Lee v. The Queen

Lee v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2018-11-15
Neutral citation
2018 TCC 230
File numbers
2013-2493(IT)G
Judges and Taxing Officers
John R. Owen
Subjects
Income Tax Act
Decision Content
Docket: 2013-2493(IT)G
BETWEEN:
VAN LEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on May 30 and 31, 2018 and September 5 and 6, 2018,
at Vancouver, British Columbia
Before: The Honourable Justice John R. Owen
Appearances:
Counsel for the Appellant:
David Jacyk, Monica Biringer,
David Wilson and David Ross
Counsel for the Respondent:
Michael Taylor
JUDGMENT
In accordance with the attached Reasons for Judgment, the appeal from the reassessments made under the Income Tax Act for the 2003, 2004 and 2005 taxation years, the notices of which are dated November 20, 2009, are allowed and the reassessments are vacated.
The Appellant shall have 30 days from the date of this Judgment to provide submissions as to costs and the Respondent shall have a further 30 days to respond to those submissions. Such submissions shall not exceed 10 pages for each party.
Signed at Ottawa, Canada, this 15th day of November 2018.
“J.R. Owen”
Owen J.
Citation: 2018 TCC 230
Date: 20181115
Docket: 2013-2493(IT)G
BETWEEN:
VAN LEE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Owen J.
I. Introduction
[1] This is an appeal by V. Paul Lee (the “Appellant”) of the reassessment by the Minister of National Revenue (the “Minister”) of his 2003, 2004 and 2005 taxation years (the “Taxation Years”) by notices dated November 20, 2009 (the “Reassessments”). The Reassessments were confirmed on March 27, 2013.
[2] The Minister initially assessed the Appellant for the Taxation Years by notices dated June 14, 2004, August 29, 2005 and August 4, 2006, respectively. Accordingly, the Reassessments were issued after the expiration of the “normal reassessment period” for the Taxation Years as defined in subsection 152(3.1) of the Income Tax Act. This issue was not pleaded by either party.
[3] The Reassessments taxed the Appellant on the basis that a trust known as the Paul Lee Spouse Trust (the “Trust”) that he settled did not exist either because the trust or the transfer of property to the trust was a sham, or because the trust was not properly constituted under Québec law.
[4] For its taxation year ending December 31, 2003, the Trust had taken filing positions in its Québec and federal income tax returns that allowed the Trust to obtain the benefit of a tax plan that was colloquially referred to as the Québec truffle. In brief, the Trust elected to be taxed federally on income it had distributed to its beneficiary but did not elect to be taxed on this same income in Québec. Since the beneficiary of the Trust was not a resident of Québec, no provincial tax was paid on the distributed income. Nevertheless, the Trust received the federal abatement.
[5] The Province of Québec subsequently enacted retroactive tax legislation that deemed the Trust to have elected to be taxed on the distributed income in Québec, thereby retroactively eliminating the tax benefit associated with the Québec truffle strategy.
II. The Facts
[6] The parties filed a Joint Partial Agreed Statement of Facts (the “PASF”) and a Joint Book of Documents (the “JBD”). The content of the PASF is as follows: [1]
Background
The appellant is an individual resident in Canada.
The appellant’s spouse is Joyce Lee.
At all material times, the appellant and Mrs. Lee resided in British Columbia.
VPL Investments Inc. (“VPL”) is a corporation formed under the laws of Canada by amalgamation on September 1, 1996.
VPL Ventures Inc. (“VCC”) is a corporation formed under the laws of British Columbia on December 18, 1992.
Briel Investments Inc. (“Briel”) is a corporation formed under the laws of British Columbia on August 27, 2003.
At all material times, VPL, VCC and Briel were Canadian-controlled private corporations for purposes of the Income Tax Act, RSC 1985, c 1 (5th Supp.) (the “Act”).
Alain Paris is, and was at all material times, an individual who is a retired tax partner of KMPG LLP and a resident of Québec.
Prior to August 30, 2003, the appellant held 100% of the issued and outstanding common shares of VPL.
Prior to August 30, 2003, the appellant held 80% of the issued and outstanding common shares of VCC, and Mrs. Lee held the other 20%.
Starting in July of 2002, the appellant sought advice from KPMG LLP.
In an engagement letter dated December 17, 2003, KPMG described the transactions it recommended as “Phase I” and “Phase II” of an estate plan. (Exhibit AR-2, Tab 21)
Phase I of the estate plan involved “freezing” the appellant and Mrs. Lee’s interest in Briel and establishing a new discretionary family trust in to which the future growth of Briel would accrue (Exhibit AR-2, Tab 21).
