Kingsdale Securities Co Limited v. Minister of National Revenue, [1973] CTC 230, 73 DTC 5194

Collier, J:—In the taxation years under review here (1964 to 1967) the appellant says it was the general partner in a limited partnership with five family trusts as the other partners. Whether there was in fact or in law such a partnership is in dispute. The appellant, in the years in question, included in its income one-sixth only of the net profits realized from the business carried on by the alleged partnership. The remaining profits were allocated to the trusts in equal shares and, speaking generally, returns were filed by the trusts declaring the one- sixth amounts. The respondent issued reassessments against the appellant adding to the appellant’s income the other five-sixths of the profits. There are substantial sums involved. The question for me to decide is whether the reassessments of the appellant are correct. As I understand it, no reassessments of the trusts nor of the beneficiaries of them were issued excluding the share of income allocated from the partnership.

In my view, the question to be decided is dependent primarily on the facts and, to make these reasons understandable, it is necessary to review the evidence in some detail.

George E Shnier & Company Ltd was incorporated on April 22, 1948. From that time on it was engaged in the distribution and manufacturing of flooring, rubber and building products. Its name was changed to G E Shnier Co Limited on December 27, 1963 and by further letters patent issued November 7, 1969 to Kingsdale Securities Co Limited, the present appellant. Prior to December 31, 1961 the shareholdings of the company were as follows:

The four Shniers were brothers. Another brother, Allan, operated a similar business in Winnipeg. His company was Eagle Distributing Co Limited.

For a number of years there had been dissension among the shareholders of George E Shnier & Company Ltd. These differences were resolved in 1961. I shall not go into lengthy detail but as of January 1, 1962 a partnership had been formed to operate the businesses formerly carried on by George E Shnier & Company Ltd and Eagle Distributing Co Limited. The partners were five corporations each having an equal interest. These corporations were owned as follows:

George Edward Corporation Ltd (George E Shnier) Phil Shnier Limited (Phil Shnier)

Eagle Distributing Co Limited (Allan Shnier)

Norman Shnier Limited (Norman Shnier)

Irving Shnier Limited (Irving Shnier)

This corporate partnership carried on business under the name of G E Shnier Co and Eagle Distributing Co.

On July 27, 1962 George E Shnier died and Wabash Enterprises Ltd (owned by Cecil Shnier) became a partner. The interest of George Edward Corporation Ltd in the partnership was bought by the other corporate partners. Earlier in time the wives of certain of the brothers had purchased interests in the now appellant company. After George Shnier’s death ownership of that company was in the wives of the five remaining brothers.

In June of 1963 the federal government introduced a budget. it was indicated that there might be some serious taxation changes affecting associated companies. The legal and accounting advisers of the Shnier brothers were concerned about the implications vis-a-vis the Shnier businesses, as were the Shnier brothers themselves, and in July and later proposals were put forward chiefly by the legal advisers as to setting up a new structure to carry on the business. While there were, from time to time, some variations in the proposed schemes for restructure, the dominant theme was to continue the business as a partnership and to bring in as partners family trusts with limited liability. Evidence was given at trial on behalf of the appellant that one of the objects in the change-over was to develop the aspects of family and estate planning, and that was the reason for the setting up of trusts. In my opinion that aspect was minor; the main purpose was to try and reduce, within legal bounds, the impact of tax that might result from the budget proposals* [1] The legal advisers’ letter of July 19, 1963 to a firm of accountants, with copies to Norman and Cecil Shnier, sets out the initial proposal. I quote these excerpts from Exhibit 54:

If you will take a look at my letter to you of May 15, 1963, setting out the matters which must be resolved before December 31, 1963, and consider the question of re-organization to avoid serious tax implications in Gesco for 1964, I would be happy to have you set a date for my trip to Toronto to make some decisions with you. . . .

On the subject of Gesco re-organization, as you know I had come to Toronto armed with a program to stop the tax effect immediately of what was then the associated corporation amendment to The Income Tax Act. As I advised you on the telephone, this involved the immediate disintegration of the corporate partnership and the transplanting of same into a special or limited partnership consisting of one corporation and several Trusts as limited partners.

I discussed the solution with Norman, Irving and Phil at some length and they were interested in the possibilities, certainly from an income tax point of view, as well as the extra benefit of estate planning that would arise from such a plan. Therefore, I am going to proceed to map out some sort of a plan along these lines and submit it in complete detail at the August Board of Directors Meeting, and naturally I will want to do so in co-operation with you and with your concurrence.

