Blum v. R., [1999] 3 CTC 2287, 99 DTC 290

Beaubier T.C.J.:

This appeal pursuant to the General Procedure was heard at Toronto, Ontario on September 10 and 11, 1998. The Appellant testified and called his chartered accountant for the pertinent years, Leslie Nochomovitz. The Respondent called Wayne Berman, C.A., the auditor on the file, to testify.

Paragraphs 5, 6 and 7 of the Reply to the Notice of Appeal read: 5. In so assessing and reassessing the Appellant, the Minister made, inter alia, the following assumptions of fact:

a) the Appellant was a shareholder of Sweet Ripe Drink Inc. and 617430 Ontario Ltd.;

b) in 1987 and 1988, the Appellant disposed of shares he held in these corporations;

c) the Appellant’s capital gain from the disposition of these shares is as Outlined on the schedule attached hereto:

d) the Appellant received interest income arising from the proceeds of the dispositions of such shares, in the amounts outlined on the schedule attached hereto.

6. The preliminary issue is whether the Notice of Assessment for the 1987 taxation year and the Notices of Reassessment for the 1988 and 1989 taxation years are valid.

7. The substantive issue is whether the Minister properly included in computing the Appellant’s income the taxable capital gains and the interest income outlined on the schedule attached hereto.

In contrast, paragraphs 9 to 14 inclusive of the Notice of Appeal read: 9. The notice of assessment dated November 26, 1993 for the Appellant’s 1987 taxation year is invalid because the Minister failed to examine and assess the Appellant’s income for that taxation year with all due dispatch.

10. The notices of reassessment dated November 26, 1993 for the Appellant’s 1988 and 1989 taxation years are invalid because the Minister issued said reassessments more than three (3) years after the dates of the Original notices of assessment.

1 1. Taxable capital gains from the sales of the Shares and interest earned on

the proceeds of disposition of the Shares were erroneously assessed as income of the Appellant.

12. The Shares were held in trust by the Appellant for his three (3) grandchildren: Adam Blum, Elisa Blum and Laura Blum (hereinafter referred to as “the Grandchildren”).

13. The taxable capital gains on the sales and the interest earned on the proceeds of the sales were reported by the Grandchildren who were the beneficial owners of the Shares.

14. The proceeds of the sales of the Shares and the interest therefrom belong to the Grandchildren and are being held in trust for them by the Appellant.

The Appellant is 83 years old. He was born and raised in Poland where he was in business before World War IT. In 1942 he was put in a concentration camp by the Germans in Poland and his business was taken. He re- mained in Eastern Europe from 1945 to 1950 where he manufactured textiles. He married in 1945 or 1946 and had one child, Ephraim, who was born in 1947. In 1950 he and his family moved to Israel where he built a factory and produced juice concentrates and grapefruit sections which he exported. In 1970 he built a factory in Honduras. In 1976 he immigrated to Canada as an investor with a “suitcase” full of money. In 1978 he and his son built a factory near Guelph to produce juice and concentrate. In 1979 he became a Canadian citizen. He kept large sums of money in cash at his home and his factory.

Ephraim married and had three children: Elisa, born September 26, 1971; Laura, born March 25, 1977; and Adam, born December 2, 1980.

Sometime in 1985 the Appellant stopped speaking to Ephraim. Ephraim remained his sole heir, but he decided to take care of his grandchildren. He discussed a trust for them with his lawyer, Marvin Talsky, Q.C., in about 1985. He had a heart attack in about 1986 or 1987. In 1986 he incorporated Sweet Ripe Drink Inc. (“Sweet Ripe”). On February 12, 1987 three shares were issued as certificates C-4, C-5 and C-6, respectively, to:

Joseph Blum, in Trust for Laura Blum (Exhibit A-6);

Joseph Blum, in Trust for Adam Blum (Exhibit A-5); and

Joseph Blum, in Trust for Elisa Blum (Exhibit A-4).

The Appellant also incorporated 617430 Ontario Limited (“617430”). According to Exhibit A-7, a letter dated March 23, 1988 from Mr. Talsky to the chartered accountant, three shares were issued in it in trust for the grandchildren in identical fashion on instructions from Joseph Blum to Mr. Talsky in 1986.

There is no dispute about the manner in which the share certificates are described.

Joseph Blum sold all of these shares to Natco Trading Corporation as follows:

Mr. Talsky handled all of these sales as solicitor. Mr. Blum is described as holding the shares in trust in all of the agreements of sale. There is no dispute that the sales were conducted at arm’s length.

The first sale came to the attention of Mr. Nochomovitz of Doane Raymond, chartered accountants, in about March, 1988 when Mr. Blum reported the sale to him and income tax returns had to be filed. Mr. Nochomovitz took steps to verify that Mr. Blum was trustee for the grandchildren and obtained particulars respecting his grandchildren from Mr. Blum. Mr. Blum gave Mr. Nochomovitz the names and years of birth; some of these names and dates were wrong. The years of birth indicated that all of the grandchildren were infants. Mr. Blum assured Mr. Nochomovitz that the grandchildren had no other income.

