The blessings are distinct from performing the sacrament of marriage, which remains out of reach of same-sex couples anywhere within the ACC.  Despite the distinction, the practice of the blessings remained controversial, with Rowan Williams, the Archbishop of Canterbury and head of the Church of England, describing the decision by some Anglican dioceses to perform the blessings as representing a ‘schismatic division’ within the Church. The core issue in Bentley was the decision by four parishes to remove themselves from the New Westminster diocese as a sign of their disapproval of the doctrinal change allowing the blessings. The plaintiffs in the case – the trustees and clergy of the four parishes – sought a variety of declarations and orders that, essentially, claimed that the property used in the parishes was held in trust for purposes consistent with “historic, orthodox” Anglican doctrine, and since the actions of the diocese were no longer consistent with that doctrine, they therefore requested a cy-pres order that would amend the trust so as to grant the breakaway parishes control over the trust. A secondary issue dealt with the authority of the Bishop to remove the trustees of the break-away parishes from their boards, but I will not discuss that here.

The judge of first instance concluded that since s. 7 of the Diocese’s own Act requires consent from the Bishop before any incorporation of a parish, a parish does not have the authority to unilaterally leave.  Therefore, said the judge, even though the parishes may have title to the real property in question, they could not use it in a manner for which they did not have approval from the Bishop and Executive Committee of the Diocese. Considering this sufficient to decide the issue, the trial judge nonetheless considered in the alternative the question relating the religious trust, finding that if a charitable purpose trust existed it was for the purposes as defined by the ACC, not individual parishes.  The plaintiffs appealed.

The Court of Appeal approached the core concerns by asking whether the properties were held on trust and if so what were the purposes of this trust? Newbury JA., writing for a unanimous court, concluded that the historical and statutory background of the ACC suggested that it held properties on trust. The second question was more complicated. The court agreed with the plaintiffs that the purpose of the trust was, in general terms, for the purposes of Anglican ministry. This however raised the troubling proposition of the court having to determine doctrinal issues internal the Church, in terms of determining appropriate “Anglican ministry”.  The court concluded that there was little authority to suggest that a cy-pres remedy was appropriate in cases of internal disagreement over doctrine – in other words, so long as there was a functioning Anglican church, it was difficult to suggest that the purposes were not being met and therefore court intervention was required.  Since the ACC was an autonomous body within worldwide Anglicanism, the relevance of global disagreement over blessing same-sex unions was of little relevance.  Thus, while the plaintiffs were correct that the properties were held on trust for the purposes of Anglican ministry, the content of that ministry was legitimately determined by the Anglican Church of Canada, and once the plaintiffs had “remove[d] themselves from the bishop’s oversight and diocesan structure” they could not legitimately also claim a right to use the ACC’s properties (at para. 76).

The four parishes have not yet sought leave to appeal to the Supreme Court, though public statements have indicated they are considering it as an option.  If they choose to do so, the Court will face an interesting question regarding the oversight of religious bodies in Canada.  While the Court of Appeal indicated deference to internal doctrinal evolution was the preferable approach, it is possible the Supreme Court will choose to hear a Bentley appeal in order to make a definitive statement on the matter. Given the possibility of a case regarding the constitutionality of polygamy laws (see the amici curiae post of my colleagues, Chris and Ivy, here) as they relate to religious groups also ending up on the SCC’s docket in the next few years, the Court may have an eye on how the principles adopted in Bentley will play out in other areas that deal with the interaction between secular courts and religious doctrine.

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, [1967] 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.

Conclusion

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.

The issue in C.P. Desjardins de Montmagny was determining the status of collected but unremitted GST and QST amounts where a business later filed for bankruptcy, and determining the priority as between the government, the trustee in bankruptcy, and secured creditors in claiming the amounts in question. Since the 1992 amendments to the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, it is established law that any statutory deemed trust creating a superpriority for the Crown for amounts related to excise tax is extinguished as soon as the debtor files for bankruptcy. Tax authorities must be treated as an ordinary creditor. Thus the fact that the Quebec Superior Court found in favour of the Crown was surprising; all three judgments were overturned by the Quebec Court of Appeal and the appellate judgments were upheld by the Supreme Court in short order.