As far as I can see, the corporate partnership which we formed in 1961 has been more than valuable to Gesco. That is, as you and I are both well aware, it saved them approximately $40,000.00 in tax in 1962, and will likely save them at least another $40,000.00 in 1963. Therefore, all the fuss and trouble has been well worth it. However, because of the serious implications of the new legislation, I feel that it has served its purpose and should now be abandoned.

The plan ! envision, will not require any major internal changes, nor any internal embarrassment.

That is, I still plan to operate a partnership known as “G E Shnier Co” and “Eagle Distributing Co” but same will no longer be owned by the five corporations, it will now be owned by Trusts for children and wives.

As I say, I’ve tried to work it out every whichway, and no matter which technique I try, I still keep running into the dangers of Section 21 and 22 and all their horrible sub-sections, as well as some of the problems of Section 63(2).

My proposal for re-organization, basically, is as follows:

fc 4. In the next few months, each of the five Gesco individuals, namely,

Irving, Norman, Phil, Cecil and Allan will each cause to be created a “leaping discretionary Trust”. That is, a Trust will be created for the wife and children of each of them which would have three Trustees, being the male parent and two strangers.

2. The nature of the proposed Trusts for the infants and wives in each case will be almost identical. The Trust will have extremely broad powers of investment, with the Trustees having almost unfettered discretion. There

will be no Settlor, merely a Declaration of Trust using the money loaned by each male parent to the wives and children (the Dunkelman case would seem to clear us on this point). There will be no gifts or settlements made upon the Trusts but all funds which the Trust may require (if any) will be provided by loans to the Trusts. The Trust will provide that. unless the Trustees unanimously otherwise decide, in each year, the income of the Trust will be allocated (but not necessarily paid) to be beneficiaries of the Trust in equal proportions. The trust will be discretionary, in the sense that the Trustees (acting unanimously only) will be entitled to add beneficiaries to the Trust, drop beneficiaries, and vary the proportions of beneficiaries from time to time, provided that under no circumstances can the Trustees name themselves as beneficiaries.

(c) That is, George E Shnier & Co Ltd, who has now taken over ownership of “G E Shnier Co/”, momentarily, will now enter into a limited partnership to carry on that business with the five Trusts. Gesco Ltd, will contribute its capital, being the business, and each of the limited partners (being each of the Trusts) will contribute the sum of $5,000.00 to constitute the capital of the limited partnerships. The profits of the limited partnership will be split equally amongst all of the partners. The question of Board of Directors etc, voting etc, and control, will be settled in a later memorandum.

9. The obvious, and incidental tax effect of this is fairly obvious. Take the Irving Shnier Trust, for example, because he has only two children, while Norman has three, Phil has four and 3/5ths, Allan has three, and Cecil apparently has an indeterminate number of children, the effect on Irving Shnier’s family is a good guide. Since the Trust itself is taxed as an individual, it can earn, say $12,000.00 for itself, and earn $12,000.00 for each of Eleanor and the two children, therefore, each Trust can earn a minimum of $48,000.00 and still be taxed effectively at about 21% and of course, Gesco Ltd, can be taxed at 23% up to $35,000.00. Thus, this arrangement would permit the Gesco organization to earn $275,000.00 per year and still be taxed at an approximate rate of 22%.

11. I recognize that there are many refinements that can be put into this plan, one of which being the possibility that the men should re-take ownership of George E Shnier & Co Ltd to assure themselves of absolute control, notwithstanding that they, in fact, control the five Trusts. I will be very interested to have your comments on the question of other refinements that you might suggest.

12. As I suggest, there will be no external changes, as far as the trading public or the office staff or accounting divisions are concerned, because there will be still “G E Shnier Co” and “Eagle Distributing Co” but the only change will be that the partners will now be, instead of the five corporations, one corporation plus five Trusts for wives and children. This will provide an excellent source of cash for the wives to tax free payout their husbands their various indebtednesses and, of course, provides an excellent estate planning device. We propose to draft a very tight and detailed partnership agreement which would provide for expulsion of partners and Trusts non-voting partners etc etc, to prevent any kind of an uprising among the natives. I will go into this in greater detail at our Toronto meeting.

On October 7, 1963 the legal advisers sent a detailed document to the accountants and to the five Shnier brothers (Exhibit 39) outlining the steps to be taken. This memorandum proposed that the five Shniers would each immediately constitute a trust by a declaration of trust, that three trustees would be appointed, the principal one being the Shnier brother, and that beneficiaries would be named. The object was that the wives, children and other relatives would become cestuis que trust. A limited partnership was then to be formed consisting of the five trusts and G E Shnier Co Limited (now the appellant). The five trusts were to contribute $75,000 each to the partnership and the interest of G E Shnier Co Limited in the existing business was to be reduced in a certain manner to a similar sum of $75,000. The corp- orate partner was to be the general partner and the trusts to be limited partners. The partnership was to trade under the same name as before. At page 20 of the Exhibit an illustration gives the tax effect which might result.