Because there was no formal written trust deed, Mr. Nochomovitz prepared income tax returns for each grandchild reporting the capital gains. He did not prepare a T-3. Mr. Blum signed the grandchildren’s returns as their trustee and paid their taxes out of the proceeds of sale. This was repeated in 1988 and 1989. As income accumulated on these monies, it was reported as well, and the taxes were paid. Revenue Canada assessed the grandchildren’s returns with minor changes and taxes were adjusted accordingly. But Revenue Canada left the capital gains reported and taxes paid on them “as is”.

On his chartered accountant’s advice, Mr. Blum did not file an income tax return for 1987 because his only income was the old age pension. Nor did he file any income tax returns from 1976 to 1988. He did file income tax returns in 1988 and 1989. On November 26, 1993 his 1988 and 1989 income tax returns were reassessed. He was also assessed for 1987. In essence the capital gains and income he reported on behalf of his grandchildren were treated as his on the following basis:

Schedule

1987

Capital gain on sale of shares of

Sweet Ripe Drink Inc. (May 1987)	$2,617,497
617430 Ontario Ltd. (August 1987)	34,812
	$2,652,309
Taxable Capital Gain (@ 50%)	$1,326,154
Interest Income	7,600
1988
Capital gain on sale of shares of:
Sweet Ripe Drink Inc. (July 1988)	$1,835,726

Taxable capital gain (@ 66.67%)	$1,223,817
Interest income	23,736
1989
Interest income	$ 44,637

Mr. Blum appealed. He is a short, wiry 83 year old who speaks rapid, broken and, on occasion, incomprehensible and furious English. At times an interpreter was required. At times he was outspoken and outside of the control of lawyers both in chief and in cross-examination.

The auditor for Revenue Canada testified in cross-examination that he accepted the fact that all of the shares in question were issued by the corporations to Joseph Blum in Trust for each of his grandchildren as described in Exhibits A-4 to A-7 inclusive. He also accepted the nominal value of the shares on issuance and that Joseph Blum had instructed Marvin Talsky, Q.C. to set up the trusts. But the auditor did not feel that was enough at the time he audited. He wanted meticulous accounting and records of the proceeds of the sales of the shares. In essence, the auditor was looking at what happened to the proceeds of sales after the trusts were established. The Respondent implied that they were used by Joseph Blum personally in later years, but there is no evidence and there are no assumptions about that. There are merely the Respondent’s inuendo and suspicion. If such evidence existed, then Joseph Blum might very well have received income, consisting of the proceeds he took from the trusts, for his personal use. However, that is not in issue in this case.

The copies of share certificates in Exhibits A-4 to A-6, inclusive are complete and Mr. Talsky stated in Exhibit A-7 that all the share certificates were issued by the corporations in the forms described. This was accepted by the auditor. There is no evidence to the contrary. Thus, there is delivery of the property into Joseph Blum’s name as trustee for trust property. Joseph Blum accepted the trust property as trustee. The subject matters or res of the trusts are clear: they are the shares. The beneficiaries are the three grandchildren as shown on the issued share certificates and the letter of Mr. Talsky. On the basis of this evidence, the trusts were established when the shares were issued. All of this was also described to third parties in the subsequent agreements of sale of the shares and in the income tax returns, taxes and penalties paid thereafter.

Respondent’s counsel made a great deal of the fact that subsequently the capital was lost. Joseph Blum invested the proceeds from the sales of shares in assets that are not authorized for trustees. That is a matter for the benefi- ciaries to raise with Joseph Blum, as trustee; it is not a question for this Court.

Appellant’s counsel suggested that if the Respondent disputed the trust, having assessed returns and accepted taxes paid on behalf of the benefiting grandchildren, then the beneficiaries should have been joined under section 174 of the Income Tax Act. Lev v. Lev (1992), 40 R.F.L. (3d) 404 (Man. C.A.), paragraphs 33 to 39 inclusive were cited as authority. They read:

33 Mr. Lev has asserted that the children are the owners of 48 per cent of Jegray’s shares, and that is the finding of the court. At the same time the evidence discloses that he has exercised complete control over the trust property and that the children have not received dividends or other benefits credited to them by the corporation, or flowing from their beneficial ownership. Mr. Lev’s actions raise the inference that he has been less than punctilious in the performance of the duties and obligations imposed upon him as trustee. Whether his conduct amounts to a breach of trust is beyond the scope of these proceedings, as is the question of the children’s rights to an accounting and to other remedies as the beneficiaries of the trust.

34 In all of the circumstances, the decision of the trial judge on the cross-appeal ought to be sustained.

35 A final issue requires some comment. The children were not made parties to the action. Counsel for Mr. Lev argued, for the first time in this court, that it is improper for the wife to challenge the validity of the trust without the beneficiaries having been joined as parties.

