http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/182415/index.do
Evoy Estate v. The Queen (November 17, 2016 – 2016 TCC 263, Paris J.).
Précis: Subsection 104(2) is an example of a very early avoidance provision of the Act that goes back to the Income War Tax Act. It was essentially designed to prevent separate trusts from benefiting from graduated marginal rates (now only applicable in the case of some testamentary trusts) where the terms of the trusts were designed such that “the income accrues or will ultimately accrue to the same beneficiary or group or class of beneficiaries”. This appears to be the only reported decision on the provision.
Mr. Evoy’s will contained trusts for each of his three children and their respective families. His widow had a life interest in each of the three trusts. The trusts were of a sort commonly used in wills and contained essentially identical terms apart from applying to different children and their lines. CRA purported to assess the trusts as one under subsection 104(2) since during the years in question (2008, 2009 and 2010), Mr. Evoy’s widow was still living and received the income from all three trusts. In the alternative CRA argued that the children and grandchildren of Mr. Evoy formed a “class” sufficient to cause subsection 104(2) to apply to all three trusts. The Estate appealed to the Tax Court which in a very sane and balanced decision rejected CRA’s arguments and allowed the appeal with costs.
Decision: The provision in dispute was subsection 104(2):
(2) A trust shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for that person’s own income tax, be deemed to be in respect of the trust property an individual, but where there is more than one trust and
(a) substantially all of the property of the various trusts has been received from one person, and
(b) the various trusts are conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary, or group or class of beneficiaries,
such of the trustees as the Minister may designate shall, for the purposes of this Act, be deemed to be in respect of all the trusts an individual whose property is the property of all the trusts and whose income is the income of all the trusts.
The Crown argued that the test must be applied in each taxation year and during 2008, 2009 and 2010 Mr. Evoy’s widow, Pauline, received all of the income from each trust:
[7] The Respondent submits that the test in paragraph 104(2)(b) must be applied on an annual basis to determine whether, in the particular taxation year, the income of the trusts accrues to the same beneficiary or will ultimately accrue to the same beneficiary, or group or class of beneficiaries. This is because liability for income tax is determined on an annual basis for a taxation year.
[8] The Respondent also submits that in any taxation year should the income from the trusts no longer accrue to the same beneficiary or group or class of beneficiaries, the Minister would have the power to re-designate under subsection 104(2). Counsel maintains that the power to designate is discretionary and the Minister may re-exercise that discretion if the conditions in that provision are no longer met.
[9] In this case the Respondent says that it is clear that during the years under appeal, the income from each of the three trusts accrues only to Pauline, and therefore the condition in paragraph 104(2)(b) is met for the years under appeal.
The Court rejected this argument, particularly the proposition that the Minister had some sort of inherent power to re-designate a trust (after the death of Mr. Evoy’s widow, for example):
[14] In the case before me, the text of paragraph 104(2)(b) appears to contemplate a consideration of the right to receive the income of the trust over the entire lifetime of the trust rather than for each taxation year. The inclusion of the wording “or will ultimately accrue” supports this conclusion. It is difficult to see how the use of the phrase “or will ultimately accrue” can be reconciled to a test that would only apply for one particular taxation year at a time.
[15] Furthermore, there is nothing in that provision that would suggest that the test is applied annually, as the Respondent contends, and would require the reading in of an annual test that does not appear on the face of paragraph 102(4)(b).
[16] Another flaw in the Respondent’s argument is that there is no power given to the Minister to re-designate a consolidated trust as multiple trusts in the event that the conditions set out in paragraph 104(2)(b) are no longer met in a subsequent taxation year, nor is any process for applying for a re-designation provided. The Respondent’s counsel says simply that since the Minister has the discretion to designate multiple trusts to be a single trust, it should be inferred that a discretion to re-designate also exists. Again, on a plain reading of subsection 104(2), no such discretion is given.
[17] I would also note that subsection 104(2) sets out the general provision deeming a trust to be an individual for the purposes of the Act. That deeming provision is not concerned with any annual process or review of the trust, and so I find it less likely than not that the tests set out in paragraphs 104(2)(a) and (b) would be premised on an annual determination either.
The Court also rejected the Crown’s alternative argument that the children and grandchildren of Mr. Evoy were a “class” sufficient to cause subsection 104(2) to apply to all three trusts:
[24] However, even accepting that the children and grandchildren of the testator form a class for the purposes of subsection 104(2), the difficulty faced by the Respondent here is that none of the trusts have the same children and grandchildren of the settlor as residual income beneficiaries. In other words, the entire class of children and grandchildren are not income beneficiaries of each trust. Rather, a different part of the class is named in each of the trusts. There are no “cross-over” beneficiaries amongst the children and grandchildren of the testator in any of the three trusts. Therefore the trusts are not conditioned so that the income will ultimately accrue to the same group or class of beneficiaries.
[25] Insofar as the Respondent suggests that it is not necessary that each trust have the same beneficiaries in each trust and that it is sufficient that the beneficiaries of each trust are members of the same group or class, I do not believe that this can be supported on the language of paragraph 104(2)(b) which refers to “the same group or class” and not to “members of the same group or class.”
As a consequence the appeal was dismissed with costs.