I emphasize that at the date of this memorandum “declaratory” trusts were contemplated, and not “settled” trusts.

A meeting of the Shnier brothers was held in Toronto on October 20, 1963 at which the setting up of trusts was discussed, and it is from this point on there is a serious conflict in the evidence. A key question, to my mind, is whether these trusts were, in fact and in law, created by January 1, 1964. Trust deeds, bearing date December 2, 1963, were filed in evidence. There is no doubt the documents were in fact not signed until March or April 1964. The appellant’s case is largely founded on the premise that the trusts came into existence prior to January 1, 1964, that a limited partnership as described was entered into and became effective on that date. Declarations and certificates of limited partnership (purportedly effective January 1, 1964) as required by the provincial statutes were filed with the appropriate authorities in British Columbia, the prairie provinces and Ontario. If the trusts did not exist in fact and in law on the date in question, then no limited partnership came into existence, regardless of what all the subsequent documentation may indicate.

It is necessary to examine the evidence in some detail.

Cecil Shnier, called on behalf of the appellant, testified that at the October 20 meeting it was decided to have non-resident persons as settlors of the trusts and a different settlor for each trust. He at one time had lived in Oklahoma City where another brother, Jack Shnier, lived. Jack had married his cousin Esther. Her mother, Anne Rose, also lived in Oklahoma City. There was another relative, Peggy Cooper, a second cousin. Her husband, Aubrey Cooper, a dentist, had been a friend of Cecil before the Coopers had married.

Cecil said that shortly after the Toronto meeting he telephoned his brother Jack and explained in some detail what was proposed: that for the future of the families and for family planning these trusts would be set up for the benefit of the wives and children, certain property of the Shnier brothers would be transferred to the trusts and part of the brothers’ interest in the business would be put into the trusts. Cecil said he spoke with Esther Shnier as well and he asked Jack to speak to Anne Rose along the same lines. It was also Cecil’s evidence that he made at least one subsequent telephone call approximately one month later and either after the first or second call it was understood that Jack and the various settlors would make the necessary gift to the trustees to constitute the trusts. (This later appeared to be the sum of $50.) He further said in one of these conversations he asked his brother to send cheques.

There was to be a bar mitzvah in Regina in the latter part of December, and Jack, his wife and the Coopers were going to attend. According to Cecil, Jack said he would bring the money with him to Regina. Ultimately the Coopers were unable to attend. Jack (according to Cecil) said the Coopers would send their money with him. Cecil said he had similar telephone conversations with the Coopers explaining the proposed trusts and obtaining their consent to act. In the deeds of trust, Jack Shnier appears as settlor for the Irving Shnier trust, Anne Rose for the Allan Shnier trust, Aubrey Cooper for the Cecil Shnier trust, Esther Shnier for the Norman Shnier trust and Peggy Cooper for the Phil Shnier trust. In each deed of trust the preamble states “.. . the Settlor has requested the Trustees to become Trustees . . .”. In each deed of trust there are three trustees, one of whom is a Shnier brother and the remaining two are persons selected by the Shnier brothers.

The evidence of the Oklahoma relatives was taken on commission by the respondent and read in at the trial. They were not, as one might perhaps have expected, called as witnesses by the appellant at the hearing of this case. The evidence of all five settlors is clear that they did not sign these documents until the spring of 1964. The deeds of trust were at some time signed as well by the trustees. None of the settlors can recall whether or not, when they received the documents, the other signatures had been affixed. Jack Shnier said his brother Cecil spoke with him by telephone in the fall of 1963 and asked him and his wife to be settlors and said the matter would be explained further at the bar mitzvah on December 26, 1963 in Regina. He testified further that the other settlors were selected at Regina and not in Oklahoma City by telephone. Jack said he had no prior discussion with the Coopers or Anne Rose concerning these trusts until the documents themselves were received in the spring.

Jack Shnier’s evidence is clear he had not agreed to anything before going to Regina, even as to becoming a settlor. He may have mentioned the telephone conversation to his wife but he had no discussion of trusts with the Coopers or Anne Rose before leaving Oklahoma City.

Esther Shnier testified she first heard of a proposed trust at the bar mitzvah in Regina, and her knowledge came from her husband. Anne Rose said a trust was not mentioned to her at Regina, and the first she had to do with it or the documentation of it was when she signed the deed at Jack’s request in the spring of 1964.

