Sachs v. The Queen, 80 DTC 6291, [1980] CTC 358 (FCA)

Thurlow, CJ:—The issue in this appeal and the relevant facts are set out in the reasons for judgment of Mr Justice Heald which I have had an opportunity to consider. I also reach the conclusion that the appeal fails but for somewhat different reasons.

I shall deal first with my view of the interpretation of subsection 75(1) of the Income Tax Act. It has been said in Fasken Estate v MNR, [1948] Ex CR 580; [1948] CTC 265; 49 DTC 491 and in J B Dunkelman v MNR, [1960] Ex CR 73; [1959] CTC 375; 59 DTC 1242 that the provision is to be strictly construed. That means that it is to have effect only when its application to the facts is clear and that the language is not to be extended to situations not strictly within the language used but within some supposed purpose or intendment of the provision. The subsection must be read as a whole to determine its application. But the wording is not technical and its interpretation should not be approached as if it were technical. Nor should it be construed as if it turned on the niceties of distinctions as to the vesting of property which have been developed and recognized by courts of equity. It must be borne in mind that the subsection applies in Quebec, where the basic property law is that of the Civil Code, as well as in the parts of Canada where the tradition of the common law prevails.

In the course of explaining the applicable provisions, in both Fasken and Dunkelman, the word “vest” was used. It was said that all that was necessary was that the transferor so deal with his property as to divest himself of it and vest it in a person referred to in the provision. But in neither case was there occasion to use the word in a technical sense. In particular there was no occasion to use it as distinguishing between rights that are vested and rights that are contingent.

The subsection does not use the word “vest”. Nor does it distinguish between what is vested in possession, vested in remainder, vested in interest, vested absolutely, vested but subject to defeasance, and what is contingent or suspensive. What its initial wording says is: “Where a taxpayer has, since 1930, transferred property to a person who was under 18 years of age, either directly or indirectly, by means of a trust or by any other means whatever..All that this calls for is a taxpayer, transferor, and a transfer of property by him by any means to a recipient who was under 18 years of age. It is not necessary, in order to fall within this wording, that all of the rights to property transferred become immediately or even eventually the property of the recipient who is under 18 years of age. But it is apparent from what follows the opening words that the subsection is concerned only with the property transferred to the person under 18 years of age and with income from that property. On the other hand “property” is defined in subsection 248(1) as including “a right of any kind whatever”. Both Fasken and Dunkelman (supra) were concerned with whether property had been transferred in the sense of the statutory provision. Here the question arising on the opening words is not whether property was transferred but whether property or rights in property were transferred to a person under 18 years of age.

To determine this, the subsection must be read in relation to the taxation years in question. The subsection applies if property was transferred at any time after 1930 to a person who at the end of 1975 or 1976 had not reached 18 years of age. In the years 1975 and 1976 there were three sons of the appellant who were objects of the trust who had not yet attained that age. The application of the wording I have quoted, therefore, in my opinion, depends on whether the appellant, by the device of the trust, transferred property to them.

In my view, it makes no difference that there was but one child at the time of the creation of the trust. The two born afterwards were also plainly within the class of beneficiaries in 1975 and 1976 and they were members of the class of beneficiaries as a result of the creation by the appellant of the trust and the transfer by him of property to the trustee.

Viewing the matter broadly and stripped of legal concepts I find it difficult to see any answer but that, within the ordinary meaning of the words of the subsection, as applied to the situation in 1975 and 1976, the appellant had by means of the trust transferred property to his three children who in the taxation years in question were under 18 years of age. It seems to me that from the point of view of the appellant and of his children the answer to the question whether he had transferred property to them would be affirmative as it would also be from the point of view of a casual observer.