Phase II of the estate plan involved gifting the majority of the appellant’s interest in Briel to a spouse trust and subsequent redemption of those shares of Briel held by the spouse trust. Phase II was subject to what KPMG described as a “Success Based Billing arrangement”, under which KPMG’s fee was contingent and subject to reduction if a tax authority successfully challenged the transaction (Exhibit AR-2, Tab 21).
The transactions the parties entered into are described in a letter dated March 12, 2004 from KPMG to the appellant regarding “Estate Planning” (Exhibit AR-2, Tab 24).
2003 – The appellant implemented the Estate Plan
a. Incorporation of Briel and reorganization of shareholdings
On August 30, 2003, the appellant and Mrs. Lee transferred all of the shares of VPL and VCC that they held to Briel in exchange for the following shares of Briel:
Type
Number
ACB
PUC
Appellant
Class C preferred
18,000
$1,947,315
$1,999,979
Class D preferred
20,000
$52 686
$22
$2,000,001
$2,000,001
Joyce
Class F preferred
2,000
$650,004
$20
The appellant and Mrs. Lee carried out the August 30, 2003 share transfers on a tax-deferred basis under section 85 of the Act. The appellant’s 18,000 Class C preferred shares had an aggregate redemption value of $18,000,000.
b. The Establishment of the Paul Lee Spouse Trust (the “Trust”) with the initial trust property
The Trust was created pursuant to a written notarial Trust Deed dated December 10, 2003. In the Trust Deed, the appellant appointed Mr. Paris as trustee of the Trust under the laws of Quebec (Exhibit AR-2, Tab 4).
Mrs. Lee was the sole beneficiary of the Trust during her lifetime.
The appellant wrote a cheque for $2,000 payable to the Paul Lee Spouse Trust dated December 8, 2003 (the “initial trust property”) (Exhibit AR-2, Tab 3).
On December 11, 2003, Mr. Paris deposited the initial trust property in an account at the Bank of Nova Scotia (the “Scotiabank account”) (Exhibit AR‑2, Tab 31).
Mr. Paris accepted the initial trust property. He accepted his appointment as trustee.
The Scotiabank account was in the Trust’s name.
The appellant transferred title to the initial trust property to Mr. Paris. Under the Scotiabank account agreement, only Mr. Paris had the legal power to write cheques or otherwise disburse or deploy funds (including the initial trust property) from the Scotiabank account.
Mr. Paris was not free to use the initial trust property for his own benefit. The trust deed did not direct Mr. Paris as to how to use the initial trust property other than in the best interests of the beneficiary. The appellant did not exercise direct or indirect control over the use, disbursement or deployment of the initial trust property after he transferred title to Mr. Paris, and no documents establish a mechanism by which the appellant controlled what Mr. Paris did with the initial trust property.
KPMG’s plan did not direct Mr. Paris how to use the initial trust property or imply how Mr. Paris should use the initial trust property. KPMG’s plan did not call for the appellant to retain control over the initial trust property (Exhibit AR-2, Tab 24). There are no facts of which the respondent is aware that support the assertion that the appellant controlled the initial trust property after he transferred title of that property to Mr. Paris.
None of the disbursements from the Scotiabank account went to the appellant.
The disbursements from the Scotiabank account were used to pay professional fees, including those of the trustee, and the payment of taxes for the Trust.
c. The transfer of preferred shares of Briel to the Trust and the redemption of the shares
Also on December 11, 2003, the appellant exchanged his 18,000 Class C preferred shares of Briel for 36,000 Class F redeemable preferred shares of Briel (Exhibit AR-2, Tab 1).
The 36,000 Class F shares received by the appellant had an aggregate redemption value of $18,000,000.
The appellant transferred the 36,000 Class F shares of Briel to the Trust on December 11, 2003. The appellant and Mr. Paris signed a Deed of Gift regarding the transfer (Exhibit AR-2, Tab 8). Mr. Paris signed a trust resolution resolving to accept the 36,000 Class F shares of Briel (Exhibit AR-2, Tab 9). The shares were registered in the name of “Alain Paris, Trustee of the Paul Lee Spouse Trust” (Exhibit AR-2, Tab 1).
The 36,000 Class F shares were not transferred to Mrs. Lee, and the December 11, 2003 transfer was not made for consideration.