Aubrey Cooper said his first knowledge of any trust or of acting as a settlor was when Jack brought up the deed of trust to him in the spring of 1964 for his signature and explained it to him. Peggy Cooper’s evidence is to the same effect as her husband’s.

It was brought out in cross-examination of Cecil Shnier that he had gone to Oklahoma City just prior to the taking of the commission evidence and had endeavoured to refresh the memory of the Oklahoma relatives, presumably to accord with his version of what had occurred. I cannot accept Cecil’s evidence of his telephone conversations with Esther, Aubrey and Peggy requesting them to act as settlors. His solicitors, in a letter dated October 29, 1963 (Exhibit 64A) to the auditors, with a copy to all of the Shnier brothers, stated:

1. For each trust we are going to have a non-resident Settlor. We will use Jack Shnier who is resident in the United States and has been for some 25 years and proposes to continue living in the United States. The settlement will be $50.00 on each trust and each trust will purchase Government Bonds with that to make the settlement sum always identifiable.

2. George E Shnier & Co Ltd, will be an equal partner with the 5 trusts in order to avoid complications.

In my view Jack Shnier’s testimony is to be preferred and I think he describes the situation as it really was, certainly prior to the bar mitzvah:

A. The gist of it was that they were contemplating setting up these family trusts and that they would like to have me as a Settlor and my wife as a Settlor. They would explain it to me further because they knew l was planning on being in Canada that winter and that is the way it came up. . . .

A. What do you mean by “specific?”

Q. Well, you haven’t been very specific. You have said that it was simply mentioned to you by Cecil but that this had been in the minds of those people. Now was there anything else said to you, was there any arrangement made, any terms settled, anything? A. No. At that time it was a matter of—we would get together and discuss it when the other brothers arrived and we all got together.. ..

I find that as of the date of the bar mitzvah the five alleged settlors had not agreed to anything and had not at that date any intention, in the legal sense, to create a trust. For reasons which I shall subsequently outline, I find that the trusts were not in fact created until the settlors actually signed the printed documents at some date in March or April of 1964.

I shall briefly review the evidence as to what occurred in Regina. Again there is some conflict. It is suggested that Jack Shnier took $250 to Regina on behalf of himself and the other settlors, in order to make the gift of $50 to the trustees of each trust. That is not his evidence. He said he goes to Canada frequently and he has always found it much easier and cheaper from an exchange rate point of view to obtain Canadian currency in Oklahoma before he leaves on a trip. He followed that same pattern in December of 1963. He took four or five hundred. dollars in Canadian money with him. At some stage he gave $250 of his own money to someone in Regina. It eventually found its way into the hands of the solicitor who was also present, and who apparently gave it to Phil Shnier. Phil had to leave the bar mitzvah early to return to Toronto. The solicitor and Cecil Shnier say there was a draft trust deed brought to Regina, and the nature of the trust and its terms were explained to the three settlors who had gone to Regina. I accept Jack Shnier’s evidence that any discussions were with him alone, other than what he may have told his wife, and that he did not see a draft trust deed. I reject the evidence of witnesses called on behalf of the appellant who testified otherwise.

In my view, all that really transpired at Regina was that Jack Shnier was told of the general nature of the proposed trusts, that he would endeavour to have his wife, his mother-in-law and the Coopers act as settlors, that the documents would be eventually sent to him, and if everyone were agreeable, they would be signed.

I quote from his evidence:

Q. Now then what happened there with reference to the Irving Shnier Family Trust? A. It was discussed that these trusts would be set up, that we would find these Settlors and myself would be one of the Settlors, my wife would be another, my, mother-in-law, Anne Rose, would be a third Settlor, Peggy and Aubrey Cooper would be Settlors.

Q. Were the Coopers at that Bar Mitz’vah? A. No.

Q. Was your wife, Esther, there? A. Yes.

Q. And was Anne Rose at the Bar Mitz’vah? A. Yes.

Q. Was she present at these discussions? A. No.

Q. So do I have it at the time the money was paid over at the Bar Mitz’vah, none of those people knew that they would act as Settlors or had consented to do so? A. Well, possibly—I wouldn’t say for sure because I discussed it with my wife.

