|
Citation: 2004TCC307
|
|
Date: 20040506
|
|
Docket: 2001-3047(IT)G
|
|
BETWEEN:
|
|
ALAN W. COCKERAM AND E. ANNE COCKERAM,
TRUSTEES OF THE COCKERAM FAMILY TRUST,
|
|
Appellant,
|
|
and
|
|
|
|
HER MAJESTY THE QUEEN,
|
|
Respondent.
|
REASONS FOR JUDGMENT
Campbell J.
[1] The issue in this appeal is
whether the Cockeram Family Trust ("the Trust") is
entitled to deduct $49,200.00 in computing its income in the 1996
taxation year pursuant to subsection 104(6) of the Income Tax
Act (the "Act"). Central to this issue is a
determination of whether a cottage property purchased in 1995 is
an asset of the Trust or a personal asset of Alan and Anne
Cockeram.
[2] Although the Notice of Appeal
identified the Appellant as "Alan W. Cockeram and E. Anne
Cockeram, Trustees of the Cockeram Family Trust", counsel
for both the Appellant and Respondent agreed that the proper
Appellant should be the Trust itself. The Notice of Appeal was
amended prior to the hearing to delete the appeal in respect to
the 1997 taxation year.
The Facts:
[3] The only witness was Dr. Alan
Cockeram. He testified that the Trust was created in November
1994 with his two minor children designated as the beneficiaries
of the Trust. Dr. Cockeram and his wife, Anne, were the
designated trustees.
[4] The Deed of Settlement which
created the Trust in 1994 (Tab 2 of Exhibit R-1) contained a
provision [paragraph 9(a)] which permitted the trustees to invest
in real and personal property as an investment for the Trust. The
trustees had unfettered discretion to exercise this power
regardless of whether or not the property was non-income
producing and whether or not the property was likely to
appreciate. Dr. Cockeram stated that there was no specific
intention for the Trust to own real estate when the Trust was
initially created.
[5] In the summer of 1995, Alan and
Anne Cockeram purchased a cottage property located in Maine,
U.S.A. Although there were funds in the Trust for this purchase,
according to Dr. Cockeram, they decided it would be easier to use
the U.S. funds which would be available from the sale of another
property the Cockerams personally owned in Montana. When the
Montana property sold the Cockerams received cash of $19,000.00
and held a mortgage for the balance. The purchase price of the
Maine property was $75,000.00 U.S. payable by a deposit of
$5,000.00 U.S., a closing balance of $12,367.00 U.S and a
mortgage to the bank for the resulting difference. The Cockerams
used the cash from the sale of the Montana property to pay the
deposit and mortgaged the property for the balance of the
purchase funds.
[6] The Warranty Deed dated October
26, 1995 conveyed the Maine property to Alan and Anne Cockeram
personally as joint tenants. Dr. Cockeram stated that this
entire transaction was completed without involvement of legal
counsel. When they decided to purchase the Maine property they
spoke to the realtor and intended at that time to put the
property in the name of the Trust. This U.S. realtor referred
them to a mortgage broker who advised the Cockerams that in the
State of Maine a trust could not legally hold a mortgage.
Dr. Cockeram stated that they relied on this advice and
although they had initially instructed the U.S. realtor to have
the property registered in the name of the Trust, they now agreed
that it would be put in their personal names and they would hold
the mortgage in their own names. A mortgage in the amount of
$60,000.00 U.S. was subsequently signed by Alan and Anne
Cockeram. In addition the title insurance documents were taken
out in the name of the Cockerams personally. All monthly mortgage
payments were paid personally by the Cockerams, from their own
account. When the mortgage which they held on the Montana
property was paid, they used these funds to pay the bank and
discharge the mortgage against the Maine property. Since the date
of purchase, the Cockerams have continued to personally pay all
of the expenses relating to this property including repairs,
insurance, taxes and so forth. It was Dr. Cockeram's evidence
that their intent when they purchased this property was that it
would be an investment for the Trust but they felt it was fair
and reasonable that they should pay some of the operating
expenses associated with this property as they were using and
enjoying the cottage along with the beneficiaries.
[7] Dr. Cockeram's evidence was
that the Trust repaid them the purchase price (i.e. $75,000.00
U.S.) but not the operating and upkeep costs or the interest they
had paid on the mortgage. He testified that the purchase price at
the time converted to roughly $100,000.00 Canadian and that the
Trust reimbursed Anne Cockeram one-half of this amount when
it issued a cheque to her on February 7, 1996 for $49,200.00.
This same amount was deposited on February 2, 1996 to the
Trust's account (Tab 1 of Exhibit R-1) from the
Dr. Alan Cockeram Professional Corporation ("the
Corporation").
