http://www.canlii.org/en/nl/nlsctd/doc/2015/2015canlii34016/2015canlii34016.html
Discovery Trust v. Canada (National Revenue) (June 18, 2015 – 2015 CanLII 34016, Thompson J.).
Précis: The Discovery Trust was settled by the late Mr. Dobbin 2002. In 2006 he arranged to have its residence moved from Newfoundland and Labrador to Alberta by means of an amendment to the trust document, change of trustees and moving the trust assets to Alberta. The trust filed as a resident of Alberta after the date of the move. The Minister reassessed the trust for its 2008 taxation year additional Newfoundland and Labrador tax of $8,845,191.69 and arrears interest of $1,447,861.68. The basis for the reassessment was that the trust was alleged to be managed and controlled by the children of the late Mr. Dobbin, a majority of whom were residents of Newfoundland and Labrador. The trust appealed to the Supreme Court of Newfoundland and Labrador Trial Division (General) pursuant to the Income Tax Act S.N.L. 2000, c. I-1.1.
In a nutshell the Court held that the move of the trust’s residence had been effected by the late Mr. Dobbin and there was nothing untoward about it. The trustee’s subsequent consultation with beneficiaries was a normal part of its functions and did not change its residence. The appeal was allowed with costs.
Decision: The Minister’s argument was simple:
[12] The Respondent relies upon the assumption that the beneficiaries of the Trust not only approved the transactions affecting the Trust but made all the decisions concerning the management and control of the Trust and that Royal Trust as Trustee was directed by them, directly or indirectly, by their advisors in investment decisions in the ultimate distribution of the Trust and in the administrative tasks associated with the Trust.
[13] Alternatively, the Respondent argues that the facts supporting the Minister’s position are consistent with the control and management of the Trust by the beneficiaries.
The Court made short work of that argument. On the question of consultations with the beneficiaries the Court was very clear that they did not alter the trust’s residence:
[57] I accept the view that the risk is minimal and the duration short. However, I do also note that this is the first time as between the Trustee and the beneficiaries that cash is on deposit in the Trust. In my view, raising the proposed intended disposition of that cash which then resides in the Trust to cover the tax liability ought not to attract consideration of the Trustees election to consult with a client beneficiary as an abdication or delegation of its authority or responsibility under the Trust. It is prudent for the Trustee to engage this discussion with the beneficiaries, particularly when the Trustee has, for the first time, control over the choice of investment for return to the beneficiary.
Moreover the Court held that the Minister was motivated by an improper purpose, an overreaching negative view of the tax minimization motive at play:
[69] There is no question that the investigation was detailed. Documentation was effectively scrutinized as was appropriate. Notwithstanding, I do not have confidence that the discernment of the information by which the inferences were made supporting the Minister’s position were not impacted by the overreaching negative view of the motive for minimization of tax. I have to conclude that improper motive entered the discernment process and compromised in an apparent manner the integrity of an independent rationale for the findings upon which the reassessment could be based.
Finally the Court concluded that there was no evidence that the trust was resident in Newfoundland and Labrador rather than Alberta and allowed the appeal with costs:
[70] It is clear that the Settlor, Craig L. Dobbin, intended by the instrument of Trust that the residency of the Trust be Alberta. As well as the Trustee, Royal Trust understood, and as the Trust’s instrument itself declared, the residency of Alberta would serve to attract tax at the Alberta rates. It is accepted that a taxpayer has the right to order its affairs as it sees fit to minimize tax payable (Commissioners of Inland Revenue v. Duke of Westminster, [1936] AC 1 (HL).
[71] It is also clear that the law firm of Osler prepared the Trust Instrument for the Settlor. It is clear that two estate tax freezes served to give value to the Trust from the Settlor. These two freezes again were prepared by the law firm of Osler.
[72] It is also clear that the Estate Plan and the Trust were prepared with a view to the disposition of CHC Corporation after the Settlor’s death and the movement of the value of the shares held by DHI through the Trust to its beneficiaries. Again, as noted, this was prepared by the law firm of Osler.
[73] It is clear that following the Settlor’s death and the sale of CHC Helicopters, Osler prepared the documentation. Notably, the procedure followed by Osler to effect the transfer of funds to the Trust and its beneficiaries was mandated by the provisions of the Trust.
[74] It is also clear that the beneficiaries had not participated in the preparation of the Trust. Nor had they participated in the completion of the various processes by which the Trust received its interest and value and the proceeds of ultimate disposition of that interest and value.
[75] It is clear that Keith Stanford, but for the preparation of a draft Income Tax Statement for the tax year 2008, did not originate or direct the process by which the Settlor created the Trust nor did the law firm of Osler which gave effect to its provisions in the plan previously established.
[76] Mr. Stanford however did have an understanding of the legal process from a business perspective sufficient to explain to the beneficiaries the nature of the documents to which each subscribed in the transactions by which Royal Trust came be to Trustee, the estate freezes completed and the transfer of funds on sale of CHC Helicopters Inc. effected.
[77] As I have noted, the Trust, the estate freezes and the ultimate value attributed to the Trust and paid out originated in the Settlor. It was the Settlor who caused Osler in Montreal and Calgary to act as it did in completing the Trust instrument. The true source for the standing of the Trust and its sole mandate was in the Settlor.
[78] I cannot conclude that the amended stated residence of this Trust as Alberta has been altered by the facts. There is no substantial decision by which control can be said to have moved to another party other than is found in compliance with that amended Trust document.
[79] Royal Trust succeeded as a Trustee of that instrument and as legal representative complied with its provisions, confirmed that the documentation prepare by Osler conformed to the Trust, received the funds from the sale of CHC Helicopters Inc. in 2008, as the only party legally entitled, received and paid the funds to the beneficiaries, subject to holdback, as was its legal obligation.
[80] From the time of the appointment of Royal Trust in 2006 by the late Craig L. Dobbin when his health issues appear to have required more detailed planning of his estate, including the appointment of a professional Trustee to replace his own children who were until then both Trustees and beneficiaries, and the choice of Alberta residence, the privately held corporate shares resided in the Trust until the sale of CHC took place. Nothing unusual took place until, as planned, the privately held shares were converted to cash after that sale in 2008.
[81] For the foregoing reasons I have concluded that the assumptions of the Minister that the beneficiaries directly or indirectly managed or controlled this Trust at the relevant times has been displaced by the evidence. Further, the evidence does not support that management and control directly or indirectly being in the beneficiaries.
[82] I conclude the residence of the Trust not to have changed from the residence of choice, Alberta.
[83] For all of the foregoing reasons, the Appeal is allowed.