The appeal arose from three cases involving bankruptcies of a number of companies and problems related to unremitted GST and QST amounts. In all three cases, businesses filed for bankruptcy under the BIA while they had GST and QST amounts that had been collected but not yet remitted or collectible by the Crown. In two of the claims—Deputy Minister of Revenue of Quebec and Her Majesty the Queen in Right of Canada v. Caisse populaire Desjardins de Montmagny and Raymond Chabot Inc., in its Capacity as Trustee for the Bankruptcy of 9083‑4185 Québec inc., 2006 QCCS 2108, and Deputy Minister of Revenue of Quebec and Her Majesty the Queen in Right of Canada v. Raymond Chabot Inc. in its Capacity as Trustee for the Estate of the Debtor Consortium Promecan inc., 2006 QCCS 6370—the Quebec Deputy Minister of Revenue gave notice to the respective businesses’ trustee in bankruptcy of the Minister’s stance that the Crown “owned” the GST and QST amounts collected by the bankrupt business. In Deputy Minister of Revenue of Quebec and Her Majesty the Queen in Right of Canada v. National Bank of Canada, 2006 QCCS 2656, the National Bank of Canada had a security interest in the accounts of the bankrupt debtors, pursuant to the Bank Act, S.C. 1991, c. 46. However, the Deputy Minister of Revenue of Quebec claimed these amounts as GST and QST amounts collected by the bankrupt businesses on behalf of the Crown.

In all three cases, the Quebec Superior Court sided with the Crown, holding that the Crown owned the disputed GST and QST amounts. “In essence, the Superior Court judges held that the GST and QST amounts were not part of the bankrupt’s patrimony” (at para. 6).

The Quebec Court of Appeal overturned all three decisions, holding that the Deputy Minister of Quebec is an unsecured creditor under the BIA and must be treated as an ordinary creditor (« que le sous-ministre du Revenu du Québec, pour fins de réclamation sur TPS et TVQ s’il y a lieu, est un créancier ordinaire au sens de la Loi sur la faillite et l’insolvabilité et, qu’en conséquence, il n’a aucun droit sur les comptes à recevoir ou autres actifs de la débitrice », 9083-4185 Québec inc. (Syndic de), 2007 QCCA 1837 at para. 7).

Writing for a unanimous panel of seven justices, Justice LeBel dismissed the Crown’s appeal in a summary fashion (the judgment consists of 30 short paragraphs).

He clarified that under the BIA, any statutory deemed trust created in favour of the Crown is extinguished when the debtor files for bankruptcy (with the exception of the three employee source deductions expressly enumerated in subsection 67(3) of the BIA: income tax deductions under subsection 227(4) or (4.1) of the Income Tax Act; CPP contributions under subsection 23(3) of the Canada Pension Plan; and EI contributions under subsection 86(2) or (2.1) of the Employment Insurance Act. See Caisse populaire Desjardins de l’Est de Drummond v. Canada, 2009 SCC 2, and its analysis by TheCourt.ca).

Justice LeBel then addressed the Deputy Minister’s submission that the Crown “owns” the GST and QST amounts collected by a business. Essentially, the argument was that the GST and QST amounts collected by a business are never the property of the business itself but immediately become the property of the Crown upon collection. As such, upon bankruptcy, these sums do not form part of the bankrupt business’s patrimony to be apportioned amongst secured and unsecured creditors. Rather, the trustee is to hold these funds separately, and turn them over to the Crown as its mandatary.