On December 12, 2003, the Trust requested that Briel redeem the 36,000 Class F shares, and Briel redeemed the shares, for cash proceeds of $18,000,000. Mr. Paris signed a trust resolution to redeem the 36,000 Class F shares (Exhibit AR-2, Tab 11) and sent a request to the board of directors of Briel to redeem the shares (Exhibit AR-2, Tab 12). The directors of Briel (the appellant and Mrs. Lee) resolved to redeem the shares for total proceeds of $18,000,000 (Exhibit AR-2, Tab 13). Briel redeemed the shares and transferred $18,000,000 to the Trust’s bank account in payment of the redemption proceeds (Exhibit AR-2, Tab 31).
d. The deemed dividend and capital gain from the share redemption
The paid up capital of the 36,000 Class F shares redeemed by Briel on December 12, 2003 was $1,999,979.
The redemption by Briel of the 36,000 Class F shares for proceeds of $18,000,000 resulted in a deemed dividend of $16,000,021, calculated as follows:
Redemption proceeds
$18,000,000
Less PUC
($1,999,979)
Deemed dividend
$16,000,021
The grossed-up amount of dividend income that is included in income under section 82 of the Act is $20,000,026.
The redemption by Briel of the 36,000 Class F shares for proceeds of $18,000,000 also resulted in a capital gain of $11,028 to the Trust.
e. The distribution and loan of the redemption proceeds
The same day (December 12, 2003), the Trust distributed $16,000,021 of dividend income to Mrs. Lee by way of a demand promissory note. Mr. Paris signed a trust resolution to distribute $16,000,021 to Mrs. Lee (Exhibit AR-2, Tab 14), and a promissory note payable to Mrs. Lee for $16,000,021. The note was payable on demand and was non-interest bearing up to the date of the demand, after which the outstanding principal bore interest at the rate of 6% per annum (Exhibit AR-2, Tab 15). Mrs. Lee signed a receipt for the note (Exhibit AR-2, Tab 16).
The same date (December 12, 2003), the Trust agreed to loan $18,000,000 to Briel at an interest rate of 4% per annum. Mr. Paris signed a trust resolution to loan $18,000,000 to Briel (Exhibit AR-2, Tab 17), and wrote a letter to the appellant offering to make the loan (Exhibit AR-2, Tab 18). Briel signed a promissory note for $18,000,000, bearing interest at 4% (Exhibit AR‑2, Tab 19). Mr. Paris signed a receipt for the promissory note (Exhibit AR-2, Tab 20).
The Trust then transferred $18,000,000 from its bank account back to Briel to fund the loan (Exhibit AR-2, Tab 31).
f. Other facts pertaining to 2003
It was in the best interests of Mrs. Lee to establish the Trust, to transfer the shares to the Trust, to redeem the shares, and to distribute the redemption proceeds to Mrs. Lee. All of those transactions, as well as the loan back of the redemption proceeds to Briel, were outlined in the KPMG planning document (Exhibit AR-2, Tab 24).
On or about December 31, 2003, VPL assumed $9,900,000 of the $18,000,000 indebtedness owing by Briel to the Trust. The assignment agreement was prepared in or about November 2004 and was fully executed on or about December 23, 2004 (Exhibit AR-2, Tabs 25, 26 and 27).
2004 – The Trust accrues interest and receives part repayments of debt to pay its expenses
On February 23, 2004, VPL transferred $18,000 to the Trust to cover operating expenses of the Trust, which expenses were professional fees (Exhibit AR-2, Tabs 22, 23, and 31).
On March 25, 2004, Briel repaid $2,622,000 of its debt owing to the Trust. The Trust used those funds to pay its federal income tax owing of $2,617,185 for the 2003 taxation year on filing its 2003 T3 income tax return (Exhibit AR-2, Tab 31).
In December 2004, the Trust accrued interest of $269,329 on its loan to Briel and $396,000 on its loan to VPL for total interest income of $665,329 (Exhibit AR-2, Tab 38).
The Trust distributed income to the beneficiary on December 31, 2004, by issuing a demand promissory note in the amount of $665,329 to Mrs. Lee. Mrs. Lee signed a receipt acknowledging the note (Exhibit AR-2, Tab 28).
2005 – The Trust accrues interest and receives further part repayments of debt to pay its expenses
On March 23, 2005, VPL repaid $166,000 of its debt owing to the Trust. The Trust used those funds to pay its federal income tax owing of $160,315 for the 2004 taxation year on filing its 2004 T3 income tax return (Exhibit AR-2, Tab 32).
In December 2005, the Trust accrued interest of $229,149 from its loan to Briel and $406,710 from its loan to VPL for total interest income of $635,859 for the year ended December 31, 2005.
