St. Michael Trust Corp. v. Canada

St. Michael Trust Corp. v. Canada
Court (s) Database
Federal Court of Appeal Decisions
Date
2010-11-17
Neutral citation
2010 FCA 309
File numbers
A-419-09
Notes
Reported Decision
Decision Content
Federal Court of Appeal
CANADA
Cour d'appel fédérale
Date: 20101117
Dockets: A-419-09
A-420-09
Citation: 2010 FCA 309
CORAM: NADON J.A.
SHARLOW J.A.
STRATAS J.A.
Docket: A-419-09
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the FUNDY SETTLEMENT
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Docket: A-420-09
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the SUMMERSBY SETTLEMENT
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Heard at Ottawa, Ontario, on September 30, 2010.
Judgment delivered at Ottawa, Ontario, on November 17, 2010.
REASONS FOR JUDGMENT BY: SHARLOW J.A.
CONCURRED IN BY: NADON J.A.
STRATAS J.A.
Federal Court of Appeal
CANADA
Cour d'appel fédérale
Date: 20101117
Dockets: A-419-09
A-420-09
Citation: 2010 FCA 309
CORAM: NADON J.A.
SHARLOW J.A.
STRATAS J.A.
Docket: A-419-09
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the FUNDY SETTLEMENT
Appellant
and
HER MAJESTY THE QUEEN
Respondent
Docket: A-420-09
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the SUMMERSBY SETTLEMENT
Appellant
and
HER MAJESTY THE QUEEN
Respondent
REASONS FOR JUDGMENT
SHARLOW J.A.
[1] St. Michael Trust Corp., in its capacity as the trustee of the Fundy Settlement and the Summersby Settlement (the “Trusts”), has been assessed under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) for the 2000 taxation year. The assessed tax arises from capital gains realized by the Trusts on the disposition of the shares of two Canadian corporations at a time when, according to the Crown, the Trusts were resident in Canada. St. Michael Trust Corp. appealed the assessments to the Tax Court of Canada. The appeals were dismissed by Justice Woods (2009 TCC 450). St. Michael Trust Corp. now appeals to this Court. For the reasons that follow, I have concluded that these appeals should be dismissed with costs.
Relevant provisions of the Income Tax Act
[2] Subsection 2(1) of the Income Tax Act imposes tax on the taxable income for a year of every person who is resident in Canada at any time in the year. By virtue of the formula in section 3 of the Income Tax Act, taxable income includes the taxable portion of any capital gain realized in the year. In 2000, the taxable portion of a capital gain was 2/3.
[3] By the combined operation of subsections 2(3) and 115(1) of the Income Tax Act, a person who is not resident in Canada is outside the scope of subsection 2(1) but nevertheless is subject to tax on certain Canadian source income, including the taxable portion of a capital gain realized by the person on the disposition of property that meets the definition of “taxable Canadian property”, unless the property also meets the definition of “treaty-protected property” in subsection 248(1).
[4] Generally, property is treaty-protected if a capital gain realized on its disposition is exempt from Canadian income tax because of an international tax treaty to which Canada is a party. The exemption operates through subparagraph 110(1)(f)(i) of the Income Tax Act which provides that, in computing taxable income, a person is entitled to a deduction equal to any amount that is included in taxable income but exempt from Canadian tax because of an international tax treaty.
[5] For purposes of the Income Tax Act, a taxpayer may be an individual, a corporation or a trust. Although a trust is not a person as a matter of law, the Income Tax Act treats the trust for income tax purposes as though it were an individual. Conceptually, the trust is embodied in the trustee as the person who generally has legal title to the trust property, and who has the powers and discretions granted by the trust documents and the law, concerning the trust property. It is the trustee who is required on behalf of the trust to comply with all filing and reporting requirements under the Income Tax Act, to whom all assessments and other official notifications are sent, who has the legal status to object to assessments and to appeal, and who is responsible for paying the tax debts of the trust. That is the result of subsections 104(1) and (2) of the Income Tax Act, which read in relevant part as follows:
104. (1) In this Act, a reference to a trust or estate (in this subdivision referred to as a “trust”) shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property …
104. (1) Dans la présente loi, la mention d’une fiducie ou d’une succession (appelées « fiducie » à la présente sous-section) vaut également mention, sauf indication contraire du contexte, du fiduciaire, de l’exécuteur testamentaire, de l’administrateur successoral, du liquidateur de succession, de l’héritier ou d’un autre représentant légal ayant la propriété ou le contrôle des biens de la fiducie.