This line of argumentation basically ends up with the same result that the government was aiming to overcome with the 1992 amendments to the BIA overriding of Crown statutory trusts under the BIA regime. At that time, subsection 67(2) was introduced, which reads:

(2) Subject to subsection (3), notwithstanding any provision in federal or provincial legislation that has the effect of deeming property to be held in trust for Her Majesty, property of a bankrupt shall not be regarded as held in trust for Her Majesty for the purpose of paragraph (1)(a) unless it would be so regarded in the absence of that statutory provision. [emphasis added]

As discussed in Justice LeBel’s decision, the aim of this and other amendments was to limit the priority given to the Crown in bankruptcy proceedings. The aim was to avoid a situation where the federal and provincial Crowns would clean up the bankrupt’s estate due to unremitted taxes, leaving nothing behind for the unsecured creditors. Rather, the Crown was to be considered an unsecured creditor on par with other unsecured creditors and compete for its claim. Conceding that the Crown does not have a superpriority trust in respect of excise tax amounts but then claiming that the Crown outright owns these amounts from the outset has the effect of a “super-superpriority.”

Justice LeBel rightly rejected this argument, finding that such a proposition would be contrary to a purposive and contextual reading of the BIA as well as the federal Excise Tax Act and Quebec Act respecting the Ministère du Revenu.

The Canada Revenue Agency has taken the position in Interpretation Bulletin IT-477 “Residence of a Trust or Estate” (dated May 30, 1980) that a trust will generally be resident in the jurisdiction where the trustee who manages and controls it resides. The “management and control” test referred to in the Bulletin was rejected in Thibodeau Family Trust v. The Queen, 78 DTC 6376 (FCTD), which held that the test was not applicable to trusts. This prevailing test in Thibodeau was challenged and deemed to be obiter in Garron Family Trust, et al. v. The Queen, 2009 TCC 450, and once again, in Antle et al. v. The Queen, 2009 TCC 465.

I. Garron Family Trust v. The Queen: Trust Residence determined based on Location of Central Management and Control, not Residence of Trustee

Canadian residents, Mr. Garron and Mr. Dunin, owned a profitable Canadian company. In 1998, during a reorganization of the share structure of the company, an individual resident in the Caribbean island of St. Vincent set up two trusts with Mr. Garron and Mr. Dunin as the beneficiaries. The sole trustee of the trusts was a resident in Barbados. In 2000, the business was sold to a private equity fund, which purchased the shares owned by the trusts, resulting in capital gains of over $450,000,000.

After remitting the taxes, the trusts sought a refund on the basis of the tax exemption provisions pursuant to the Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes and Capital (“the Treaty”). As per the Treaty, capital gains may only be taxed in the country of residence. The trusts claimed that they were residents of Barbados whereas the Ministry of Revenue held that the trusts were residents of Canada and, therefore, that the exemption did not apply.

The Argument
Relying on Thibodeau, the trusts argued that the rules that are applicable are those of the jurisdiction where the trustee resides. Furthermore, Thibodeau established that the test for determining residency of corporation as being the place of “central management and control” does not apply to trusts.

The Decision
Justice Woods rejected the trust’s argument stating that the Thibodeau decision was “insufficient authority” to reject the central management and control test for trusts. She stated that the test in Thibodeau was intended to be limited to its particular facts. She further held that the judicial test of residence should apply to trusts with appropriate modifications.

When addressing the meaning of “management and control”, Justice Woods took a number of factors into consideration including the purpose of the trust, the appellant’s ability to replace the trustee, an internal memo setting out the intention of the parties, and the lack of credible witnesses involved in management of trust. She found that the trustee was selected on behalf of the beneficiaries to provide administrative services. The role of the trustee was not expected to extend to beyond administrative services to encompass decision-making responsibility. Therefore, management and control was not established in the Barbados trust. For a more detailed analysis of Garron, I recommend Ahsan Mirza’s article on TheCourt.ca, Garron: Determining residency of Trusts.

II. Antle v. The Queen: Court Finds that Trust Was Not Validly Constituted and GAAR Was Applicable

In 1998, Mr. Antle, a Canadian resident, bought shares in a private corporation through another company, Stratos Global Corporation. In 1999, he decided to sell his shares to a third party. To avoid paying taxes on the accumulated gain, he used the “capital property step-up strategy” which involved shifting capital property to a Barbados spousal trust. The trust sold the shares to his wife at fair market value in exchange for a promissory note; then the wife sold the shares to a third party and used the proceeds to pay the trust. Soon after, the trust was dissolved. This strategy resulted in no tax on capital gains.