[8] At all relevant times, the Trust
held common shares in this Corporation. The Corporation is the
medical practice of Dr. Alan Cockeram. Dr. Cockeram
explained that the Corporation, on the advice of accountants,
paid dividends from time to time to the Trust. The Trust
investments were held primarily for the education of the
beneficiaries and Dr. Cockeram testified that very little of the
investments was used, except for the purchase of the cottage and
for a ski-box for the roof of their vehicle. On February 2, 1996
the Corporation paid dividends to the Trust in the amount of
$49,200.00. This was the same amount that the Trust paid to Anne
Cockeram a few days later on February 7, 1996. The Trust
allocated this amount to the beneficiaries in its 1996 tax return
and sought a deduction in the same amount. The Minister of the
National Revenue (the "Minister") disallowed this
deduction as there was no evidence that $49,200.00 was paid to
the beneficiaries in 1996. Instead, the Respondent argued that
the exact amount of the dividend was paid to one of the trustees
to reimburse her for monies personally expended in respect to the
Maine property.
Position of the Appellant:
[9] The Appellant argues that the
cottage property is an asset of the Trust even though the Trust
has never held legal title to it. The Cockerams hold title to the
property personally but do so as trustees. Expenses such as
repairs, insurance, mortgage payments and taxes were paid
personally but the intent was always that this property was being
purchased on behalf of the Trust. Because the Trust could not
hold a mortgage, they held the property personally so they could
provide a mortgage to their lending institution. They felt there
was no alternative but to complete the purchase in this manner
but did not appreciate the problems that it could create. Since
they were also using the cottage in the summer, the Cockerams
felt they were assisting the Trust when they did not request
repayment of the interest they paid on the mortgage or
reimbursement for the expenses they paid. The Cockerams believe
their actions throughout have been fair and reasonable.
Position of the Respondent:
[10] The Trust is not entitled to deduct the
$49,200.00 because the property was owned personally by the
Cockerams. All documentation supports the Respondent's
position. The oral testimony alone of Dr. Cockeram of intent is
insufficient to alter the nature of this transaction for tax
purposes. Since the $49,200.00 was paid in relation to an asset
that was not owned by the Trust, the amount was therefore not
paid to the beneficiaries of the Trust, either directly or
indirectly. Respondent counsel also argued that this amount could
not be deducted by the Trust because the Trust did not pay this
amount to the beneficiaries in 1996 as required by subsections
104(6) and 104(24) of the Act. It was paid to
Anne Cockeram to reimburse her for a portion of the purchase
price which she paid for the property. Regardless of whether the
Trust owned the property or whether the amount actually benefited
the beneficiaries, the requirement of subsection 104(24) is not
met because the $49,200.00 was not paid to the beneficiaries in
1996.
Analysis:
[11] The Appellant seeks to benefit from the
deduction available to trusts pursuant to
paragraph 104(6)(b) of the Act, which states
that a trust may deduct in computing its income any amounts
payable by it in the year to a beneficiary. To obtain the
deduction, an amount must be payable to a beneficiary in the year
or the beneficiary must be entitled to enforce payment of the
amount pursuant to subsection 104(24). The beneficiaries here
were clearly not legally entitled to enforce payment and
therefore this is inapplicable.
[12] The relevant portion of paragraph
104(6)(b) states:
104(6) For the purposes of this Part, there may be deducted in
computing the income of a trust for a taxation year ...
(b) in any
other case, such amount as the trust claims not exceeding the
amount, if any, by which
(i) such part
of the amount that, but for ... would be its income for the year
as became payable in the year to a beneficiary ...
[13] Subsection 104(24) states:
104. (24) For the purposes of ... subsections (6) ..., an
amount shall be deemed not to have become payable to a
beneficiary in a taxation year unless it was paid in the year to
the beneficiary or the beneficiary was entitled in the year to
enforce payment of the amount.
[14] The Appellant has the burden of
establishing that the property is an asset of the Trust and that
the Trust is entitled to deduct the payment of $49,200.00 in 1996
from its income pursuant to the relevant sections. It is clear
from the Deed of Settlement, establishing the Trust, that the
trustees would have the power and the discretion to purchase this
cottage property as an investment of the Trust. The evidence of
Dr. Cockeram is that it was the intention of the trustees to
purchase the property as an investment of the Trust but legal
title to the property was taken in the personal names of the
Cockerams because the Trust could not hold a mortgage in the
State of Maine. Other than the oral testimony of Dr. Cockeram,
there was no other evidence produced to support his statements of
intent. Although the Agreement of Purchase and Sale was not
produced, both parties agreed that it was executed by the
trustees in their personal capacity with no reference to the
Trust. None of the subsequent documentation, including the
mortgage application forms, the Warranty Deed, the mortgage, the
title insurance policy, the annual mortgage account statements or
the discharge of mortgage form, made any reference to the Trust,
the trustees or the beneficiaries. All of the documentary
evidence is contradictory to Dr. Cockeram's claimed
intention.
[15] Respondent counsel referred me to
statements contained in the case of Friedberg v. The
Queen, 92 DTC 6031, where the Court held that mere subjective
intention is not by itself sufficient to alter the
characterization of a transaction for tax purposes. Where
transactions have tax consequences, form does matter. Certainly
evidence of intent may be considered to assist in determining the
true nature of a transaction. However evidence of intent alone
will rarely be determinative. I have no reason not to believe Dr.