…
[...]
(2) A trust shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for that person’s own income tax, be deemed to be in respect of the trust property an individual …
(2) Pour l’application de la présente loi, et sans que l’assujettissement du fiduciaire ou des représentants légaux à leur propre impôt sur le revenu en soit atteint, une fiducie est réputée être un particulier relativement aux biens de la fiducie …
[6] Subsection 94(1) of the Income Tax Act is a special provision relating to trusts that are not resident in Canada. Broadly speaking, it applies when certain conditions are met as to the identity of the beneficiaries of the trust (the “beneficiary test”, paragraph 94(1)(a)) and the manner in which the trust has acquired property (the “contribution test”, paragraph 94(1)(b)). Those two provisions read in relevant part as follows:
94. (1) Where,
94. (1) Lorsque :
(a) at any time in a taxation year of a trust that is not resident in Canada or that, but for paragraph 94(1)(c), would not be so resident, a person beneficially interested in the trust (in this section referred to as a “beneficiary”) was
a) d’une part, à un moment donné d’une année d’imposition d’une fiducie qui ne réside pas au Canada, ou qui, sans l’alinéa c), n’y résiderait pas, une personne ayant un droit de bénéficiaire sur la fiducie (appelé un « bénéficiaire » au présent article) était :
(i) a person resident in Canada, …
and
(i) une personne résidant au Canada, …
(b) at any time in or before the taxation year of the trust,
b) d’autre part, à un moment donné avant la fin de l’année d’imposition de la fiducie :
(i) the trust … has … acquired property, directly or indirectly in any manner whatever, from
(i) soit la fiducie … a acquis des biens, directement ou indirectement, de quelque manière que ce soit … auprès :
(A) a particular person who
(A) ou bien d’une personne donnée qui remplit les conditions suivantes :
(I) was the beneficiary referred to in paragraph 94(1)(a), was related to that beneficiary or was the uncle, aunt, nephew or niece of that beneficiary, …
(I) elle était le bénéficiaire visé à l’alinéa a), elle était liée à ce bénéficiaire ou elle était l’oncle, la tante, le neveu ou la nièce de ce bénéficiaire, …
the following rules apply for that taxation year of the trust: …
les règles suivantes s’appliquent pour cette année d’imposition de la fiducie: …
[7] It is undisputed in this case that the beneficiary test is met for both Trusts because they both have beneficiaries who are resident in Canada.
[8] There is a dispute as to whether the contribution test is met in this case. The contribution test may be satisfied in a number of ways. For the purposes of this case it is enough to say that it would be met if the Trusts acquired property, directly or indirectly in any manner whatever, from a Canadian resident person who is either a beneficiary or a person related to a beneficiary.