The Argument
The Ministry of Revenue included the capital gains from the share dissolution in his taxable income, arguing that the trust was fraudulent, and not validly constituted. The Minister also invoked the General Anti-Avoidance Rule (GAAR).

The Decision
The court concluded that this was not a case of “willful evasion and intentional deception”, but rather it was a case of “self-deception, albeit innocent, on the part of Mr. Antle”.

Although the trust was not found to be fraudulent, the courts nevertheless held that the trust was not valid. Conducting a fact-specific analysis, the court came the conclusion that the documentation of the transaction was not helpful to the Mr. Antle’s case. There were various discrepancies that undermined the trust’s argument, including timing inconsistencies as to when the shares were sold, and when the trust was formed.

Furthermore, a valid trust has to have three certainties: intention, subject matter, and object. It must also have a complete transfer of subject property to trust. The court concluded that the trust was not validly constituted as it did not meet the certainty of intention and of subject matter.

The court held that the actual conduct of the parties is a relevant consideration when determining the intention and should not be limited to consideration of the trust document alone. It held that the intention was not to settle the trust, but that the trustee was an agent in the transaction, giving the gift to Mr. Antle’s wife.

In terms of subject matter, the court found that Mr. Antle retained an interest in the share when disposing the shares to recover a portion of the sale proceeds. Because the full interest was not transferred to the Trustee, the trust created an uncertainty of subject matter.

GAAR Analysis in Antle
Going a step further than Garron, the courts in Antle conducted a GAAR analysis. Justice Miller in Antle stated that even if his conclusion on the validity of trust was incorrect, the trust would fail under a GAAR analysis. The court found that relying on a treaty provision to avoid application of an anti-avoidance provision of the Act was inherently abusive. Though disappointing for taxpayers, this decision has wide-ranging implications for what constitutes as “abuse” under the GAAR, advancing development in this area of law.

The courts and the Mr. Antle agreed that there had been a tax benefit and an avoidance transaction. However, the courts found that the avoidance was abusive within the meaning of section 254(4) of the Income Tax Act [Act]. Using the textual, contextual and purposive test in Canada Trustco Mortgage Co. v. The Queen, 2005 SCC 54, the court considered the object, spirit and purpose of the relevant provision (section 73(1)of the Act).

As per Justice Miller, “[t]he object, spirit and purpose of the Canadian legislation as it pertains to a Canadian resident is not to be swept aside because the policy of the Treaty, as pertaining to a non-resident Trust, might save the Trust, especially when one considers an overriding policy of entering treaties to prevent tax avoidance by Canadian residents.”

The policy underlying section 73(1) of the Act is to recognize spouses as a single economic unit allowing for an automatic tax-deferral on a gain on transfer of property between the spouses. The Court held that the object, purpose and spirit of this section was not to allow permanent tax avoidance, but only a tax deferral. The gains would be taxed when property leaves the marital unit.

The court concluded that the transactions abused the Act and the Treaty and were subject to the GAAR. Applying the GAAR analysis, the court denied Mr. Antle the ability to access the spousal rollover and transfer of shares to the Trust, subjecting the transaction to capital gains tax on disposition.

Tax planning strategies have always been important to corporations and individuals alike. However, there is a fine line between tax planning and illegal tax avoidance. Justice Miller stated:

“This conclusion emphasizes how important it is, in implementing strategies with no purpose other than avoidance of tax, that meticulous and scrupulous regard be had to timing and execution. Backdating of documents, fuzzy intentions, lack of transfer documents, lack of discretion, lack of commercial purpose, delivery of signed documents distributing capital from the trust prior to its purported settlement, all frankly miss the mark – by a long shot. They leave an impression of elaborate window dressing. In short, if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution.”