On December 31, 2005, the Trust distributed income to the beneficiary by issuing Mrs. Lee a demand promissory note in the amount of $635,859.
2006 and subsequent years
On March 28, 2006, VPL repaid $312,000 of its debt owing to the Trust. The Trust used those funds to pay its federal income tax owing of $153,332 for the 2005 taxation year on filing its 2005 T3 income tax return, and to pay Quebec provincial income tax of $148,607 on filing its 2005 Quebec income tax return (Exhibit AR-2, Tab 33).
On April 18, 2006, Alain Paris requested that Briel and VPL pay accrued but unpaid interest of $497,864 and $636,710, respectively, to the Trust (Exhibit AR-2, Tab 29).
On April 20, 2006 Briel and VPL paid $497,864 and $636,710, respectively, to the Trust. On April 24, 2006, Mr. Paris issued a receipt acknowledging those payments (Exhibit AR-2, Tab 30). Also on April 24, 2006, Mr. Paris wrote a cheque from the Trust for $1,134,574 (the total interest received from Briel and VPL) to the beneficiary, Mrs. Lee (Exhibit AR-2, Tab 33).
After 2005, up to the end of 2009, the Trust continued to report interest income and to distribute income to Mrs. Lee.
[7] In addition to the PASF, the Appellant, Alain Paris and David Lam were called to testify by the Appellant. Mr. Paris was the trustee of the Trust from December 10, 2003 to December 12 or 13, 2008 and until he retired last year, Mr. Lam was a member of the aggressive tax planning section of the Vancouver Tax Services Office of the Canada Revenue Agency (“CRA”).
[8] I found all of the witnesses to be credible. The following facts are drawn from their testimony.
[9] Mr. Paris has been a resident of Québec for almost all of his life and was with KPMG for 30 years between 1969 and 1999. For approximately one half of his tenure with KPMG, approximately 10% to 15% of Mr. Paris’s practice included advising individuals regarding estate and financial planning matters and acting as a liquidator or trustee of estates. Mr. Paris estimated that he had acted as a trustee or liquidator approximately a dozen times between 1990 and 1999.
[10] In 1992, Mr. Paris was awarded the medal commemorating the 125th Anniversary of the Confederation of Canada by the Governor General of Canada. When he retired in 1999, Mr. Paris was head of KPMG’s tax group in the Montreal office.
[11] After he retired from KPMG, Mr. Paris became an independent consultant focussing on strategy planning for small companies. Between 1999 and 2003, Mr. Paris remained a trustee of ten trusts that were established before he left KPMG.
[12] In the fall of 2003, [2] Mr. Paris was approached by Richard Frank, a tax manager with the Vancouver office of KPMG. Following that, Mr. Paris talked with two tax partners in the same office of KPMG about the then yet-to-be-established Trust. In an e-mail to Richele Frank, one of the tax partners, Mr. Paris stated that he “would be delighted to act as trustee for these New Quebec Trusts”. [3] One of these trusts was the Trust.
[13] Mr. Paris engaged the services of Hugo Patenaude, a notary who was, at the time, with Fasken Martineau DuMoulin in Montréal and who Mr. Paris identified as an expert in the legal aspects of Québec trusts. Mr. Paris had engaged Mr. Patenaude in the past (including to draft ten trust deeds) and made the decision to engage him to perform the legal work in respect of the Trust. Mr. Paris described why he retained legal advisors as follows:
I always retain Hugo and other people as well as legal advisor as I’m not from the legal side of the practice, the business practice, and I do -- I had a lot of confidence in Hugo in terms of his comments, recommendation, and his experience. Therefore, Hugo was retained by me to help me in the decision that had to be taken just to make sure that what I was doing was according to the trust agreement, what was contained in the trust in venture. And I was exchanging with Hugo regularly in the trust situation to make sure that I would be doing the things according to what was made -- what was planned to be done. [4]
[14] Mr. Paris knew the Trust was to be a resident of Québec and that none of the beneficiaries of the Trust would be residents of Québec. Mr. Paris had discussions with the Appellant prior to the execution of the Deed of Trust (the “Deed”) establishing the Trust. Mr. Paris also visited the Appellant at his office in Vancouver but he could not recall whether that was before or after the Deed was signed. The Appellant testified that the meeting took place before the Deed was signed because he wanted to meet and vet Mr. Paris.