[9] If the beneficiary and contribution tests are met, and the trust is a discretionary trust (as the Trusts are), then paragraph 94(1)(c) deems the trust to be a person resident in Canada for the purposes of Part I of the Income Tax Act and certain provisions in Part XIV imposing reporting requirements (sections 233.3 and 233.4). Part I of the Income Tax Act contains the main charging provisions of the Income Tax Act, including section 2, the provision that imposes on every person resident in Canada a tax on income from any source in the world. Paragraph 94(1)(c) reads in relevant part as follows:
(c) where the amount of the income or capital of the trust to be distributed at any time to any beneficiary of the trust depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power,
c) lorsque le montant du revenu ou du capital de la fiducie à attribuer à un moment donné à un bénéficiaire de la fiducie est fonction de l’exercice ou de l’absence d’exercice, par une personne, d’un pouvoir discrétionnaire :
(i) the trust is deemed for the purposes of this Part and sections 233.3 and 233.4 to be a person resident in Canada no part of whose taxable income is exempt because of section 149 from tax under this Part and whose taxable income for the year is the amount, if any, by which the total of [rules for computing taxable income omitted] …
(i) la fiducie est réputée, pour l’application de la présente partie et des articles 233.3 et 233.4, être une personne résidant au Canada dont aucune partie du revenu imposable n’est exonérée, par l’effet de l’article 149, de l’impôt prévu à la présente partie et dont le revenu imposable pour l’année correspond à l’excédent éventuel de la somme des montants suivants [règles applicables au calcul du revenu imposable omises] …
[10] The remainder of paragraph 94(1)(c) sets out special rules for the computation of the taxable income of a trust to which section 94 applies. The rules are complex, but for the purposes of this case the parties agree that under paragraph 94(1)(c), the taxable income of a discretionary trust includes all income of the trust except income from an active business outside Canada.
[11] The assessments under appeal in this case are based in the alternative on the general anti-avoidance rule in section 245 of the Income Tax Act. Broadly speaking, subsection 245(2) may apply to justify an assessment, regardless of any other statutory provision, where a transaction is undertaken to avoid tax and the transaction is abusive within the meaning of subsection 245(4). Section 245 reads in relevant part as follows:
(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.
(2) En cas d’opération d’évitement, les attributs fiscaux d’une personne doivent être déterminés de façon raisonnable dans les circonstances de façon à supprimer un avantage fiscal qui, sans le présent article, découlerait, directement ou indirectement, de cette opération ou d’une série d’opérations dont cette opération fait partie.
(3) An avoidance transaction means any transaction
(3) L’opération d’évitement s’entend :
(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or
a) soit de l’opération dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer que l’opération est principalement effectuée pour des objets véritables — l’obtention de l’avantage fiscal n’étant pas considérée comme un objet véritable;
(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.
b) soit de l’opération qui fait partie d’une série d’opérations dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s’il est raisonnable de considérer que l’opération est principalement effectuée pour des objets véritables — l’obtention de l’avantage fiscal n’étant pas considérée comme un objet véritable.
(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction
(4) Le paragraphe (2) ne s’applique qu’à l’opération dont il est raisonnable de considérer, selon le cas :
(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of
a) qu’elle entraînerait, directement ou indirectement, s’il n’était pas tenu compte du présent article, un abus dans l’application des dispositions d’un ou de plusieurs des textes suivants :
(i) this Act,
(i) la présente loi,
(ii) the Income Tax Regulations,
(ii) le Règlement de l’impôt sur le revenu,
(iii) the Income Tax Application Rules,
(iii) les Règles concernant l’application de l’impôt sur le revenu,
(iv) a tax treaty, or
(iv) un traité fiscal,
(v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or
(v) tout autre texte législatif qui est utile soit pour le calcul d’un impôt ou de toute autre somme exigible ou remboursable sous le régime de la présente loi, soit pour la détermination de toute somme à prendre en compte dans ce calcul;
(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.
b) qu’elle entraînerait, directement ou indirectement, un abus dans l’application de ces dispositions compte non tenu du présent article lues dans leur ensemble.