I turn now to what it was that was transferred to the children. Again it is the situation as of 1975 and 1976 that must be considered. The property transferred by the appellant consisted of shares of Glacier Realties Limited and in the way in which the trust was worded the deed dealt separately, but not differently, with the property rights in the shares as capital and with the income to be derived therefrom. The relevant clause of the deed is set out in full in the reasons of Mr Justice Heald and I shall not repeat it. Under it (save to the extent to which the discretionary power to pay to the children or some of them was in fact exercised) the trustee was not merely authorized but was required to accumulate the income and add it to the capital until December 1,1991, when both capital and accumulated income were to be divided into as many shares as there were then children of the appellant and therefore to keep “the share from (sic) each such child invested” and ‘‘to pay income and capital to such child upon such terms and in such manner as” was thereinbefore provided until the child should attain the age of 25 years, then to pay the child /3 of his share, retain the remainder of such share upon the same trust until he reached 30 years of age and then pay it to him absolutely. This in my view is a trust for the appellant’s children giving them a present beneficial interest in the capital and income but with payment or delivery deferred in the case of each of them in part until he reaches 25 years of age and for the remainder until he reaches 30 years of age. There is discretionary power in the trustee to divert capital or income or both from one child to another and there are provisions under which upon the death of a child prior to his reaching the age of 30 years his interest may pass to his children or to other children of the appellant and there is finally provision for an event where by reason of the death without issue of children of the appellant prior to their reaching 30 years of age the trust estate would pass to the appellant’s wife, but while the rights of each child are subject to these provisions I do not see this as affecting the present right of the three children, as the members of the class, in the capital and in the income of the trust for 1975 and 1976 as conferred on them by the trust deed subject to the possibility that they might later be deprived of it under such provisions. I should add that I think this view of the present right of the children draws support from the presence in the deed of provisions for the disposition of the share of a child dying without issue before the distribution date in 1991.

In the course of argument, reference was made to a number of cases on vesting of property in the law of trusts and on the application of statutory provisions imposing taxes in respect of interests in trust property. These included in particular Minister of Revenue for Ontario v J S McCreath, [1977] 1 SCR 2; [1976] CTC 178 and Gartside et al v IRC, [1968] AC 553, but while these cases are illuminating as to the rights there in question in relation to the particular taxing provisions under consideration I do not regard them as applicable or as of assistance in resolving the very different questions that arise on subsection 75(1).

I should add that in my view the provisions of this trust are quite different and readily distinguished from those considered in Re Rispin (1912), 25 OLR 633, affd (1912) 46 SCR 649 where the will merely authorized the trustee in his discretion to pay income to the testator’s son during his lifetime and gave the son no rights, whether absolute or defeasible, in capital or income. The present trust deed is also readily distinguishable for the same reasons from that considered in Gartside et al v IRC (supra). Here if there is no exercise of discretion to prejudice the right of a child and if he does not die prematurely, both the capital and the income of his share must ultimately come to him.

In my view the property transferred by the appellant to the children by or as a result of the trust deed and the transfer of the shares to the trustee included the right to both the capital and the income of the trust property, subject to the provisions of the deed, and that in my opinion is sufficient to satisfy the requirements for the application of the opening words of subsection 75(1), notwithstanding that, by reason of actions or events that might subsequently occur, the three children might be deprived of it in whole or in part in favour of other members of the class of beneficiaries under the trust.

The wording of the remainder of subsection 75(1), which must next be considered, is “any income . . . for a taxation year from the property or from property substituted therefor shall . . . be deemed to be income . . . of the transferor and not of the transferee . .

In A Pichosky v MNR, [1964] Ex CR 946 at 948; [1964] CTC 177 at 177; 64 DTC 5105 at 5106, the President of the Exchequer Court (as he then was) concluded on the similar wording of the former subsections 21(1) and 22(1), the predecessors of the present subsections 74(1) and 75(1), that the income referred to is income that, but for the subsection, would be taxable as income of the transferee. The learned judge said:

In my view, subsection (1) of section 21 and subsection (1) of section 22 clearly provide only for income that otherwise would be taxable in the hands of the transferee being taxable in the hands of the transferor. I think this view is clinched by the enacting words at the end of subsection (1) of section 21, which provide that the income from the property or the property substituted therefor shall be deemed to be income of the transferor “and not of the transferee’’. Similar words are to be found in subsection (1) of section 22.