[15] Mr. Paris testified as to the nature of the conversations that he would have with the settlor before a trust was settled:
Well, I always wanted to make clear that they understood the role that I was playing as a trustee, as being acting independently and being representing the -- being there to represent the [beneficiary] and take the beneficiary’s interest at heart and making sure that it was all done to make sure that the beneficiary was always in the front of all of the decisions that were taken and that I would be the one that would take the decision. I would require the assistance of legal advisor or business advisor that I would retain if that was required. And that was all me and I didn’t tolerate to have any interference from the settlor. [5]
[16] Mr. Paris testified that he did consider wishes of settlors but that he was never inclined to receive directions from settlors. Mr. Paris stated that he had resigned as a trustee on two or three occasions when the settlor asked him to change his investment policy.
[17] The Deed was prepared by Mr. Patenaude and was signed by Mr. Paris and the settlor on December 10, 2003 in front of Pierre Girard, who acted as the signing notary for the Trust under Québec law. Mr. Girard retained the original Deed and filed an original copy of the Deed under Québec law. Mr. Paris also retained an original copy of the Deed. [6]
[18] Mr. Paris reviewed the Deed before he signed the Deed. The beneficiaries of the Trust were Joyce Lee during her lifetime, and, upon her death, the children of Paul Lee (i.e., the Appellant) and Joyce Lee. Mr. Paris testified that this was consistent with his understanding of the Appellant’s intentions as settlor of the Trust.
[19] The Appellant provided Mr. Paris with a cheque dated December 8, 2003 in the amount of $2,000, which Mr. Paris deposited in the bank account of the Trust in Montreal on December 11, 2003, the day after the Deed was signed. Mr. Paris opened the bank account for the Trust. Mr. Paris described this $2,000 cheque as the “initial gift to the Trust”. [7]
[20] Mr. Paris testified that following the receipt of the $2,000 from the Appellant, he expected a further contribution by the Appellant of the shares of a private corporation called Briel Investment, a gift that had been discussed prior to the creation of the Trust.
[21] After reviewing articles 2.4 and 2.5 of the Deed, Mr. Paris described his understanding of his role vis-à-vis the property of the Trust and the non‑reversionary nature of the Trust as follows:
My understanding that I was in charge of the trust property, and that under my entire discretion and power, I would use that money or that patrimony for the benefit of the beneficiary, that was Joyce Lee. And it could be the capital, or the income of the trust.
. . .
. . . whatever was transferred by the settlor, became the property of the trust, and wasn’t going to be returned to the settlor. [8]
[22] Mr. Paris testified that article 2.4 of the Deed was consistent with his understanding of the Appellant’s intentions vis-à-vis the Trust.
[23] Mr. Paris further stated that the non-reversionary nature of the trust stipulated in Article 2.5 was also consistent with his understanding of the Appellant’s intentions and that during his tenure as Trustee no property of the Trust reverted to the Appellant and no attempt was made to have property of the Trust revert to the Appellant.
[24] Articles 3.1.1 and 3.1.2 of the Deed state:
Until the Material Date, the Trustee shall pay, to Joyce Lee all the Income derived from the Trust Property that arises before the Material Date.
. . .
Until the Material Date, the Trustee may pay or make payable all or part of the capital of the Trust Property, as the Trustee shall from time to time in his absolute, uncontrolled and unfettered discretion determined to or for the benefit of Joyce Lee.
[25] Mr. Paris testified that his understanding of these clauses was as follows:
My understanding was that the income of the trust, on a yearly basis, was going to be attributed to Mme. Lee, and only to Mme. Lee.
. . .
I had the option to pay to Mme. Lee, the capital, or portion of the capital of the trust if I decided to do so, on my own judgment. [9]
[26] Mr. Paris also referred to Article 4 of the Deed, which he described as confirming Articles 2.5 and 3.1 of the Deed and providing the trustee with broad investment powers that were consistent with those conferred by the trust deeds of other trusts of which he was trustee.
[27] Mr. Paris testified that the transfer by the Appellant of 36,000 Class F preferred shares of Briel (the “Class F Shares”) to the Trust was discussed before the Trust was established and that the transfer took place on December 11, 2003, which is the date of the deed of gift. [10]
[28] Counsel for the Appellant asked Mr. Paris about the redemption of the Class F Shares the next day on December 12, 2003:
Q So, whose decision was it to redeem those shares?
A I decided to redeem the shares. It was offered to me to redeem the shares, I considered that, and I felt that it was very appropriate to do that.
Q Okay, did you discuss the potential of redeeming these shares in advance of signing the trust deed?
A It was discussed at the same time, yeah.
Q And who would you have discussed that with?
A I have discussed that probably with Paul Lee, and probably with Linda Richkum, and Rob Gear. Robert Gear.