Relevant provisions of the Barbados Tax Treaty
[12] The Canada-Barbados Income Tax Agreement (1980) (the Barbados Tax Treaty), formally titled “Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital”, was enacted as a federal law by S.C. 1980-81-82-83, c. 44, Part IX. For the purposes of these appeals, the following interpretive provisions in Article III (General Definitions) of the Barbados Tax Treaty are relevant:
1. In this Agreement, unless the context otherwise requires: …
1. Au sens du présent Accord, à moins que le contexte n’exige une interprétation différente : …
(c) the term “person” includes an individual, an estate, a trust, a company, a partnership and any other body of persons; …
c) le terme « personne » comprend les personnes physiques, les successions (estates), les fiducies (trusts), les sociétés, les sociétés de personnes (partnerships) et tous autres groupements de personnes; …
2. As regards the application of this Agreement by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Agreement.
2. Pour l’application du présent Accord par un État contractant, toute expression qui n’est pas autrement définie a le sens qui lui est attribué par la législation dudit État régissant les impôts qui font l’objet du présent Accord, à moins que le contexte n’exige une interprétation différente.
[13] Broadly speaking, the Barbados Tax Treaty exempts the residents of one of the contracting states from income taxes imposed by the other on specified income and gains, subject to numerous conditions. For purposes of the Barbados Tax Treaty, residence is determined under Article IV (Fiscal Domicile), which reads in relevant part as follows:
1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.
1. Au sens du présent Accord, l’expression « résident d’un État contractant » désigne toute personne qui, en vertu de la législation dudit État, est assujettie à l’impôt dans cet État en raison de son domicile, de sa résidence, de son siège de direction ou de tout autre critère de nature analogue, et les expressions « résident du Canada » et « résident de la Barbade » ont le sens correspondant.
…
…
3. Where, by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Agreement to such person.
3. Lorsque, selon la disposition du paragraphe 1, une personne autre qu’une personne physique est considérée comme résident de chacun des États contractants, les autorités compétentes des États contractants s’efforceront d’un commun accord de trancher la question et de déterminer les modalités d’application du présent Accord à ladite personne.
[14] By virtue of paragraph 4 of Article XIV of the Barbados Tax Treaty a person (including a trust) that meets the treaty definition of “resident of Barbados” but not the treaty definition of “resident of Canada” is entitled to an exemption from Canadian income tax on any capital gain realized on the disposition of shares of a corporation (subject to exceptions that are not relevant to this case). Article XIV (Gains from the Alienation of Property) reads in relevant part as follows:
1. Gains from the alienation of movable property may be taxed in the Contracting State in which such property is situated.
1. Les gains provenant de l’aliénation de biens immobiliers sont imposables dans l’État contractant où ces biens sont situés.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State … may be taxed in the other State. …
2. Les gains provenant de l’aliénation de biens mobiliers faisant partie de l’actif d’un établissement stable qu’une entreprise d’un État contractant a dans l’autre État contractant…sont imposables dans cet autre État. …
3. (a) Gains from the alienation of shares of a company, the property of which consists principally of immovable property situated in a Contracting State, may be taxed in that State. …
3. a) Les gains provenant de l’aliénation d’actions d’une société dont les biens sont constitués principalement de biens immobiliers situés dans un État contractant sont imposables dans cet État. …
4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.
4. Les gains provenant de l’aliénation de tous biens autres que ceux qui sont mentionnés aux paragraphes 1, 2 et 3 ne sont imposables que dans l’État contractant dont le cédant est un résident.
Facts
[15] I summarize as follows the facts relating to the transactions underlying the assessments under appeal.
[16] PMPL Holdings Inc. (“PMPL”) was incorporated in Canada in 1992 to hold the shares of two Canadian operating corporations, Progressive Moulded Products Inc. and Progressive Tools Limited. The PMPL corporate group was originally owned and controlled by Myron Garron and members of his family. In 1990, Mr. Andrew Dunin, who is not related to the Garron family, became involved with Progressive Moulded Products. He was promised the right to earn equity shares of PMPL, and in fact he contributed substantially to its financial success.
[17] By 1996, the common shares of PMPL were owned as to 50% by Mr. Dunin and as to 50% by a Canadian corporation, Garron Holdings Ltd. (“Garron Holdings”). The shares of Garron Holdings were owned by Myron Garron and his spouse Berna Garron, and a trust of which Mr. and Mrs. Garron were the trustees and their children and grandchildren were the beneficiaries. At all material times, Mr. Garron and his spouse and Mr. Dunin were resident in Canada.