Cockeram's evidence concerning his intent but mere statements
of intent alone will not be sufficient to correct the entire
array of documents which clearly point to the cottage ownership,
both legal and beneficial, residing personally with the
Cockerams. If a taxpayer wishes to arrange his personal affairs
to obtain certain tax advantages, then the transactions must be
documented. If this were not the case, the courts would be left
to second-guess the true intent and nature of a multitude of
attempts at restructuring.
[16] In addition to the documentation, the
conduct of the Cockerams, both prior and subsequent to the
purchase of this property, clearly points to the Cockerams
treating it as if they owned it personally. They funded the
purchase and pay out of the mortgage with monies from the sale of
their Montana property, even though the Trust had funds in its
account. They paid the mortgage payments until the proceeds from
the mortgage they held on their Montana property was paid out and
then those proceeds were used to discharge the cottage property
mortgage. Since its purchase, they have continued to pay all
expenses relating to the cottage, which remains in their
name.
[17] I simply cannot ignore the array of
evidence which, except for the statements of Dr. Cockeram, point
unequivocally to the cottage property being a personal asset of
the Cockerams. While I do appreciate Dr. Cockeram's evidence
that he had no legal expertise and did not understand the
consequences of the various legal documents, taxpayers bear the
responsibility of ensuring that their actions comply with the
very provisions of the Act they wish to invoke. If the
intent was for the property to be a Trust asset, the minimum the
trustees should have done was to seek legal advice at some point
in time. There are a number of methods that might have been
employed to support their claimed intention, including a separate
trust agreement, whereby the property would be transferred to the
Trust upon discharge of the mortgage or a deed registered to the
Trust immediately after the mortgage was discharged. Dr. Cockeram
would like to retroactively shift this property to the Trust,
although the treatment of the property in all of the intervening
years since its purchase has pointed to personal ownership and
possession. I do not doubt Dr. Cockeram's sincerity nor do I
believe he intended anything untoward in his actions. However
there are certain responsibilities that attach to the office of a
trustee and this is particularly so where it is a family trust as
it is here. Where pursuant to paragraph 251(1)(a) the
beneficiaries and trustees are deemed not to deal with each other
at arm's length, it is incumbent that a taxpayer support
claimed intention with written documentation. Here there is not
only a lack of supporting documentation but all of the
documentation clearly points to the opposite conclusion.
[18] Appellant counsel introduced an undated
letter of Ann Ruel (Exhibit A-1), the U.S. realtor involved with
the purchase of the property. This document, faxed from Ms. Ruel
on December 22, 2001, stated that the intent of the Cockerams was
to acquire this property in the name of the Trust. I am not
inclined to attach much weight to this letter because it appears
to be created after the fact, perhaps many years after, and
because cross-examination was not possible given the absence of
the party who provided the document. Even if I were able to give
it more weight than I have, it simply would be insufficient to
overcome the other evidence which supports the opposite
conclusion.
[19] If we return again to the provisions
which govern the deductions available to a trust in computing its
income, the evidence was that the amount of $49,200.00 was paid
by the Corporation to the Trust, deposited to the Trust's
account and then several days later the same amount was withdrawn
by cheque payable to Anne Cockeram. Dr. Cockeram's evidence
was that this amount was partial reimbursement of payments made
by the Cockerams in respect to the purchase of the property.
Although this amount may have been used to partially reimburse
the Cockerams for their payments, I am unable to conclude that
the beneficiaries benefited indirectly because the property is
simply not an asset of the Trust. There is no evidence that
$49,200.00 was paid to the beneficiaries in the year. The
evidence, as supported in the banking records, is that
Anne Cockeram received this amount from the Trust.
Subsections 104(6) and 104(24) of the Act require that the
amount to be deducted by the Trust be paid in the year to the
beneficiary. The Respondent argued that even if the Trust had
legal title to the property, the requirements contained in these
provisions would not be met because it was not paid to the
beneficiaries. Counsel referred to the case of Howard Langer
Family Trust v. M.N.R., 92 DTC 1055 where it was held that if
an amount is not paid directly to a beneficiary but benefits the
beneficiary, it will not be sufficient to satisfy the
requirements. Based on the facts of this case, there can be no
benefit direct or indirect to the beneficiaries where the Trust
had no entitlement, legal or otherwise, to the cottage property.
Therefore the argument, that the payment to Anne Cockeram
bestowed an indirect benefit on the beneficiaries, has no
application here. If I had concluded that the property was or had
become an asset of the Trust, which I have not, I see no reason
however why payments to third parties which benefit beneficiaries
by preserving an asset of the Trust, may not be deducted pursuant
to these provisions, where properly documented.
[20] The Appellant has not succeeded in
overcoming the onus of demonstrating that the Minister's
assumptions were wrong and consequently that the assessment is
wrong. The Appellant took one path in dealing with this property
which prevented the Trust from obtaining the deductions under
subsection 104(6). The Appellant is simply too far down that path
to retrace the steps taken in order to restructure the
transaction in light of the legal documentation, records and
conduct of the Cockerams, all of which point to the opposite
conclusion of the Cockerams' claimed intention.
[21] For these reasons, the appeal is
dismissed, with costs.
Signed at Ottawa, Canada, this 6th day of May 2004.
Campbell J.
Email this Content