Implications of Garron and Antle
Disregarding current industry norms, the courts in Garron and Antle held that the residence of the trustee is not sufficient to establish the trust’s residence for tax purposes. The implications of these decisions cannot be ignored.

It is evident from the decision in both cases that courts will not be limited by the document of the transaction, but will take into consideration the intention and conduct of the parties. Although both cases are fact-dependent, it is an eye-opener for those using trusts to understand the court’s standpoint with regard to such transactions. The only way to avoid liability is to overtly conduct the transaction in a manner that establishes management and control. The more a transaction blurs the line between tax planning and illegal tax avoidance, the better the documentation and implementation. Mere documentation is not enough. Mere documentation is not sufficient proof to establish management and control. The burden of proof is higher, requiring tax professionals to demonstrate control through intention and actual conduct.

Because of this unplanned development in tax law, as well as the large monetary figures involved and complexity of the issues, there is a strong possibility that these cases will be appealed. Taxpayers and adviser alike wait in anticipation for the appeal and the aftermath of this decision.

The established common law principle for determining the residence of trusts is that a trust is resident in the jurisdiction where its trustees reside and operate (Trustees of the Thibodeau Family Trust v. The Queen, [1978] 78 DTC 6376 [Thibodeau]). In Thibodeau, two of the trustees were resident in Bermuda and the third trustee was resident in Canada. The Federal Court held that the trust was resident in Bermuda because the majority of the trustees resided in Bermuda and the trust document allowed for majority decision-making.

The Tax Court of Canada’s decision in Garron Family Trust v. Her Majesty The Queen, 2009 TCC 450 [Garron], released September 10, 2009 abandons this established approach in favour of the “central management and control” test used to determine the residence of corporations (De Beers Consolidated Mines, Limited v. Howe, (1906) A.C. 455). Garron holds that the residence of a trust is determined by the jurisdiction where the central management and control of the trust resides regardless of the residence of the trustee.

Factual Background

Garron concerned the residence of two trusts formed in Barbados. The settlor for the trusts was a resident of St. Vincent Islands, the trustee was a holding company resident in Barbados, and the trust beneficiaries were Canadian residents.

The beneficiaries initially owned a Canadian Controlled Private Corporation called PMPL Holdings Inc., which in turn had full ownership of the subsidiaries Progressive Moulded Products Inc. and Progressive Tools Limited. These two subsidiaries were in the business of manufacturing and assembling automobile parts.

In 1998, a corporate reorganization similar to an estate freeze was carried out on the capital of PMPL Holdings Inc. The common shares held by the original owners were converted into fixed-value preferred shares and new common shares were issued to two newly-established holding companies, 1287325 Ontario Ltd. and 1287333 Ontario Ltd. The shares of these new holding companies were then issued to the Barbados trusts. The result was that any accrual in paid-up capital flowed out to the offshore trusts.

In 2000, shares for the two holding companies, 1287325 and 1287333 Ontario Ltd. (owned by the two Barbados trusts), were sold in an arm’s-length sale to Oak Hill Capital Partners LP. As a result of the sale, the two trusts realized capital gains of $450 million on which Canadian tax was paid due to a withholding mechanism. The trusts subsequently claimed tax refunds on these capital gains based on Article XIV(4) of the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital. Under Article XIV(4), capital gains may only be taxed in the jurisdiction where the taxpayer is resident. The issue before the Tax Court of Canada was the residence of the two Barbados trusts.

The Central Management and Control Test

Neither the appellant taxpayers nor the Minister of National Revenue disputed the fact that the trustee for both trusts was a resident of Barbados and not resident in Canada. Relying on Thibodeau, the appellants argued that the residence of the trust is determined by the residence of the trustee. However, the Minister argued for the use of the central management and control test in determining residence of the trusts. The Minister submitted that throughout the period in question, the beneficiaries were in control of the trust; the offshore trustee had played merely a subordinate role.