[18] At some point early in 1998, a decision was made to change the ownership structure of PMPL. One objective of that change was to increase Mr. Dunin’s share of PMPL in continued recognition of his contribution to its financial success. Another objective was to ensure that no Canadian tax would be payable on any capital gain that could result from an increase in the value of PMPL after the 1998 reorganization.
[19] The tax objective was intended to be achieved by attributing any post-reorganization increase in the value of PMPL to the common shares of a newly created corporation held by trusts that would not be resident in Canada but would, as residents of Barbados, be entitled to the benefit of the exemption from Canadian tax in paragraph 4 of Article XIV of the Barbados Tax Treaty.
[20] The plan to restructure the ownership of PMPL required that the existing common shares of PMPL be cancelled and replaced with three new classes of shares, as follows:
1000 Class A preference shares – the “Freeze Shares”.
a. The Freeze Shares would be issued in exchange for the existing common shares. They would carry voting rights and be redeemable for an amount equal to the fair market value of the existing common shares immediately before the reorganization took effect, which at the time the parties agreed was $50 million. The Freeze Shares would not participate in dividends except on redemption, when dividends would be cumulative between the date of the request for redemption and the date of redemption.
100 Class B shares – the “Special Value Shares”
b. These shares would carry no voting rights or dividend entitlement. They would be retractable (that is, redeemable at the call of the holder) at an amount equal to 10% of the amount by which the fair market value of all shares of PMPL and Progressive Marketing, Inc. at the time of retraction exceeded $50 million. They would be issued to Mr. Dunin or a corporation controlled by him, so that the economic benefit of the retraction amount of the Special Value Shares would accrue to Mr. Dunin.
An unlimited number of Class C shares – the “New Common Shares”
c. These were ordinary common shares. The economic benefit of the value of PMPL would accrue to the holders of the New Common Shares, except for the amount attributable to the retraction value of the Freeze Shares and the Special Value Shares. The New Common Shares would be issued to corporations controlled by two trusts resident in Barbados, one established for the benefit of Mr. Garron and his family, the other for the benefit of Mr. Dunin and his family.
[21] In March of 1998, Mr. Dunin caused Dunin Holdings Ltd. (“Dunin Holdings”) to be incorporated as an Ontario corporation. Mr. Dunin subscribed for the sole issued common share. On April 1, 1998, Mr. Dunin transferred his common shares of PMPL to Dunin Holdings in exchange for 499 common shares of Dunin Holdings. An election was made under subsection 85(1) of the Income Tax Act so that no capital gain arose on Mr. Dunin’s disposition of the PMPL shares. At that point, the common shares of PMPL were owned as to 50% by Dunin Holdings and as to 50% by Garron Holdings.
[22] On April 2, 1998, Mr. Paul Ambrose, a resident of Kingstown, St. Vincent and a long time friend of Mr. Garron, settled two trusts at the request of Mr. Garron and to accommodate him. One of the trusts was settled for the benefit of Mr. Garron and his family (the Fundy Settlement, which for ease of reference I will refer to as the “Garron Trust”). The other trust was settled for the benefit of Mr. Dunin and his family (the Summersby Settlement, which I will refer to as the “Dunin Trust”). The Crown has conceded that the Garron Trust and the Dunin Trust were validly constituted trusts in the sense that the “three certainties” required for a trust were present.
[23] The Garron Trust and the Dunin Trust were each settled with US$100 of Mr. Ambrose’s own funds, and he signed the trust indentures. Mr. Ambrose provided no input or instructions as to the content or terms of the trust indentures, but he reviewed them with a lawyer from St. Vincent and the Grenadines, Agnes E. Cato, who also witnessed his signature.