It seems to me that that interpretation is consistent not only with the wording of the subsections but with other provisions of the Act as well. Under it the transferor is liable for tax only on income in respect of which the person under 18 years of age would otherwise be liable for tax. If it were not so limited, in a case such as the present, the appellant and the trustee could both be liable for tax on the same income. In my opinion it is not open to the Crown to treat the transferee as being at one moment the person under 18 years of age and at another moment the trustee, when, under the trust, the trustee has the authority to retain and accumulate the income to a time when events may have deprived the person under 18 years of age of any right to it. In my view the interpretation in the Pichosky decision is correct. Applying it to the present case, since under the terms of the trust the income in question would not, without more, be income of the children of the appellant for the taxation years in question the subsection could not apply to make the appellant liable to tax in respect of income of the trust. Put in another way the appellant would not be liable under the subsection because the persons under 18 years of age would not themselves have been liable to tax in respect of the income of the trust as their income for the taxation years in question.

At this point, however, it becomes necessary to consider the effect of the elections, under subsection 104(14) made in respect of the 1975 and 1976 in- come of the trust. The facts with respect to them are summarized as follows in paragraph 9 of the appellant’s memorandum:

9. Preferred beneficiary elections with respect to each child were made jointly by the Trustee and each such child for the 1975 and 1976 taxation years pursuant to the provisions of the Income Tax Act with respect to the said dividends. The total amounts included in the incomes of the beneficiaries were $6,222.22 in 1975 and $12,444 in 1976.

One may wonder how the children participated in the elections but, presumably, someone did so on their behalf and for their benefit. It does not seem possible to me, however, that the income of the trust can be treated as their income for taxation purposes and still be in fact income that is subject to the terms of the trust. If it is to be treated as income of the children for the taxation years in question it must be because they are entitled to it by reason of the trustee having decided that it was to be theirs rather than to hold it subject to the trust terms under which they might at some future date be deprived of it. Apart from that, subsection 104(14) would not apply. It reads:

(14) Where a trust and a preferred beneficiary thereunder jointly so elect in respect of a taxation year in prescribed manner and within prescribed time, such part of the accumulating income of the trust for the year as is designated in the election, not exceeding the preferred beneficiary’s share therein, shall be included in computing the income of the preferred beneficiary for the year, and shall not be included in computing his income for a subsequent year in which it was paid. (Emphasis added)

In my view by making elections under this provision to avoid taxation of the income as that of the trust the trustee acknowledged the right of the children to the income and invited the Minister to assess them accordingly. That in my view could only be done on the basis that there had been an exercise of the trustee’s authority to pay the whole of the income for the taxation years in question to the children and to irrevocably confer on them the right to it. The authority to pay income to beneficiaries, in my opinion, includes the authority to declare or designate income as held for them to the exclusion of the continuance of the trustee’s authority to deprive them of it and to the exclusion of the possibility of their being deprived of it upon the happening of events referred to in the trust deed.

One further point that should be noticed is whether the income thus allocated to the children by the trustee is to be regarded as income from property transferred to them by the appellant in view of the necessity of an act by the trustee to make it irrevocably theirs. In my view, while such an act by the trustee was required, the source of the income was the property rights transferred to the children which rights included the right to the whole of the income if and when allocated or paid to them by the trustee prior to 1991. It came to them earlier by reason of the act of the trustee but was still, in their hands, the income of property transferred to them by the appellant.

I would dismiss the appeal with costs.

Heald, J:—This is an appeal from a judgment of the Trial Division dismissing the appellant’s appeal from the decision of the Tax Review Board confirming the Minister’s income tax assessments for the appellant’s 1975 and 1976 taxation years. The issue in this appeal is whether or not the income of a trust for the years 1975 and 1976 should be assessed as income of the appellant (the settlor of the trust), pursuant to subsection 75(1) of the Income Tax Act.* [1]

The appellant is a medical doctor and was, at all material times, a Canadian resident. On December 1, 1971, he established the Harold J Sachs Family Trust, naming his wife, Merida Phyllis Sachs as trustee therein. The beneficiaries of the trust were the children of the appellant and his wife. At all material times the children were under 18 and the appellant’s wife was over 18 years of age. On December 1,1971, there was only one child (born on October 31, 1971). Since then, there are three additional children, one born in 1974, one in 1975 and one in 1977.