Madam Justice Woods sided with the Minister, holding that the central management and control test was the appropriate test for determining trust residence. Justice Woods found that Thibodeau‘s reliance on the residence of trustee alone could be restricted to the unique facts of that case. She further held that Thibodeau‘s rejection of the central management and control test was erroneous: “in my view the Thibodeau decision does not form a solid foundation for rejecting the Minister’s position that residence should be determined by a central management and control test” (at para. 151).

According to Justice Woods, Thibodeau relied on the assumption that trustees will always comply with their fiduciary obligations. Since the trustee has a fiduciary obligation to manage the trust for the benefit of the beneficiaries, the residence of the trustee is sufficient to determine the residence of the trust. In her view, this assumption was erroneous and key to the rejection of the central management and control test in Thibodeau.

The Garron judgment falls short in providing convincing rationale for moving away from the Thibodeau approach to trust residency. Madam Justice Woods approaches the decision as developing a test for trust residence rather than following or moving away from established jurisprudence. The rationale for provided by Justice Woods is that “adopting a similar test of residence for trusts and corporations promotes the important principles of consistency, predictability and fairness in the application of tax law” (at para. 160). The judgment lacks a discussion of the legal and structural differences between corporations and trusts and why a central management and control test may be necessary for determining corporate residence but not necessary for determining trust residence.

A better approach may have been to carve out an exception from Thibodeau to deal with the facts of this case: situations where there is evidence that that the trustee is not fulfilling its fiduciary duties and legal obligations towards the trust and the beneficiaries of the trust. In such cases, residence could be found in jurisdictions other than the jurisdiction where the trustee is resident because of the limited or subordinated role of the trustee.

Applying the new approach to the facts of the case, Justice Woods held that there was a lack of evidence to show that the trustee actually played a role in the management of the trust assets and investment portfolio. The trustee was selected by the beneficiaries to deal with the administrative aspects of the trusts and had no effective decision-making authority beyond this.

Another factor that weighed against the appellants in Garron was that the trust indentures provided for the appointment of a protector who could replace the trustee. On its own, this would not be a problem (like the trustee, the protector in this case was also not a Canadian resident). However, the trust indentures further provided that a majority of the beneficiaries could replace the trustee and retain control of the trusts. For Justice Wood, the subordination of the trustee was apparent and “effectively enforceable” through this mechanism.

Implications for Offshore Trusts

Despite the drastic shift in law resulting from Garron, the management and control test may not be as arduous to get around as it would seem on first glance. The UK case Wood v. Holden, [2006] EWCA Civ 26 [Wood], discussed in the Garron judgment is indicative of this.

Wood also concerned determining an off-share entity’s residence for purposes of calculating capital gains tax. A London financial services firm set up a holding company, Eulalia, in the Netherlands. The arrangement produced favourable tax consequences for Mr. and Mrs. Woods, who were residents of the UK and who were disposing their family business. However, the sole managing director of the holding company was another corporation in the Netherlands.

The Court of Appeal held that Eulalia was not a resident in the UK despite the involvement of UK residents in its set-up and its affairs. The court found that:

• i) the London firm “did not dictate any decisions” that the director was to make, and the directors of Eulalia “were not by-passed nor did they stand aside”; and
• ii) the managing director exercised its duty as managing director by signing and executing relevant documents.

The court also noted that “[t]he documents [adduced as evidence] showed guidance and influence coming from [the London firm], but no more than that” (at para.31).

In Garron, Justice Woods relied on the lack of evidence adduced by the appellants to distinguish the application of the management and control test from Wood: “[i]n contrast [to Wood], the appellants led very little evidence as to the formation and operation of the Trusts. In these circumstances, there is no basis for concluding that St. Michael [the trustee] did not agree to assume a limited role in the management of the Trusts” (at para. 262).

The management and control test in the offshore trust context could be satisfied when the trustee exercises its independent authority over the trust, such as affecting changes in the trust’s investment portfolio and management of the trust’s property. The trustee could do this even with guidance and influence from a Canadian resident beneficiary or an investment advisor, as long as the trustee’s authority is not bypassed or undermined. Avoiding a set-up where the trustee can be ousted at any time by a Canadian resident protector or beneficiary would further bolster the argument for vesting central management and control in the offshore trustee.