[24] It was planned that the Garron Trust would acquire the shares of a newly incorporated Ontario corporation, 1287333 Ontario Ltd. (“New Garron Co”) which in turn would acquire 800 of the New Common Shares of PMPL. The Dunin Trust would acquire the shares of another newly incorporated Ontario corporation, 1287325 Ontario Ltd. (“New Dunin Co”), which in turn would acquire 800 of the New Common Shares of PMPL as well as the 100 Special Value Shares of PMPL. As a result, the Dunin Trust (and thus Mr. Dunin and his family) would obtain the benefit of 10% of the increase in the value of PMPL in excess of the redemption value of the Freeze Shares, while any further increase in the value of PMPL would be shared equally by the Dunin Trust (benefiting Mr. Dunin and his family) and the Garron Trust (benefiting Mr. Garron and his family).
[25] The terms of the trust indentures that are relevant to these appeals are substantially the same except for the name of the trust and the identification of the beneficiaries. It is not necessary to recite all of the terms. A sufficiently accurate picture of the trust indentures emerges from the following summary:
a. The trustee was required to keep the trust property invested until the “Division Date” (any date chosen by the trustee or 80 years from the date of settlement, whichever occurred first), subject to the absolute discretion of the trustee to distribute some or all of the income to one or more beneficiaries, with any undistributed or unallocated income to be added to the capital.
b. The trustee had the absolute discretion to encroach on capital to or for the benefit of one or more of the beneficiaries, even to the extent of using all of the trust property.
c. On the division date, the property was to be divided and distributed as follows:
(i) in the case of the Garron Trust, equally among the children of Myron and Berna Garron or their children (subject to certain conditions relating to the age of the child at the division date); and
(ii) in the case of the Dunin Trust, to Mr. Dunin or, if he was not then living, equally to his children or their children (subject to certain conditions relating to the age of the child at the division date).
d. The trustee was precluded from distributing in specie the Class A shares of New Garron Co (in the case of the Garron Trust) or New Dunin Co (in the case of the Dunin Trust), but had the power at any time to convert those shares to cash or other property which could then be distributed in accordance with the general power of distribution.
e. Except for the specific prohibition relating to distribution in specie of the Class A shares of New Garron Co and New Dunin Co, the trustee was given broad powers to invest and to make payments and distributions in money or other property of the trust, and the power to retain or sell any property in any manner and on any terms.
f. The protector had the absolute discretion to remove a trustee and appoint a new trustee.
g. The protector could be removed and a new protector appointed by the majority of beneficiaries who had attained a specified age.
[26] As mentioned above, St. Michael Trust Corp. was the trustee of the Dunin Trust and the Garron Trust. St. Michael Trust Corp. was incorporated in Barbados and began its operations in 1987. At that time its shares were owned by the Barbados partners of the accounting firm Price Waterhouse, which later merged with Coopers & Lybrand. After the merger, the Barbados partners of the merged firm, PricewaterhouseCoopers, became the shareholders of St. Michael Trust Corp. Justice Woods referred to the Barbados partners of both the merged firm and its Price Waterhouse predecessor as “PwC-Barbados”, and I will do the same. The shares of St. Michael Trust Corp. were sold in 2002 and again in 2008, but those transactions are not relevant to any of the issues raised in this appeal.
[27] At all times relevant to this appeal, St. Michael Trust Corp. was licensed as a trustee under the Financial Institutions Act of Barbados and regulated by the Central Bank of Barbados. It was subject to the Trustees Act of Barbados. Its sole business activity was the administration of trusts and acting as a trustee, which it carried on only in Barbados. It had only one office, which was in Barbados. Its business records and the records of all of the trusts under its administration were in Barbados. Its board of directors met in Barbados.