On December 1, 1971, immediately after the creation of the trust, the appellant sold to the trustee in her capacity as trustee pursuant to the trust, all of the shares that he owned in Glacier Realties Limited (hereafter Glacier) for the sum of $40,000 to be paid by promissory note, without interest. Immediately after the sale, the trustee gave the appellant a promissory note in the amount of $40,000 dated December 1, 1971. The shares then formed part of the trust estate.

The material article of the Trust Deed for the purposes of this appeal is Article VIII which reads as follows:

ARTICLE VIII: PAYMENT OF INCOME AND CAPITAL

The Trustee shall invest and keep invested the Trust Estate until the first day of December, 1991 (hereinafter referred to as the ‘‘distribution date”) and may, from time to time, pay none, some or all of the net income derived therefrom or none, some or all of the capital thereof to or for the benefit of one, some or all of the children of the Settlor as the Trustee shall, in his absolute and uncontrolled discretion, determine; any income not so paid or applied in any calendar year to be added to form part of the Trust Estate; on the distribution date the Trust Estate shall be divided into as many equal shares as there shall be children of the Settlor then alive; any child of the Settlor who shall not be then alive, but who shall have children him or her surviving, shall be considered alive for the purposes of such distribution; the Trustee shall keep the share from (sic) each such child invested and shall pay income and capital to such child upon such terms and in such manner as hereinbefore provided until such child shall attain the age of twenty-five (25) years, whereupon one-third ( /a) of his or her shall be paid to him or her for his or her own use absolutely; the remainder of such share shall be kept invested as aforesaid and the income and capital shall be paid as aforesaid until such child shall attain the age of thirty (30) years whereupon the amount of such share remaining shall be paid to him or her for his or her own use absolutely; provided, however, that in the event that any such child shall die prior to the distribution date, or surviving the distribution date shall die prior to attaining the age of twenty-five (25) years or, having attained the age of twenty-five (25) years, shall die prior to attaining the age of thirty (30) years, leaving children him or her surviving, then the interest of such child in his or her share shall be subject to the defeasance and the share of such child or the amount thereof remaining shall be held in trust for the children of such deceased child alive at the date of such deceased child’s death in equal shares per stirpes, upon such terms and in such manner as herein provided; in the further event that such deceased child shall die in such manner as aforesaid, leaving no children him or her surviving, then the share of such deceased child or the amount thereof remaining shall be subject to defeasance and shall be held in trust for the brothers and sisters of such deceased child alive at the date of the death of such deceased child in such manner as herein provided; in the further event that there shall be no children of the Settlor alive at the distribution date or all of them shall die prior to attaining the age of twenty-five (25) years or, if one or some of them shall have attained the age of twenty-five (25) years but shall die prior to attaining the age of thirty (30) years leaving no children them surviving, to pay over the Trust Estate to or for the benefit or MERIDA PHYLLIS SACHS for her own use absolutely.

In the taxation years 1975 and 1976, the Trust received taxable dividends from Glacier. Preferred beneficiary elections with respect to each child were made jointly by the trustee and each child for the 1975 and 1976 taxation years pursuant to the provisions of the Income Tax Act with respect to the said dividends. In assessing the appellant for his 1975 and 1976 taxation years, the Minister of National Revenue proceeded on the assumption that the dividends received by the Trust from Glacier were deemed to be in- bome of the appellant and not of the beneficiaries of the Trust and his authority for this assumption is said to be subsection 75(1) of the Income Tax Act (supra).

