Barwicz v. The King, 2024 TCC 93

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada in 2001. In January 2004, the trust distributed $2.25 million to the taxpayer, and in December 2005, made a further distribution to him of $0.83 million, as a result of which the trust was terminated.

After finding that the trust had realized departure tax pursuant to s. 128.1(4)(b) in 2001 and had a tax debt that had amounted to $1.6 million at the end of 2005, Gagnon J confirmed the Crown’s position that the taxpayer had not given consideration to the trust for either distribution (e.g., in exchange for part satisfaction of his capital interest in the trust). In this regard, Gagnon J first noted (at para. 62, TaxInterpretations translation):

[I]f one party is enriched and the other impoverished by the same amount, it will be possible to conclude that the party who became richer did not offer equivalent consideration … .

In finding that that was the situation here, he indicated that:

• “the trustee's distributions had no impact on the rights of a beneficiary of the Trust who had or had not received a distribution” (para. 65); and
• although the taxpayer “had a right under the Trust to be considered by the trustee for any distribution on the same basis as the other beneficiaries … there is no reason to believe that anyone would have paid even a very small amount for [this right]” (para. 67);

In also rejecting the taxpayer’s submission that the deeming by s. 107(2) of proceeds for the distributed property equal to its cost amount constituted the receipt of consideration for s. 160(1)(e) purposes, Gagnon J stated (at para. 79) that “[w]hen there is a transfer of value between two patrimonies, there is a transfer within the meaning of subsection 160(1)” and it was “hardly conceivable that the tax treatment of a transaction could interact with the notion of transfer contemplated by Parliament for the purposes of subsection 160(1)” (para. 80). In any event, the deemed proceeds arising under s. 107(2) were not deemed to be paid by the beneficiary, and the taxpayer’s argument implied that in the quintessential case of a parent gifting property to a child, s. 160 would not apply because the parent received deemed FMV proceeds under s. 69(1)(b).

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year, and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain.

In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J stated (at paras. 34, 40, 48 and 50, TaxInterpretations translation):

[I]t cannot be ruled out that the taxation year to which paragraph 94(1)(a) refers is a year other than a calendar year because of an express provision to the contrary in the ITA, in this case paragraph 128.1(4)(a). …

The Court is of the view that if Parliament had wished to exclude the application of subsection 128.1(4) pursuant to subsection 94(1), it would have done so. …

[I]t can be deduced that the purpose of subsection 128.1(4) is to crystallize and tax gains realized by a taxpayer while in Canada and before departing for another jurisdiction. …

Nor is there any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4).

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust which ceased to be resident in Canada on December 17, 2001 as a result of the replacement of its sole trustee by a Barbados corporate trustee. The taxpayer noted that an inter vivos by virtue of s. 249(1) generally had a calendar taxation year, and argued that “year” in s. 94(1)(c)(i) referred to the 2001 calendar year, so that, by virtue of becoming a deemed resident trust under s. 94(1) on December 17. 2001, the taxpayer was deemed to have been resident in Canada for Part I purposes from the time of its formation in 2001 (i.e., both before and after the emigration time) – hence, s. 128.1(4) had no application and the trust avoided capital gains tax on shares held by it with an accrued gain. (This argument would have been more difficult under current s. 94(3)(a), which refers to the trust’s “particular taxation year.”)

In rejecting this submission and in finding that the trust realized gain on the shares pursuant to s. 128.1(4)(b), Gagnon J noted that the two provisions could be readily read as giving priority in this regard to s. 128.1(4), and that he could not see “any indication that Parliament's objective was to allow trusts such as the Trust to leave Canada without incurring the special emigration tax triggered by subsection 128.1(4)” (para. 50, TaxInterpretations translation).

The taxpayer was one of nine beneficiaries of a discretionary inter vivos personal trust who received substantial capital distributions from the trust, the second of which resulted in the termination of the trust. In finding that these distributions did not entail the taxpayer giving consideration to the trust for s. 160 purposes, Gagnon J found that:

• “the trustee's distributions had no impact on the rights of a beneficiary of the Trust who had or had not received a distribution” (para. 65, TaxInterpetations translation); and
• although the taxpayer “had a right under the Trust to be considered by the trustee for any distribution on the same basis as the other beneficiaries … there is no reason to believe that anyone would have paid even a very small amount for [this right]” and
• “[i]n fact, it is highly unlikely that such a right could be transferred to a third party” (para. 67).