Q Of KPMG?
A KPMG, yeah.
Q Okay. So, it’s not as if this was a surprise of any sort?
A No, that wasn’t a surprise.
Q So, something discussed in advance of entering the trust deed?
A Yeah, as an additional.
Q And I asked you whose decision was it, and you said that it was yours. So, let me ask you, why do you redeem the shares at this point?
A Well, I redeemed the shares because there was a substantial benefit by redeeming the shares. On upon the redemption, there was a deemed dividend of 16 million dollars, and a capital gain of approximately 11,000 taking place. And because that was done at the trust level, under the legislation that was in place at the time. There was a substantial saving of approximately 25 to 27 percent.
Q Okay, and what about -- these are shares in a company called Briel Investments Inc.
A Yeah.
Q And what was your understanding of Briel Investments Inc?
A That was a private company owned totally or partly, that I don’t recall exactly by Paul.
Q Okay, so you knew that in advance?
A I knew that.
Q And we’ve looked at the different powers that you had. In your view, could you have made a decision not to redeem the shares?
A I could have, yeah, that was my decision. But as I said, I felt that it was quite appropriate, given the substantial savings that was attached to a transaction like that.
Q And what about the options? For example, did you feel -- would it have been an option to simply keep the shares?
A It would have been an option, but I don’t think that it would have been very appropriate to sit on the share certificate there, and with -- I didn’t know if there would be any dividends or anything of that nature on those shares. Before, by cashing that, I was receiving the cash of 18 million dollars, and realizing at the same time they got tax savings on their legislation that was in place in those years.
Q Did anyone ever tell you that you must redeem those shares?
A No, nobody told me that I must do things.
Q Did Mr. Lee ever tell you that?
A No, no, never did. [11]
[29] In cross-examination, Mr. Paris had the following exchanges with counsel for the Respondent regarding the redemption of the Class F Shares:
Q When you were asked to be a trustee for the Paul Lee Spouse Trust, everyone was very clear to you that they wanted you to take advantage of this [tax] opportunity, right?
A Yeah, it was obvious.
. . .
Q Now, you must’ve understood as well that when you were approached -- and it could’ve been Mr. Lee, or it could’ve been KPMG, or it could’ve been a combination of the two of them talking to you, you must have understood that in order to realize that tax benefit you would have to go through with their proposal that you redeem those shares that Mr. Lee would contribute to the trust and you get proceeds from Briel Investments?
A I was aware that we can -- we get proceed upon redemption of the shares, yeah, sure.
Q Doesn’t -- from a tax perspective it doesn’t do you any good to receive those shares and just hold them, right?
A No.
Q There’s no income to generate tax that can be saved. You’re not taking advantage of that opportunity.
A Yeah
. . .
Q Yes, I understand that, but I’m just saying, put yourself back in your shoes as trustee on December 11th, 2003. Mr. Lee gifts $18 million worth of redeemable shares to the trust.
A Yeah.
Q Until you redeem those shares, there is no way to access the tax saving from that strategy?
A No, there wasn’t.
Q So, if you held the shares into 2004, there is no 2003 tax, there is nothing to save, right?
A Yeah, right.
Q But there is also no loan, there is no interest in that year either, until you actually do these things, these transactions?
A Sure, mm-hmm.
Q And what I am suggesting to you is, once you became, once you agreed to become trustee of this trust, and to accept those shares, it really made no sense, there is no good reason not to redeem those shares immediately and receive the proceeds, is there?
A That is your opinion, yeah.
Q Well, what was your opinion? You redeemed them the very next day.
A I did look at the situation, and I felt that it was very appropriate to redeem them, therefore I decided to redeem them.
Q And why was it appropriate?
A Well, it was appropriate because that puts $18 million worth of cash that could be lend back to Briel and earn four percent more of interest, which would amount to approximately $600,000 worth of income a year. And I felt that was quite appropriate to do that in order to create the patrimony for Mme. Lee, the beneficiary of the trust.
Q So, you thought that was better for her, than leaving the value in those shares without redeeming them?
A That was my opinion.
Q Also, obviously, it put that $16 million worth of income, which was distributed to her, into her hands, through a promissory note.
A Yeah.
Q With no provincial tax.
A You are right. [12]
[30] Counsel for the Appellant asked Mr. Paris about the loan by the Trust to Briel in the amount of $18 million:
Q Okay, and can you just tell me what it is?
A I did prepare that. It was further to a request by Mr. Lee, I did accept to loan Briel Investment an amount of money of 18 million dollars.