Nonetheless, if the hurdle is not too difficult to overcome, it is a higher hurdle than the Thibodeau approach of determining residence based on the residence of the trustee. As of yet, Garron has not been appealed to the Federal Court of Appeal; the taxpayers have 30 days from the release of the decision to file an appeal. Those of us on the sidelines watch with interest for further developments on this issue.

The facts in the two cases are quite similar and for our purposes it is unnecessary to go into them separately or in great detail. Each case involves a father who opens and desposits a large sum of money into a joint bank and investment account which is shared with an adult daughter. After the father passes away, ownership of the contents of these accounts passed to the daughter, since these accounts carry a right of survivorship. However, the daughter’s entitlement to these funds is challenged by other beneficiaries in the father’s will who claim that they were not intended as gifts and should be included with the disposition of the rest of the father’s estate.

The aim of a court in these situation is to determine whether or not the true intention of the father in creating the joint account was to provide a gift to his daughter. The common law has developed a rebuttable presumption that in situations where a gratuitous transfer is challenged, the transferee bears the burden of proving on a balance of probability that this transfer was indeed a gift; otherwise, it is a resulting trust, where the property is held by the transferee on behalf of the transferor, who still retains equitable title. While this is the general rule, there is an exception to this presumption when the transfer is made from a father and to one of his children. In these situations, the presumption of advancement reverses the onus so that such transfers are presumed to be gifts unless the person challenging the transfer can prove that it was not intended as such.

The SCC used Pecore as the lead case and the judgment in that case enunciated the principles which were then applied to the facts of Madsen. In Pecore, the SCC held that the common law principles of the presumption of resulting trust and the presumption of advancement are still relevant today. Furthermore, while the presumption of advancement originally only applied to transfers made by fathers, the SCC held that in contemporary society, woman have both the means and obligation to care for their children. The SCC concluded that there is no reason why the same presumption should not apply to transfers made by mothers to their children.

On the other hand, the SCC restricted the application of the presumption of advancement to situations where the parent makes a transfer to a minor child. According to the majority, the main rationale for this presumption is that a parent has the obligation to care for minor children and that this obligation ends as the child becomes an adult. Further, a gratuitous transfer by a parent to an adult child could be made for reasons other than to care for them; for example, aging parents may transfer assets into a joint account with adult children so that the child can help them in managing their financial affairs. Thus, the majority held that gratuitous transfers by parents to their adult children will carry a presumption of resulting trust.

Justice Abella alone disagreed with the majority on this point and wrote a separate judgment in both cases. In her view, the historical rationale behind the presumption of advancement was based not only in parental obligations but also in parental affection to their children. She held that the presumption of advancement should apply to gratuitous transfers from parents to adult as well as minor children.

While the divergent approach of the majority and the minority made little difference to the result in Pecore, it formed the basis for the different results in Madsen. In Pecore, both judgments held that there was sufficient evidence to support the assertion that the joint account constituted a gift by the father to his daughter, regardless of which presumption was used. However, in Madsen, Justice Abella relied upon the presumption of advancement to hold that the joint account was a gift, despite the lack of corrobatory evidence. The majority judgment held that the daughter could not provide sufficient evidence to overcome the presumption of resulting trust.

Thus, while these presumptions may not matter in cases where there is sufficient evidence to prove the intentions of transferor, often these disputes arise where the transferor is unavailable or has passed away and such evidence is difficult to obtain. The SCC’s judgments in these two cases help to provide certainty and to allow persons in similar situations to manage their affairs in a predictable manner.

The issue in the Buschau decision was whether the classic trust doctrine of Saunders v. Vautier could be used by the members of the plan to terminate the pension trust and recover the existing surplus. Briefly, the rule in Saunders v. Vautier provides that if the holders of all of the actual and contingent interests under a trust are sui juris and consent to the termination of the trust, the trust will be terminated notwithstanding the terms of the trust instrument and without any necessity for approval of the settlor of the trust, the trustee or any court or other third party.

