The taxpayer settled a trust governed by U.S. law (the “Family Trust”) for the purpose of ensuring that its property could be rolled into separate trusts for the benefit of others upon his or his wife’s death without going through probate. He testified that the Family Trust did not hold any property but was merely an instrument to hold three sub-trusts: the husband’s, wife’s and joint property trust. He transferred his own property to the husband’s trust.
The Family Trust entered into a Partnership Agreement to become a limited partner and then through its “trustors,” i.e., trustees (the taxpayer and his wife) signed a separate declaration of trust declaring that the Family Trust held the limited partnership interest as bare trustee for the husband’s and wife’s trusts as to respective 90% and 10% interests.
The taxpayer claimed the partnership’s loss as his own loss as to a 90% share.
Lamarre J accepted that the Family Trust held the partnership interest as bare trustee for the husband’s and wife’s trusts. In finding that the husband’s trust also was a bare trust respecting the partnership interest, so that its share of the losses flowed through to the taxpayer individually, she stated (at paras. 46-48):
According to the Declaration of Trust, the appellant, as trustee of the husband's trust, is to accumulate or distribute the net income and principal thereof as the husband may direct from time to time. Under that same Declaration of Trust, the beneficiaries are the trustors while both trustors are alive.
Furthermore, while both trustors are living, only the husband has the power to revoke the husband's trust and, should he exercise it, the trustee must deliver to the husband any separate property in the husband's trust (the same applies to the wife's trust). It seems to me, therefore, that the appellant can cause the husband's trust's share of the Partnership interest to revert to him at any time….
It is therefore difficult to say that the trustee has significant powers or responsibilities and can take action without instructions from the settlor, or that the trustee is not subject to the control of his beneficiary, since the appellant in fact plays the roles of all three of the constituent parties to the trust: he is the settlor, the trustee and the beneficiary of his own trust.