36 The rule in effect at the time the proceedings were commenced was former Queen’s Bench Rule 57(1), which provided:

Trustees, executors, and administrators may sue and be sued on behalf of, or as representing, the property or estate of which they are trustees or representatives, without joining any of the persons beneficially interested, and shall represent them; but the court may at any time order any of them to be made parties in addition to, or in lieu of, the previous parties.

The present Queen’s Bench Rule 9.01(1) came into effect on March I, 1989, and provides as a general rule:

A proceeding may be brought by or against a personal representative or trustee as representing an estate or trust and its beneficiaries without joining those beneficiaries as parties.

Subrule (2) codifies the situations in which it would be inappropriate for the representatives alone to be parties and where the persons beneficially entitled should be joined. Included in this list are proceedings “to establish or contest the validity of a will or trust.”

37 Rule 1.02(2) provides that the new rules apply to a proceeding whenever commenced, subject to an order of the court to the contrary. No application under the rule has been made. Prima facie, therefore, the new rules apply. In my opinion, however, the result would be the same whether the matter was governed by the old or new rules, namely, that the three children of the marriage ought to have been made parties to the proceedings. In Bradburn v. National Trust (1961), 34 W.W.R. 381 (Man. Q.B.), Bastin J. was required to consider the effect of former R. 57(1). He concluded that where there was even a “conceivable conflict of interest ... however inconsiderable this conflict of interest may appear it is sufficient, in my opinion, to justify those beneficially interested in taking a direct part in the action" (at p. 382). This is certainly the situation here, where the wife’s allegations are that Mr. Lev has dealt with the trust assets as if they were his own.

38 Counsel for the wife argues that Mr. Lev, and through him the children, were notified by letter to Mr. Lev’s counsel in November 1989 (during the accounting process before the master) that the wife was contesting the validity of the trust. This is hardly an answer to the specific requirements of the rule.

39 In my opinion, the children should have been added as parties when the validity of their trust was put in issue in the proceedings. The failure to do so is fatal to the wife’s attack on the trust. That does not mean that substance is giving way to form. Had I concluded that there was no evidence to support the conclusion of the trial judge that the father had demonstrated a certainty of intention to create the trust, I would be reluctant to find, on the evidence of the record and without the interests of the children being represented in the proceedings, that a valid trust did not exist.

Subsections 174(1) to (3) inclusive of the Income Tax Act read: (1) Where the Minister is of the opinion that a question of law, fact or mixed law arising out of one and the same transaction or occurrence or series of transactions or occurrences is common to assessments or proposed assessments in respect of two or more taxpayers, the Minister may apply to the Tax Court of Canada for a determination of the question.

(2) An application under subsection (1) shall set forth

(a) the question in respect of which the Minister requests a determination,

(b) the names of the taxpayers that the Minister seeks to have bound by the determination of the question, and

(c) the facts and reasons on which the Minister relies and on which he based or intends to base assessments of tax payable by each of the taxpayers named in the application,

and a copy of the application shall be served by the Minister on each of the taxpayers named in the application and on any other persons who, in the opinion of the Tax Court of Canada, are likely to be affected by the determination of the question.

(3) Where the Tax Court of Canada is satisfied that a determination of the question set forth in an application under this section will affect assessments or proposed assessments in respect of two or more taxpayers who have been served with a copy of the application and who are named in an order of the Tax Court of Canada pursuant to this subsection, it may

(a) if none of the taxpayers so named has appealed from such an assessment, proceed to determine the question in such manner as it considers appropriate, or

(b) if one or more of the taxpayers so named has or have appealed, make such order joining a party or parties to that or those appeals as it considers appropriate and proceed to determine the question.

While the operative words are that “the Minister may apply”, surely it is appropriate that there be such an application where the tax has been paid by the grandchildren, just as such an application is appropriate in spousal tax cases. Whether the failure of the Minister to make such an application in these circumstances is fatal need not be decided in this case.

To deal with the issues as stated in paragraphs 6 and 7 of the Reply:

1. (a) Since no income tax return for 1987 was filed by Joseph Blum, the assessment is valid.

(b) The reassessments for 1988 and 1989 were made on the basis that Joseph Blum had failed to report capital gains and income. If the reassessments had been correct, the time period would have been acceptable.

2. The Minister did not properly include in computing the Appellant’s income the capital gains and interest income outlined on the schedule attached to the Reply to the Notice of Appeal and described in paragraph 12 hereof. On the evidence the capital gains and interest income belonged to the grandchildren of the Appellant. The Appellant was merely their trustee.

The appeals are allowed. These matters are referred to the Minister of National Revenue for reconsideration and reassessment pursuant to the within reasons. The Appellant is awarded party and party costs.

Appeal allowed.