At the hearing before us, counsel for the appellant made three basic submissions:

1. That for subsection 75(1) of the Income Tax Act to apply, it would be necessary to find a vesting of the capital of the Glacier shares in the infant children of the appellant;

2. That, on the facts of this case, there was not, a vesting of the Glacier shares in appellant’s infant children; and

3. That, in the event the Court determines that there was a transfer of property within the meaning of subsection 75(1) to a person under 18 years of age, subsection 75(1) will only operate to attribute to the appellant the income of the eldest child since that child was the only child born prior to December 1, 1971, the date of the transfer of the shares to the trustee.

Turning now to the first of these three submissions, I agree that before subsection 75(1) can apply, there must have been a vesting in the infant children. In dealing with the predecessor section of the Income Tax Act to subsection 75(1), Thurlow, J (as he then was) in the case of Joseph B Dunkelman v MNR, [1959] CTC 375; 59 DTC 1242, expressed the view that all that was necessary for the section to apply was . . that the taxpayer shall have so dealt with property belonging to him as to divest himself of it and vest it in a person under 19 years of age.* [2] In that judgment, Mr Justice Thurlow cited with approval similar views expressed by President Thorson of the Exchequer Court in David Fasken Estate v MNR, ([1948] Ex CR 580; [1948] CTC 265; 49 DTC 491), and by Lord Radcliffe in St Aubyn v Attorney General, ([1952] AC 15).

Turning now to the question as to whether, on the facts here present, there can be said to be a vesting of the property of which the taxpayer has divested himself in persons under 18 years of age, it is my view that if one were to be restricted to a consideration of the Trust Deed only, it would be clear that, because of the terms of Article VIII thereof, it cannot be said that there is a vesting in the objects of the trust. An estate is contingent if the accrual of the owner’s title depends upon the occurrence of some event.* [3] Before it can be said that a beneficiary is entitled to a vested interest, two things must concur:

(a) his identity must be established;

(b) his right to the interest (as distinguished from his right to possession) must not depend upon the occurrence of some event, [4] j-

Pursuant to this Trust Deed, no single member of the class of discretionary beneficiaries had, at all relevant times, any right to receive any portion of the income or corpus of the estate; likewise, when considered collectively, the situation is the same. The situation of a beneficiary under a discretionary trust was described by Lord Wilberforce in the case of Gartside et al v IRC, [1968] 1 All ER 121 at 134 as follows:

No doubt in a certain sense a beneficiary under a discretionary trust has an “interest”: the nature of it may, sufficiently for the purpose, be spelt out by saying that he has a right to be considered as a potential recipient of benefit by the trustees and a right to have his interest protected by a court of equity. Certainly that is so, and when it is said that he has a right to have the trustees exercise their discretion “fairly”, or “reasonably” or “properly” that indicates clearly enough that some objective consideration (not stated explicitly in declaring the discretionary trust, but latent in it) must be applied by the trustee and that the right is more than a mere spes. But that does not mean that he has an interest which is capable of being taxed by reference to its extent in the trust fund’s income: it may be a right with some degree of concreteness or solidity, one which attracts the protection of a court of equity, yet it may still lack the necessary quality of definable extent which must exist before it can be taxed.

Counsel for the respondent relies on comments made by Dickson, J in the case of Minister of Revenue for the Province of Ontario v McCreath et al, [1977] 1 SCR 2; [1976] CTC 178. In that case, the comments relied on are contained on pp 10 to 15 and relate to a consideration therein as to whether the testatrix has reserved to herself, in a Trust Deed, an interest in the corpus of the Trust so as to make it “property passing on her death” as defined in subparagraph 1 (p)(viii) of The Succession Duty Act of Ontario. In the McCreath case supra, the relevant section of the Trust Deed read as follows:

1. ...

(a) During the lifetime of the Settlor to pay or apply the whole net income of the trust fund in each year to or for the benefit of the Settlor, and her issue from time to time alive or some one or more of the Settlor and her said issue as the Trustee may from time to time in its absolute discretion determine and if paid or applied to or for the benefit of more than one of them to pay or apply the same in such proportions as the Trustee may from time to time in its absolute discretion determine.

