Antle v Canada (2010): That Trust was a Sham!
Last month, the Federal Court of Appeal, in Antle v Canada, 2010 FCA 280 [Antle 2010], upheld the Tax Court of Canada decision in Antle v. The Queen, 2009 TCC 465 [Antle 2009], finding that an offshore spousal trust was not valid. Both courts agreed that the primary purpose of the spousal trust was to avoid capital gains taxes.
The Tax Court of Canada considered two main issues: whether the trust was valid and if the General Anti-Avoidance Rule (“GARR”) was applicable to deny the transactions and related tax savings. Sona Dhawan discussed the Tax Court decision in an earlier post. This post will focus on the validity of the trust and the appeal court’s reversal of the lower court’s finding that the arrangement was not a sham.
Background and Facts
Mr. Antle transferred shares that had accumulated a capital gain to a spousal trust set up in Barbados. The trust then sold the property to his wife who then sold the property to an arm’s length third-party. The proceeds from the sale were put back into the trust and the wife received them as a beneficiary. Barbados has zero capital gains tax, therefore the wife’s beneficial interest from the ultimate disposition of securities was tax-free.
As a result, the taxpayer saved approximately $1,299,821. Normally, if he had sold his shares to a third-party in Canada he would have been liable for tax on the accumulated capital gain. The Minister of National Revenue (“Minister”) reassessed Mr. Antle and included these gains as taxable capital gains. (It is not uncommon in these types of transactions for the tax savings to be divided between the taxpayer and the legal professionals who implemented the strategy.)
The Three Certainties
The first problem for the taxpayer was the creation of the trust. For a trust to be valid it must exhibit the three certainties: certainty of intention, certainty of subject matter, and the certainty of objects. For example, regarding certainty of intention, Mr. Antle argued that determining intention was not a subjective process but merely an objective evaluation of the text of the trust agreement. In other words, if the trust document itself indicated an intention to create a trust, the surrounding circumstances did not matter. Hence, if from reading the trust document it was clear that the trust had been set up to hold property for the eventual beneficiary, Mrs. Antle, then the certainty of intention requirement was met.
However, C. Miller J. of the Tax Court agreed with the Minister, concluding that there was no certainty of intention to create a trust; rather it was merely “a conduit to avoid tax.” The Justice concluded that determining intention is not solely an exercise in interpreting the written words of the trust agreement. He agreed with the Minister’s contention that “the language of the [trust] is insufficient if it does not accord with Mr. Antle’s actions.” According to C. Miller J.:“the inevitable conclusion [is] that Mr. Antle did not truly intend to settle shares in trust with Mr. Truss. He simply signed documents on the advice of his professional advisers with the expectation the result would avoid tax in Canada.”
On appeal, Antle again argued that to look beyond the wording of the trust agreement to determine whether certainty of intention existed was an error in law. This argument was also rejected by the Federal Court of Appeal, which affirmed that contextual considerations are relevant, making it necessary to look at the actions that accord with the trust agreement.
The Trust was a Sham
One of the more interesting conclusions of the Tax Court judge in Antle 2009 was the ruling that the trust was not a sham. Even though this issue did not affect the outcome of the appeal, it is notable that the Court of Appeal felt it necessary to correct the error in law.
A sham trust is a trust, validly constituted or not, where the terms of the trust are meant to deceive. In Snook v London West Riding Investments,  2 QB 786, Lord Diplock considered the term “sham,” stating:
it means acts done or documents executed by the parties to the “sham” which are intended by them, to give to third parties or the Court, the appearance of creating between the parties, legal rights and obligations different from the actual legal rights and obligations (if any), which the parties intend to create…[T]hat for acts or documents to be a “sham,” with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived.
Canadian jurisprudence adds that in order for a trust to be a sham, the settlor and trustee must both be of the same intent—that is to deceive or misrepresent the actual transaction.
The Tax Court of Canada undertook a nuanced determination of whether the trust was a sham, looking for proof of the intentions of those involved. The Federal Court of Appeal was much more succinct, stating:
the Tax Court judge misconstrued the notion of intentional deception in the context of a sham. The required intent or state of mind is not equivalent to mens rea and need not go so far as to give rise to what is known at common law as the tort of deceit. It suffices that parties to a transaction present it as being different from what they know it to be…[B]oth the appellant and the trustee gave a false impression of the rights and obligations created between them. Nothing more was required in order to hold that the Trust was a sham.
The Federal Court of Appeal may have been issuing a warning to those who structure tax avoidance transactions using trusts, and in particular offshore trusts. For one, they affirmed that determining certainty of intention required contextual considerations; the taxpayer is not able to rely solely on the wording of the trust agreement in order to prove that certainty of intention exists. If the property was, as according to the agreement, to be held in trust for the beneficiary, then that is what must occur.
Again, the intention referred to by Lord Diplock “is not equivalent to mens rea.” A trust is a sham if “parties to a transaction present it as being different from what they know it to be….” Nothing more is required. This effectively makes the Minister’s job much easier. A valid trust must be a valid trust, there may be no way around it.