Q And so you mentioned that you prepared this document?
A I did prepare the document.
Q And it says, “payable on demand.”
A Yes, that was a demand loan.
Q And it says, “interest at the rate of 4 percent.”
A It was interest at 4 percent.
Q And how did that accumulate, the 4 percent?
A The compounded interest accumulated on a compound basis, therefore it means if the interest is not paid it’s added to the capital and new interest is -- the following year the interest is computed on the capital plus the interest, the accrued interest.
Q Okay, and who came up with these terms? Who decided on these terms?
A After consulting different sources, I felt that it was appropriate to lend the money at that rate of interest.
Q Why?
A The choices were that I could use an investment manager to take the money. There would have been fees that I would have to pay, and therefore here I didn’t have any fee to pay and I was confident that the $18 million could be redeemed easily.
Q Okay, and why is that? What if anything did you know about Briel Investments?
A When I consulted what was in Briel I did realize that Briel and the company associated with that had substantial amount of investment at fair market value were substantial, way above the $18 million.
Q Now, would you have discussed with anyone the possibility of this loan in advance of signing the trustee?
A That was discussed at the same time when we put the trust in place.
Q So, again, this is not a surprise.
A No, it is not a surprise. The request was made that I can make a loan and I discussed that if it was an appropriate and I discussed that with Hugo Patenaude, the legal advisor, and I came to the conclusion that I can do that.
Q So whose decision was this, Mr. Paris?
A That was my decision.
Q And did anyone ever tell you that you must loan these monies back to Briel?
A Never -- nobody never told me that I must do those things.
Q And let me ask you, had you come to the conclusion that if it wasn’t in the interest of the beneficiaries, would have entered into that loan?
A No, I would not have.
Q Did you have some other form of agreement, that for example required you to redeem the Briel shares?
A No.
Q And can I ask you what if you had been told that you must do this?
A I do not recall receiving any directions or must things to do in regard to any of those related transactions or surrounding transactions. That was my decision, it was offered to me to do those things. I looked at the options and I felt that it was the best thing I can do in the circumstances. [13]
[31] Mr. Paris explained in examination-in-chief that the deemed dividend received on the redemption of the Class F Shares was income to the Trust and therefore under the terms of the Deed had to be paid to Mrs. Lee as the sole beneficiary of the Trust during her lifetime. The income was paid by the Trust to Mrs. Lee by issuing a demand promissory note in the amount of $16,000,021 (the “Demand Note”). [14] The Demand Note was non-interest bearing until demand, after which it bore interest at 6% per annum. Mr. Paris stated that he did not receive a demand from Mrs. Lee to repay the Demand Note. Mr. Paris was asked what he would do if there was a demand to pay the Demand Note:
Q Okay, but had you considered what you might have done if the beneficiary makes the demand?
A If the demand had been exercised, I would have request repayment from the Briel Investment on my demand note and received the money quickly and pay Mme. Lee at that time.
Q I want you to turn to – you mentioned earlier that again, I think, I think I’m being accurate, that this was something that would have been discussed in advanced of entering the trust?
A Yes. [15]
[32] In April 2006, Mr. Paris sent an e-mail to the Appellant reminding him that Briel and VPL owed the Trust interest that had accrued during 2005 in the amount of $497,864 and $636,710, respectively. Mr. Paris stated that the outstanding interest was paid by cheques within two days. [16]
[33] Mr. Paris created and maintained running summaries of the payments in and out of the Trust’s bank account and of the interest accruing on the debts owed by Briel and VPL. [17]
[34] In cross-examination, counsel for the Respondent and Mr. Paris had the following exchange regarding the steps outlined in Exhibit AR-2, Tab 24:
Q And I’m going to suggest to you that, you know, I will never know what you discussed with Mr. Lee or KPMG before you agreed to be trustee, but I’m going to suggest to you that all of those details were known to you before you became trustee. You know what was going to happen. You were -- you knew you were going to implement those transactions as they were proposed to you, as they had been planned. Would you agree with that?
A Well, I mean what I did, what you see here is the document that was prepared from what I see on March 12th, 2004. And at that point all of the resolution that you’re referring to had been prepared by my legal counsel in December 2003. Therefore, it seems to me that what you have here is a recap of what I did on my own with the help of my legal counsel. And what they’re saying is what happened. Therefore I was contacted at the end of November 2003, to do a transaction. That is exactly what happened. And I confirmed that it all happened like that, but I was involved in each step of the transaction without seeing that. And here what I can see, and with all due respect, the document here is dated March 12, 2004 three months after the transaction happened. Therefore, all of those resolutions were available to anybody that was close to Paul Lee or KPMG. And the resolutions were prepared by Fasken Martineau DuMoulin in Montreal, that was retained as my legal counsel, before I question all of those steps, all along the way. And that’s what I did.
