Pellerin v. R. - TCC: Infant entitled to capital gains exemption

Pellerin v. R. - TCC:  Infant entitled to capital gains exemption

Pellerin v. The Queen (May 22, 2015 – 2015 TCC 130, Boyle J.).

Précis:   In this case shares were formerly held by a trust of which the appellant was a beneficiary.  The trust had been created in 2005 at a time the appellant was not yet born or conceived.  They were transferred to the appellant after he was born and sold in 2008 in the year he turned one year old.  The date of the sale was more than 24 months from the date of his conception, which the parties agreed was in June of 2006.  The sole question was whether during the 24 month period preceding the sale the shares had been held by “the taxpayer or persons related to the taxpayer”.

The Court held that this situation met that test and allowed the appeal.

Decision:  The facts of this case were relatively simple:

[1]             This is an appeal brought under the informal procedure and concerning Mika Pellerin’s 2008 taxation year. In 2008, he turned one year old. The issue in this case is whether the shares sold by the Appellant before his second birthday qualified for the capital gains exemption for qualified small business corporation shares (“QSBCS”) under section 110.6 of the Income Tax Act (the Act). Consequential appeals in respect of minimum tax credits for 2009 and 2010 were heard at the same time. Those appeals are entirely incidental and raise no issues relevant to the determination of these appeals. The parties filed an Agreed Statement of Facts, a copy of which is attached hereto. Both parties’ counsel’s arguments at the hearing were supplemented with later written submissions.

[2]             The trust was established by deed of trust creating the Fiducie Famille Mathio Pellerin in January 2005 (the “trust”) for the benefit of, among others, Mathio Pellerin, his children and his grandchildren, from their birth or their adoption, as well as any legal person controlled by Mathio Pellerin. It is a personal trust as defined for purposes of the Act. The Appellant, Mika Pellerin, was born March 8, 2007 and is the son of Mathio Pellerin. It was agreed that the Appellant, Mika Pellerin, was conceived about nine months before his birth, that is, around June 2006.

[3]             Certain shares that had been owned by the Trust for at least 24 months were transferred to Mika from the Trust as a capital distribution on October 1, 2008 and were sold by Mika the following day, giving rise to part of the capital gain at issue. Similarly, on November 27, 2008, the Trust transferred to Mika, as a capital distribution, shares of another corporation that it had held for at least 24 months, which were sold by Mika later that same day, giving rise to the rest of the capital gain at issue. Mika reported these capital gains, claimed the capital gains exemption available in respect of QSBCS under section 110.6 of the Act, and paid alternative minimum tax (“AMT”) in respect of his income subject thereto that year.

[4]             The sole issue in this case is whether the requirement that shares be held by the taxpayer or persons related to the taxpayer for a 24-month period prior to the disposition is satisfied through the taking into account of the several months before Mika’s birth. The shares in question are accepted by the Respondent as otherwise qualified and the Respondent has not put quantum or anything else in issue. The issue arises solely because Mika was not yet two years old when he sold the shares. Throughout the 24-month period preceding their distribution to Mika, the shares were held by the Trust.

Thus, upon agreement of the parties, the shares were sold more than 24 months after Mika was conceived.

The Court stated the issues quite succinctly:

[5]             The questions to be decided as a result of Mika being not yet 24 months old when he sold his shares result in the need to consider the period during which Mika had been conceived but was not yet born. Those questions are the following:

(1) Once born viable, was Mika a beneficiary of the trust for the purposes of the relevant provisions of the Act, pursuant to the Quebec law applicable to the Trust?

 (2) What is the significance of Article 5.1 of the Trust deed, which provides that children are beneficiaries from their birth if that provision is in conflict with applicable Quebec law?

(3)     Does the phrase “throughout the 24 months immediately preceding” in paragraph (b) of the definition of QSBCS in subsection 110.6(1) apply to both the ownership of the shares and to the status of the individual (Mika) and another owner of the shares (the Trust) as being related to each other? More specifically, is the requirement in paragraph (b) satisfied if, throughout the 24-month period preceding the sale of the shares by Mika, the only other owner of the shares was the Trust, which was related to him at the particular time he sold the shares (and had been ever since he became a person at birth)?

On the first point the Court concluded that under Quebec law Mika was regarded as a beneficiary of the trust retroactively to the date of his conception:

[13]        Under the Quebec law applicable to Mika and the Trust, as presented and argued by the parties, once Mika was born viable, he was retroactively considered a beneficiary, indeed a person, as of his conception for the purposes of all generally applicable public laws, if that was beneficial for Mika.

[14]        By reason of this legal fiction applicable in Quebec law, (i) the 24-month holding period requirement is satisfied by virtue of the shares only ever having been owned by Mika and by the Trust before Mika disposed of them, and (ii) the Trust was related to Mika throughout that period by virtue of his having been a beneficiary of the Trust from his birth, and by virtue of his being deemed to have been a beneficiary of the Trust during the period of 24 months that preceded his birth.

On the second point the Court did not accept the Crown’s submissions that Article 5.1 of the trust deed prevented the retroactive application provided by the general law of Quebec:

[17]        I do not find this position meritorious for two reasons. Firstly, Article 5.1 of the trust deed can and should be read to conform with applicable Quebec law, including the Civil Code. It is clear from the Supreme Court of Canada’s pronouncements in Montreal Tramways and Ivanhoe that it is only once a child is born viable that it is retroactively considered to be a beneficiary or a person, if that benefits the child. Hence, the rule of general application in Quebec described by the Supreme Court of Canada is triggered only if and when the child is born viable. Only then does the legal fiction retroactively regard Mika as being a beneficiary or a person when he had been conceived but was not yet born. Article 5.1 of the trust deed is not inconsistent with that. It similarly provides that a child is only a beneficiary once he or she is born. It does not by its terms negate the legal fiction that thereafter that child will also retroactively be considered to have been a beneficiary prior to his or her birth. I do not believe that on a reasonable reading Article 5.1 is inconsistent with the Quebec law generally applicable to the Trust in this respect.

[18]        Secondly, the Civil Code provides in Articles 8 and 9 that generally applicable laws of public order may not be departed from by private acts of parties. Thus, even if the terms of Article 5.1 did in fact preclude a child born viable from becoming a beneficiary and retroactively being considered to have been a beneficiary while conceived but not yet born, it would appear that the provision would have no effect.

On the final point the Court accepted the taxpayer’s position:

[21]        It appears that the purpose of the paragraph (b) 24-month holding period requirement is to preclude a taxpayer who disposes of a share from claiming a capital gains exemption in respect of gains that accrued that while the share was owned by a third party. That purpose can be achieved by regarding as third parties persons who are not related to the person disposing of the share at the time that person disposed of the share. Neither the language nor the purpose of the provision would require anything broader in scope.

[22]        I conclude that it is sufficient if, at the time of the taxable event, the taxpayer was related to any other person who owned the property during the 24‑month ownership requirement period (subject of course to abusive tax avoidance considerations, which are not applicable or involved in this case).

[23]        Finally, I would note that none of the above analysis is materially affected by the interposition of the Trust between Mika and his father. The same questions would arise, and I would answer them in the same manner, if the facts involved a parent and a child born during the 24-month holding period, or two persons who become spouses during that 24-month period, or a person who adopts a child in that 24-month period (except that in this last case Question 1 may or may not arise).

[Footnote omitted]

In the result the appeal was allowed with costs.

Comment:  All in all, a classic Boylean decision.