Olympia Trust Company v. R. – TCC: Trustee of RRSP liable for tax under subsection 116(5) when purchasing shares from non-resident

Bill Innes on Current Tax Cases

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/100156/index.do New Window

Olympia Trust Company v. The Queen (December 19, 2014 – 2014 TCC 372) is an interesting decision where the trustee of various self-administered RRSPs acquired shares from non-resident vendors who did not obtain section 116 certificates. CRA assessed the trustee, Olympia Trust Company (“Olympia”), pursuant to subsection 116(5) of the Income Tax Act (the “ITA”) for the tax which the non-resident vendors should have paid on the sale transactions. Olympia claimed that it was not the “purchaser” of the shares as defined in subsection 116(3). Hence the stage was set for battle. The matter proceeded as a Rule 58 application:

[1] On April 9, 2014, Justice Lamarre of this Court issued an order directing that the following question of mixed fact and law be determined under section 58 of the Tax Court of Canada Rules (General Procedure) (“Rule 58 Question”):

Whether, on the accepted facts in this matter, as outlined in Exhibit “A” to the Amended Notice of Motion, or such other facts as the Court may accept or direct in the circumstances, Olympia Trust Company (“Olympia Trust”) is the purchaser [as defined in subsection 116(3) of the Income Tax Act (ITA)] under subsection 116(5) of the ITA.

The facts are somewhat convoluted because of the underlying purchase and sale documentation (which is set out in considerable detail in the decision) but are summarized by the Tax Court Judge as follows:

A. Relevant Parties and Transaction Description

[3] At all relevant times during the years 2000 through 2004 (the “years in dispute”) Olympia, in its business as a trust company, acted as trustee in respect of self-directed RRSP plans: well-known arrangements wherein the annuitant directs which property shall be acquired and held within the RRSP plan. In establishing an RRSP plan, each annuitant (“Annuitant”) completed a registered plan application. Olympia was responsible for implementing the instructions of the Annuitant with respect to the property to be acquired and held within the RRSP plan. In each instance, identification of, and acquisition terms for, the shares were memorialized under a separate share purchase agreement (“SPA”) to which Olympia was not a party. Olympia was not the beneficial owner of any shares. In some instances, the identity of the non-resident vendors was unknown to Olympia.

[4] Procedurally, each Annuitant, in the course of Olympia’s administration of the RRSP plan, would direct Olympia to accept delivery of shares into the RRSP. Prior to the delivery of such shares into the RRSP fund, Olympia would marshal and tender from each RRSP plan, cash representing the purchase moneys required for the shares. Certificates representing the shares, engrossed in the name of Olympia, were delivered to Olympia via either vendor’s counsel or Annuitant’s counsel pursuant to a written direction executed by the Annuitant.

In a nutshell, the two most salient agreed facts underlying this decision were:

1. the shares were acquired with funds paid by Olympia to the non-resident vendors; and

2. the share were issued in the name of Olympia at the time of purchase.

Olympia essentially argued that section 116 of the ITA did not apply to a trustee. The Crown obviously argued the converse.

The Tax Court Judge reframed the issues slightly before providing his reasons:

[21] Therefore, based upon the accepted facts, documents and legal issues the Court has established the following secondary issues:

a) which required parties and legal steps effected the “transfer” of property?

b) given the foregoing, was Olympia “the purchaser” to whom the shares were disposed within the definition of subsection 116(3)? and

c) if so, was Olympia “a purchaser [who] acquired the [taxable] property from a non-resident and thereby assumed liability under subsection 116(5)?

As to the steps required to effect a transfer, the Court held:

[22] From the submissions and facta, the analysis of who undertook which steps to “transfer” the property is of material importance. It requires an examination of the admitted documents and the facts through the lens of the attendant legal structures and concepts.

[23] Factually, the following documents afford certain conclusions:

a) Plan Application: While the Annuitant was required to sign all directional documents, this document acknowledges that: legal title to all securities within the RRSP plan is to be held by the trustee, the trustee could reject a securities sell order and impose an obligation on the Annuitant to indemnify the trustee for fees and other amounts arising from the arrangement.

b) Share Purchase Agreement regarding specific securities: The SPA memorializes the seller’s obligation to sell, to assign its interest to the purchaser (defined within as the Annuitant), to have the securities registered in the name of the trustee and, reciprocally, the seller’s obligation to execute a pre-delivery, interim trust obligation in favour of the Annuitant. The purchaser also indicates it is purchasing as principal and not as agent.