An application of this doctrine by members of a pension plan to terminate a pension trust on this basis would be rare, as pension plans are inherently structured to accommodate future entrants. Thus the potential beneficiaries of contingent interests under the trust can never be definitively identified and the consents required to satisfy the rule cannot be satisfied. However, in this instance, the plan had been closed to new members and the British Columbia Court of Appeal had found that Rogers, the employer, was not entitled to reopen the plan on the basis of an obligation of good faith. This created an unusual situation where the members of the plan were identifiable. The Court of Appeal found that the rule in Saunders v. Vautier was applicable provided that the members could satisfy the conditions of the doctrine by obtaining the consent to the termination of the trust from all potential beneficiaries of existing or contingent interests in the trust property.

The SCC found unanimously that the doctrine of Saunders v. Vautier should not be applied. The basis for the decision relied upon four factors. First, unlike personal trust situations, a pension trust is not a stand-alone instrument. It is a mechanism for providing security for the funding of pension obligations created under the pension plan. In this respect, the pension plan and pension trust are intertwined and the termination of the funding entity prior to the termination of the plan itself defeats the purpose for which it was created. Second, an extensive system for the regulation of pension plans has been created by legislation. The plan in this context was governed by the federal Pension Benefits Standards Act, R.S.C. 1985, c.32 (PBSA), which provides specifically for the termination of pension plans and the distribution of the trust assets. The PBSA does not provide for the unilateral termination of the trust by members and to permit the application of the Saunders v. Vautier doctrine would render ineffective the statutory scheme and the supervisory role of the Superintendent under the PBSA. Third, the pension plan was created voluntarily by the employer as part of the employment relationship between the employer and employee and fourth, pension plans provide a valid social purpose by ensuring that funds are available to employees after retirement. The acceleration of payment of the pension funds to members on the basis of an early termination of the trust under the rule in Saunders v. Vautier is inconsistent with the employment and social purpose of the plan.

The basis for the decision of the SCC suggests that the underlying principles should have broader application than the limited context of whether an application for termination of a trust under the rule in Saunders v. Vautier should apply. The Court appears to be providing that classic trust law principles will not be invariably relevant to the determination of pension trusts. The Court is recognizing that pension trusts are created in a very different legal and social context than the traditional personal trust and that, in this context, classic trust principles cannot always be appropriately applied.

Although it seems clear that there is a continuing role for trust principles in the interpretation of pension trusts, unfortunately the parameters of this role are left unclear. Four of the seven members of the SCC continued to extend the possibility that the rule in Saunders v. Vautier may still have application to a pension trust in an appropriate situation, such as a small pension plan with limited members. This suggests that the application of trust concepts may be fact dependant and that the existence of a legislative scheme will not necessarily preclude the overriding application of trust principles. The minority of the SCC stated that it is appropriate to apply common law trust principles where there is a gap in the legislative scheme on an issue relating to pension trusts. This was the position argued as the appropriate interpretation to the statement of the SCC in Schmidt in 1994. However, one of the bases for their decision was the denial of the availability of the rule in Saunders v. Vautier on technical reasons relating to the inability of the members to obtain all necessary consents even though, in light of the substantial legislative provisions relating to termination of trust funds, the doctrine of Saunders v. Vautier should be inapplicable on the broader policy basis. The continuing focus on the requirements of the rule suggests that perhaps the broader principle, limiting the application of trust principles to resolution of issues not addressed by the legislation, cannot be solely relied upon to identify the ongoing role of these common law trust concepts in the context of pension plans.

Nonetheless, the SCC is providing a change in direction for the interpretation of pension trusts. The SCC has clearly indicated that the applicability of trust principles to pension trusts should be considered having regard to the plan documents and the social and legislative context of the plan. It will remain to be seen how this guidance is interpreted in subsequent decisions to determine the ongoing extent to which common law trust concepts will continue to have a role in the area of pension plans.