Clearwater Seafoods Holdings Trust v. R. – FCA: Where Trust Dissolved Rule 29(1) of the Tax Court Rules Permits Substituted Appellant

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Clearwater Seafoods Holdings Trust v. The Queen
[1] (July 8, 2013) dealt with the novel question of how to deal with an existing tax appeal when the appellant trust had ceased to exist.  The material facts are set out in the decision of the Tax Court:[2]

Summary of Facts

[5]              The Trust filed an appeal with the Court on June 10, 2011 in respect of reassessments issued for its 2002 and 2003 taxation years.

[6]              The reassessments increased the income tax payable by the Trust. The Trust has not paid the additional taxes assessed by the Minister.

[7]              The Trust was involved in a plan of arrangement that was drawn up under section 192 of the Canada Business Corporations Act and whose implementation was completed on October 2, 2011 (the “Plan of Arrangement”).

[8]              The parties did not inform the Court of what the actual activities of the Trust had been prior to the execution of the Plan of Arrangement. Article 2.5 of the Declaration of Trust states that the Trust is a limited purpose trust. Article 4.1 of the Declaration of Trust sets out the trust’s purposes, which appear to relate primarily to the purchase and holding of securities and the holding of cash.

[9]              Prior to the implementation of the Plan of Arrangement, all of the units of the Trust were held by Clearwater Seafoods Income Fund (the “Fund”), an unincorporated open-ended investment trust governed by the laws of Ontario.

[10]         As a result of changes in the taxation of income trusts, the Fund and the Trust (together with certain investors in the Fund) entered into the Plan of Arrangement. The purpose of the plan was to convert the income trust into a corporation.

[11]         On October 2, 2011, in the course of implementing the Plan of Arrangement, Seafoods Inc. acquired all of the units of the Fund, and all of the unit holders of the Fund became shareholders of Seafoods Inc. Immediately following this step, the following occurred:

−         the Trust distributed all of its assets to the Fund and the Fund assumed all of the liabilities of the Trust; and,

−         the Fund then distributed all of its assets to Seafoods Inc. and Seafoods Inc. assumed all of the liabilities of the Fund.

[12]         The Plan of Arrangement states that after the Trust distributes its assets to the Fund and the Fund assumes all of the liabilities of the Trust, “[ . . . ] the Trust will be dissolved in accordance with applicable law and the [Trust’s] Declaration of Trust.”

[Footnotes deleted]

The Trust took a motion in the Tax Court for a direction pursuant to section 29 of the Tax Court of Canada Rules (General Procedure) to allow the appellant to be changed to Clearwater Seafoods Incorporated (“Seafoods Inc.”) (the recipient of all the Trust property).  The  Tax Court dismissed the motion on the basis that Seafoods Inc. was not the assignee of the rights to pursue the existing tax appeal:

[32]         That Seafoods Inc. may now have the legal obligation, as between itself and the Trust, to pay any income tax debt of the Trust does not change the fact that any such debt is still owed by the Trust to the Crown. Further, the assumption/assignment of any such debt does not result in the transfer by the Trust of its rights of appeal in respect of the relevant assessments.

The appellant Trust appealed from that decision to the Federal Court of Appeal.

The Court of Appeal first stated:

[4]               It is common ground that the Taxpayer Trust ceased to exist when it ceased to own any property. However, the transactions described above did not automatically put an end to the Taxpayer Trust’s income tax appeal.

The Crown’s position was that the appeal should be dismissed for want of an appellant and that the underlying issue could be resolved in new assessments issued against either the transferee of the trust property or the former trustee:

[7]               The Crown opposed the Rule 29 motion, mainly on the basis that the appeal cannot be continued because the taxpayer has ceased to exist. The Crown’s position is that the merits of the Taxpayer Trust’s income tax appeal should not be determined in the tax appeal now pending in the Tax Court. Rather, that appeal should be dismissed for want of an appellant. Then, if Minister issues one or more assessments under subsection 160(1) or 159(3), those assessments may be appealed. It is now well established that in an appeal of such derivative assessments, the correctness and validity of the underlying tax assessment can be raised: Gaucher v. Canada (2000), 264 N.R. 369, 2000 D.T.C. 6678, [2001] 1 C.T.C. 125 (FCA).

The Court of Appeal held that Rule 29 conferred a discretion on the Tax Court to name a substitute appellant and remitted the matter back to the Tax Court with directions as to the manner in which that discretion should be exercised:

[13]           In my view, there has been in this case a transmission of the liability of the Taxpayer Trust to another person by “other means” – which I take to include the termination of the existence of the taxpayer. The disposition of property of the Taxpayer Trust resulted automatically in the termination of the Taxpayer Trust and the transmission of its federal income tax liability to one or more other persons. That is a sufficient basis for concluding that the circumstances are within the language and intended purpose Rule 29(1).

[14]           Once a notification is made under Rule 29 and it is determined that the circumstances are within the scope of Rule 29(1), the Chief Justice or a judge designated by him must make the directions required by Rule 29(3). The content of such directions is a matter of judicial discretion, and may well vary from case to case. Therefore, I consider it appropriate to return this matter to the Tax Court so that the motion filed on behalf of the Taxpayer Trust may be reconsidered with a view to directing the continuation of the proceedings.

[15]           For these reasons I would dismiss the motion to adjourn, without costs. I would allow the appeal with costs, set aside the order of the Tax Court of Canada dated June 1, 2012, and refer this matter back to the judge, or any other judge designated by the Chief Justice of the Tax Court of Canada, for reconsideration in accordance with the following directions:

(1)         The appeal in the Tax Court is to be allowed to continue if there is a person or group of persons who may appropriately be named as the appellant in the place of the Taxpayer Trust.

(2)         In determining whether there is a person or group of persons who may appropriately be named as the appellant in the place of the Taxpayer Trust, the judge is to consider all relevant factors including, without limitation, the following:

                                             a)                        whether the person or group has the legal and financial capacity to retain and instruct counsel in this appeal, and has undertaken to do so;

                                             b)                        whether the person or group has ability to ensure the completion of pre-trial discoveries in accordance with the relevant rules of the Tax Court, and has undertaken to do so;

                                             c)                        whether the person or group has the financial resources to pay the costs of the appeal in the Tax Court in the event the appeal is unsuccessful, and has undertaken to do so.

(3)         In the reconsideration, both parties should be permitted to present fresh evidence relating to the factors listed above, as well as any other factors that they consider relevant to the application of Rule 29.

(4)         Any award of costs of the motion and the reconsideration are to be determined in the discretion of the judge who reconsiders the motion.

This decision clearly represents a commonsense application of Rule 29 and is intended to eliminate unnecessary duplicative litigation.

Comment:  As a purely academic matter the assumption of both parties that the trust ceased to exist upon the distribution of all of its properties seems suspect.  Apart from the obvious question of who is the moving party on this motion, there is the more fundamental question whether a trustee can resign its office when still holding a trust asset (i.e., the right of appeal) which is inalienable;  that is, if the right to pursue the tax appeal cannot be alienated then it remains a trust asset held for the benefit of the trust beneficiaries.  Even if a trustee purported to abandon that asset and claim that the trust had ceased to exist the court would not normally permit that and would generally be prepared to appoint a new trustee to complete the terms of the trust, i.e., pursue the tax appeal for the benefit of the trust beneficiaries.  If all of the trust beneficiaries, being cognizant of the issue, directed the trustee to terminate the trust and abandon the right of appeal, then arguably Rule 29 should not be available to them.

[1] 2013 FCA 180.

[2] 2012 TCC 186.