Therefore, it was my decision and the loan agreement was negotiated by me, I had an offer to loan the money back, which I did. And I confirmed all of that. It was all done. But this document here I didn’t have that document and I didn’t know anything about that except what I did was backed by resolution documented paper, documenting all the work. [18]
[35] With respect to the timing of his decisions regarding the actions of the Trust on December 10, 11 and 12, 2003, Mr. Paris testified as follows in cross‑examination:
A Yeah, I mean you’re right. The decision was taken on the 10, 11 or 12 but it was proposed before. Therefore I have time to think about it, maybe not take a decision at that time but the process of thinking was there and the reflection and the call for doing whatever has to be done for doing whatever has to be done could have been done on the 10 or the 11 or the 12. But the proposal -- it was clear what was the position. You came across that and I confirmed that it was, that’s the way it was done. But it doesn’t mean that the decision was taken before I became trustee.
I became trustee and at that point I did look at it once again and I said, “Well, it makes sense to do that.’ Obviously I had seen what was involved in that and I knew what were the consequences of doing that and I knew that it could be done in accordance with the law that was in force at the time. [19]
[36] The Appellant testified that he began to contemplate the establishment of a trust in 2002 and sought advice from KPMG. Initially, he considered only a family trust but that evolved into a spouse trust and a family trust. The Appellant explained that the spouse trust would allow him to transfer wealth to his wife and the family trust would allow him to transfer future growth to his two children, who were born in 1999 and 2000. The Appellant described the reasons for using trusts as estate planning and liability protection.
[37] The Appellant told KPMG that he was looking for a trustee who had a strong reputation, was conservative when it came to investments and was an expert in trusts. Approximately three months later, KPMG recommended Mr. Paris. The Appellant understood that there were tax benefits to having a trustee resident in Québec.
[38] The Appellant testified that he met with Mr. Paris in his office in Vancouver in October or November 2003. The Appellant stated that he insisted on meeting Mr. Paris and that the meeting had two purposes:
A Well, there was two parts. I wanted to know who he was. I wanted to see if he met the criteria. As we got closer, it was also clear that he hadn’t accepted yet. So then I wanted to also convince him that he should take this on. [20]
[39] The Appellant described the content and result of the meeting in the following exchange with his counsel:
Q Okay. And do you recall what you would’ve discussed at that meeting?
A Yeah, we talked about his background, how long and that he was retired now and that he was a professional trustee. I talked about my background, about Electronic Arts a lot. He asked me a lot of questions about Electronic Arts. And then I talked a lot about my investment background. I wanted to give him some comfort and understanding that the money was legitimate and that I was a) a stable person. I was -- I knew what I was doing and -- I was trying to convince him to be the trustee. I remember I was going in saying, ‘I gotta somehow convince him to take this on.’
Q After meeting with Mr. Paris, did you draw any conclusions of whether he would meet your expected requirements?
A Yeah, I thought he was perfect. [21]
[40] The Appellant’s counsel took the Appellant to articles 2.2, 2.3, 2.4, 2.5, 3.1.1, 3.1.2 and 4 of the Deed and asked him for his understanding of the provisions and whether the provisions were consistent with his intentions. The Appellant described the purpose of each of the provisions and in each case stated that that purpose was consistent with his intentions. The Appellant stated that he was advised probably in every meeting of the irrevocability of the gifts to the Trust and that it was his intention to make such gifts to the Trust. He also understood that the trustee of the Trust had full authority over the property of the Trust and the discretion to invest in almost anything.
[41] The Appellant testified that he donated $2,000 and the Class F Shares to the Trust and that but for the financial crisis in 2008 he may have made further contributions. The Appellant stated that after the gift of the Class F Shares to the Trust he did not expect to control those shares. He also stated that he did not try to compel Mr. Paris to redeem the Class F Shares, that he did not have any agreement with Mr. Paris that required Mr. Paris to redeem the shares or loan the proceeds of redemption to Briel and that he did not expect to control the proceeds received by the Trust on the redemption of the shares.
[42] Mr. Lam led the audit of the Paul Lee Spousal Trust. Mr. Lam was subject to cross-examination by counsel for the Appellant under subsection 146(3) of the Tax Court of Canada Rules (General Procedure) (the “Rules”).
[43] Mr. Lam te