Q. All right, let’s exclude your wife for the moment, how about the others? A. No, I don’t think so.

Q. In fact, did you know whose family you were settling at that time? A. That I was?

Q. Yes. A. I figured possibly I would be—from the discussion that I would be an Irving Settlor, a Settlor on his.

Q. Well, had that been finally decided or is that something that you presumed? A. Well, in the matter of explanation and discussing, it was possibly brought up and maybe it was named but I can’t specifically say that it was said. We discussed this and discussed who would be the Settlors for each but for me to say actually it was set up ahead that now we agreed on this and we agreed on that, at the time l couldn’t remember just exactly whether that was said or not.

Q. Now as far as Aubrey and Peggy Cooper are concerned, the first they ever heard about their participation in the trusts was actually when you came back from Regina? A. Yes. We had discussed it and I told them I didn’t think there would be any problem in having them sign as Settlors.

Q. You had discussed this with your brothers? A. With my brothers. It was my—during the discussion.

Q. Well, that’s all right but let’s now talk about the Coopers—A. Yes.

Q. —when you came back from the Bar Mitz’vah, this was the first knowledge they would have had? A. I would say so.

I am satisfied that these settlors had no part in the selection of the trustees who were ultimately named. In fact some of the settlors testified they still do not know who some of their trustees were or what they did. I am also satisfied the settlors, up to the time of receiving the deeds, did not know the name of the particular family for which they were creating a trust.

Jack Shnier was never repaid $50 by any of the other settlors for whom he allegedly advanced funds. Receipts dated December 19, 1963, signed on behalf of the particular family trust by the particular brother, in favour of the five settlors, were filed as exhibits. That date is, to my mind, meaningless, as is the case with the dates on many other documents filed as exhibits in this litigation. Jack Shnier says he was never given any receipts. Those filed as exhibits at trial, I was told, did not come from the possession of any of the settlors.

Before turning to the actual signing of the trust deeds by the settlors, I point out there is no evidence from the co-trustees that as of January 1, 1964 they had agreed to act or had been requested by the settlors to act as such. The five trust deeds, each 73 pages in length, were sent from Winnipeg by Cecil to Jack. Before any of the settlors signed them, Jack had his own attorney review them. That is a significant fact. From the testimony of Jack Shnier and Aubrey Cooper, I think a strong inference can be drawn that none of the settlors would have signed the document if the attorney had advised against it. I quote from the evidence of Cooper:

Q. Can you tell me where it was signed? A. To the best of my knowledge, it must have been in Oklahoma City.

Q. And how did the document come to you? A. Well, Mr Jack Shnier approached me and said—and tried to explain what a trust was and all that and said that they needed some people from—they needed some relatives to sign this, they needed me to sign. I don’t know, they might have needed more to sign up from the city. He said he had checked with his attorney, who was in Norman, Oklahoma, and that, you know, it was all right to sign.

The female settlors merely followed the advice of Jack and signed the deeds, not really knowing their contents or effect. To create a trust, the settlor must have intended the trust property be held in trust for ascertainable beneficiaries (Snell, Principles of Equity, 26th ed, pp 127-8; Underhill, Law of Trusts and Trustees, 12th ed, p 19; Lewin on Trusts, 16th ed, p 41). Here, on the facts as I see them, and I so hold, the settlors did not evince any intention, either in fact or in law, to create the trusts relied on in this case until the date they signed the deeds.

Counsel for the appellant submitted that if I arrived at that conclusion, then “declaratory trusts” came into being prior to January 1, 1964.* [2] On December 24, 1963 Shnier opened five bank accounts for the family trusts, depositing $10 in each. On December 30 a further $40 was deposited in each account (the $250 received from Jack Shnier less the earlier $50). On December 31 the bank credited each family trust bank account with $75,000. I shall not go into the details of how the $75,000 found its way into each account. It was allegedly for the purpose of buying into the partnership. In my view, it was in reality a bank book-keeping transaction giving the appearance of substituting family trusts for the corporate partners. It is contended, as I understand it, that by becoming trustees and opening these bank accounts and controlling these sums on behalf of beneficiaries, the brothers and their co-trustees created a trust. In my opinion no so- called “declaratory trusts” came into existence. In any event, these are not the trusts relied upon in this case, nor are they the trusts relied upon in all the documents tendered to support the limited partnership in question. The declarations of limited partnership are based on the “settled trusts’, not some vague “declaratory trusts”.

In view of my findings expressed earlier, I hold that no limited partnership as contended came into existence and the appeal must therefore fail.

Counsel for the respondent argued alternatively that if in some manner the settled trusts did come into existence by January 1, 1964, then the alleged legal result of all the documentation (a valid and real limited partnership) did not actually occur. In view of the reasons I have expressed above, it is not necessary to review the evidence and argument on this alternative submission. I, however, must say I am in general agreement with the respondent’s contention.

The appeal is dismissed with costs.