
|
|
Counsel for the
Respondent:
|
Margaret A. Irving
|
COUNSEL OF RECORD:
For the Appellants:
Name: Gordon D. Beck
Firm: MacPherson
Leslie & Tyerman LLP,
Edmonton, Alberta
For the
Respondent: John H. Sims, Q.C.
Deputy
Attorney General of Canada
Ottawa,
Canada
Email this Content