Based on the Trust Deed in that case, Dickson, J held that the “property passing” was the equitable interest in a voting trust certificate representing 99,986 common shares in a company, which were transferred by the settlor to the trustee. He then went on to say at p 10 of the report:

If the “property” for purposes of subsection 1 (p)(viii) is such equitable interest, the next question is whether Mrs McCreath retained an “interest” therein. In all the circumstances it seems to me difficult to say that she did not reserve an interest in the property, the subject-matter of the trust. Collectively she and her children were entitled to all of the income.

He then concluded that the settlor had retained an interest in the settled property for purposes of subparagraph 1 (p)(viii) by making herself one of the possible objects of the discretionary trust. In my view, the McCreath case Supra is distinguishable from the case at bar because of significant differences in the terms of the trust deed. As noted supra from the terms of clause 1(a) of the trust deed and as observed by Dickson, J, collectively the settlor and her children were entitled to all of the income. The obligation of the trustee by clause 1(a) is . . to pay or apply the whole net income of the trust fund in each year to or for the benefit of the Settlor, and her issue . .

In the case at bar, the trustee’s obligation until December 1, 1991 is to keep the trust estate invested but there is no requirement to pay any of the income or corpus to or for the benefit of any of the beneficiaries. Even after December 1,1991, there is no vesting of any of the shares of the trust in any of the beneficiaries until they attain the full age of 25 years. Thus, the terms of the two trust deeds are quite different and since in this case collectively the beneficiaries had no entitlement to the income, it seems to me that the rationale for the statements made by Dickson, J in the McCreath case supra would not apply to the case at bar if the only matters to be considered herein were the clauses of the trust deed itself. However, in this case, in 1975 and 1976, Glacier paid taxable dividends to the trust and preferred beneficiary elections with respect to each child were made jointly by the trustee and each child for 1975 and 1976, pursuant to subsection 104(14) of the Income Tax Act.* [5] In my view, in so distributing the dividends to the beneficiaries, the trustee has exercised her discretion in favour of the infant beneficiaries thereby transferring at least a portion of the “property” of the trust to those beneficiaries. Subsection 104(14) refers to the “preferred beneficiary’s share” in “the accumulating income of the trust”. By completing the election under subsection 104(14), and by distributing dividends pursuant thereto, it seems to me that the trustee has created a vested interest in the accumulating trust income. Accordingly, on the basis of the rationale of the McCreath case supra, if the beneficiaries have an interest in the income of the trust, a fortiori, they also have an interest in the property forming the subject-matter of the trust.

Such being the case, the following comments of Dickson, J in the McCreath case supra at 15 thereof apply equally here:

The fact that a discretionary object may have no interest in property law terms because she has no “right” to a definable amount of income is irrelevant. I do not believe that the niceties and arcana of ancient property law should be fastened upon with mechanical rigidity to determine the effect of a modern taxation statute whose purpose is plain . ..

Accordingly, and for the foregoing reasons, I have concluded that there was a vesting of the subject matter of the trust, sufficient to render applicable, the provisions of subsection 75(1) of the Income Tax Act.

Dealing with the third submission by appellant’s counsel, in view of my conclusion that the vesting in this case occurred when the trustee made the election under subsection 104(14) and since that election applied to all of the infant children, I do not agree that the vesting under subsection 75(1) can only occur at the time of the creation of the trust. I therefore reject this argument.

since I agree that the Minister correctly applied the provisions of subsection 75(1) to the factual situation here present, it follows that, in my view, the appeal should be dismissed with costs.

Kerr, DJ:—I have considered the reasons for judgment of the Chief Justice and Heald, J which set forth the issues and facts. I agree that the appeal should be dismissed.

It is clear that in December 1971, the appellant established the trust in favour of his children and thereupon sold the Glacier Realties Limited shares to the trustee in her capacity as trustee, and the shares became part of the trust estate; also that in 1975 and 1976 the appellant’s infant children then living received taxable dividends from the shares. I am satisfied that by means of the trust, the appellant transferred to the said children property rights in the shares and that subsection 75(1) of the Income Tax Act applied to deem the said dividends to be income of the appellant in those years.