c) Trust Declaration: Accompanying the SPA, this document gives effect to the vendor’s declared interim trust in favour of the Annuitant as to certain rights: dividends, voting and notices. Further, this document acknowledges such interim trust until the registration of title in the name of the Annuitant or personal representative. Within the document the Annuitant is described, ironically, as the “Beneficiary” of such interim transactional trust.

d) Letter of Indemnity: This document diminishes certain of Olympia’s otherwise subsisting legal obligations as a trustee: valuation, qualification and payment of expense obligations. Lastly, it directs Olympia to transfer funds from the RRSP fund to purchase certain investments and authorizes it to receive the certificates therefore in its name.

e) Letter of Direction: Although two different forms existed, materially they have similar legal effect. Each embodies the Annuitant’s direction to Olympia and encloses the forms required by Olympia to “proceed to transfer and close” on the purchase agreement and accept delivery of the shares to be held by the RRSP plan. The purpose of either was to have title to the shares engrossed in favour of Olympia, as trustee.

f) Certificate of Shares: The import of this document provides evidence to Olympia, given it was not a party to the SPA, that the shares qualify for investments within an RRSP plan.

On the second point, the Court concluded that Olympia was the “purchaser” of the shares within the meaning of subsection 116(3):

[29] This is not a question of who “owns” the greater sole right to dividends (Prévost Car) or residency based upon management and control (St Michael Trust), but rather who, at law, is the party which either of the Annuitant or Olympia intended to legally acquire, be seized of or dispose of the shares as underlying trust property. The answer is clear: Olympia as trustee of the RRSP plan was the initial, solely seized and registered legal owner of the underlying trust property within the RRSP plan. This intention and legal consequence resulted in the disposition of the taxable property by the vendor to Olympia.

[34] Additionally, the contention that the interim trust in favour of the Annuitant under the SPA somehow demonstrates the Annuitant is the sole purchaser is inconsistent with the mandated registration requirement under section 4 of the same document. By its plain wording, the SPA interim trust declaration by the vendor ceases upon the date the shares are registered to the “Beneficiary or his/her person representative.” There is nothing inconsistent between this interim trust arrangement or the direction for Olympia to be registered owner and to receive delivery of the shares. Normally – for example, in the absence of a trust — the named party executing the SPA would take title and possession of the property. However, in the present case, the documents in aggregate determined Olympia would tender the purchase money, take title and receive delivery of the shares: all of which facts were known, acknowledged and consistent within the documents executed by the vendors or their agents and counsel.

[35] Additionally, the name of Olympia figured prominently in the relevant documentation available to the vendor and/or its counsel. This is relevant since section 116 relates to the seller’s liability and any purchaser’s vicarious liability for non-compliance in the context of that section.

On the final point the Court held that Olympia was responsible for the tax levied under subsection 116(5) since it had as purchaser acquired the shares from non-residents:

[40] Purposively, section 116 is a well-known charging provision of Part I tax on disposition of taxable Canadian property by a non-resident vendor. In default of the vendor remitting the withholding taxes upon disposition of taxable Canadian property, the non-compliant purchaser pays the vendor’s taxes. Conjunctively, its purposes are both a charging provision and collection mechanism of the vendor’s tax: RCI Trust (Trustee of) v MNR, 2009 FCA 373. No express or implied purpose within section 116 relates to exigible income tax of a trust, trustee or beneficiary per se. To the extent that a trustee (or any other person) becomes a purchaser who non-compliantly acquires taxable Canadian property from a non-resident vendor, then the vendor’s liability is now the purchaser’s, and in this case, the trustee’s.

[41] The coincidence of the trust and acquisition of the shares at the direction of the Annuitant may have clouded Olympia’s view of its role and obligations, but it cannot frustrate the distinct context and purpose of this vendor tax and enforcement provision. And although not relevant to the Rule 58 Question, this is true where the purpose of the provision is otherwise so well-known and complied with easily, even by slight modification to the sample transactional documents before the Court.

[42] For these reasons, the Court returns its answer to the Rule 58 Question: based upon the accepted facts in this matter, as amended, Olympia, as a matter of mixed fact and law, is a purchaser (as defined in subsection 116(3) of the Income Tax Act (“ITA”)) under subsection 116(5) of the ITA.

The Court reserved the issue of costs allowing the parties 30 days to make written submissions.

Comment: It is interesting to speculate whether this structure was intended to avoid the application of subsection 116(5) or whether Olympia simply had the bad luck to run afoul of the provision.