The testator of a testamentary trust holding shares of a company provided that an executive employee of the company had an entitlement to the income from one-fifth of those shares until the termination of her employment. When the executive (the taxpayer) was subsequently dismissed, the taxpayer sued the capital beneficiary and the trust for wrongful dismissal, oppression and wrongful depletion and termination of her income interest. A settlement agreement provided for the payment by the trust to her of $1.7 million in satisfaction of her interest in the trust. Through a numbered company, the capital beneficiary issued a promissory note to the trust for $1.7 million in exchange for the shares held for the taxpayer. The trust issued a promissory note to the taxpayer in the same amount. The trust's law firm then gave the taxpayer a certified cheque for $1.7 million to discharge the trust's promissory note.
Boyle J. found that s. 106(3) applied to the settlement payment, and therefore that s. 106(2) did not apply. The three elements of s. 106(3), that the $1.7 million was property of the trust when paid, that the alleged trust property was distributed to a beneficiary, and that the distribution was in satisfaction of the taxpayer's income interest, were all met. Boyle J. rejected the Minister's argument that the money was never the property of the trust, but rather was property of the beneficiary's numbered company. The transfer of promissory notes was a transfer of trust property. He stated (at para. 21):
Surely [the Minister] would not seriously have contested a bill of exchange involving a bank and I have been provided with no persuasive argument that enforceable promissory notes from solvent entities should be treated any differently.
Boyle J. also found that the property had been distributed to the taxpayer. He stated (at para. 22) that "[t]here is no apparent reason put forward to suggest that the term 'distributed' should not be given its ordinary meaning." Finally, he found that the distribution was in satisfaction of an income interest. He rejected (at paras. 26-27) the Minister's argument that the lump sum payment to the taxpayer, which was contrary to the existing terms of the trust, amounted to an impermissible amendment of the trust deed. The rule in Saunders v. Vautier permitted the beneficiaries and the trust to modify the operation of the trust by entering into a termination agreement.