[28] St. Michael Trust Corp. contends that at all relevant times, it was a resident of Barbados for purposes of the Barbados Tax Treaty. Justice Woods considered it unnecessary to reach a conclusion on that point and she declined to do so. However, there can be no doubt that, for the purposes of the Barbados Tax Treaty, St. Michael Trust Corp., in its own right and in relation to its own tax affairs, would be considered a resident of Barbados and not a resident of Canada. One of the issues raised in this appeal is whether, as a matter of law, the residence of St. Michael Trust Corp. is necessarily the same as the residence of the Garron Trust and the Dunin Trust. That point is addressed later in these reasons.
[29] At the time of the transactions in issue in this case, the acts of St. Michael Trust Corp. in its capacity as trustee of the Garron Trust and the Dunin Trust were fulfilled by Mr. Peter Jesson, a tax partner of PwC-Barbados and a director of St. Michael Trust Corp., and Mr. Jim Knott, the general manager of St. Michael Trust Corp. They had both retired by the time of the Tax Court hearing, and neither of them gave evidence.
[30] From 2003 until the time of the Tax Court hearing, the acts of St. Michael Trust Corp. in its capacity as trustee of the Garron Trust and the Dunin Trust were performed by Mr. Ian Hutchinson, the president and a director of St. Michael Trust Corp. Mr. Hutchinson’s background was as an accountant with Coopers & Lybrand in Barbados. He moved to the trust division of PwC-Barbados in 1999 but until 2003, his involvement with the Trusts was limited to “investment recording.” He gave evidence at the Tax Court hearing.
[31] Mr. Jesson signed a memorandum dated April 9, 1998 with respect to the Garron Trust (the Fundy Settlement) that reads as follows:
It is the Trustee’s intention, with respect to the Fundy Settlement (Trust) [the Garron Trust] as follows:
1. Investment Policy
a. that the shares of 1287333 Ontario Limited [New Garron Co] be held until such time as the other shareholders of PMPL Holdings Inc., decide to sell their shares. At that time we will facilitate the sale of the shares of [New Garron Co];
b. any sale proceeds which arise from the sale of the shares of [New Garron Co] (and any other amounts received by the [Garron Trust] as a consequence of the realisation of any assets of [New Garron Co] or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the [Garron Trust]; and
c. we will seek the investment advice of Myron Garron from time to time.
2. Distribution Policy
a. that during the lifetime of Myron Garron the primary consideration in making distributions of income and capital should be the best interests of Myron Garron subject only to his wishes with respect to distributions to other beneficiaries;
b. if Myron Garron should die at a time we continue to hold assets under the terms of the [Garron Trust], distribution shall be made in view of the best interests of Myron Garron’s widow during her lifetime, and thereafter the best interests of his issue, as defined in the [Garron Trust] deed.
[32] Mr. Jesson also signed a memorandum dated April 29, 1998 with respect to the Dunin Trust (the Summersby Settlement) which reads as follows:
1. Investment Policy
a. the shares of 1287325 Ontario Limited [New Dunin Co] should be held until such time as the other shareholders of PMPL Holdings Inc. decide to sell their shares. At that time, we, as the trustee, will facilitate the sale of our shares of [New Dunin Co];
b. any sale proceeds which arise from the sale of our shares of [New Dunin Co] (and any other amounts received by the [Dunin Trust] as a consequence of the realisation of any assets of [New Dunin Co] or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the [Dunin Trust]; and
c. we, as trustee, may seek the investment advice of Andrew Dunin, from time to time.
2. Distribution Policy
During the lifetime of Andrew Dunin, the primary consideration in making distributions of income and capital should be the best interests of Andrew Dunin, subject only to his wishes with respect to distributions to other beneficiaries. If Andrew Dunin should die at a time when we, as trustee, continue to hold assets under the terms of the [Dunin Trust], distributions shall be made in view of the best interests of Andrew Dunin’s widow during her lifetime, and thereafter
the best interests of his issue (as defined in the Settlement Deed).
3. Power to Amend Trust
We, as trustee, will consult with Andrew Dunin each April (*) to determine whether the provision of clauses 3.1(e)(iv) or 3.1(f) of the Settlement Deed should be amended to reflect any amendments which might have been made to the will of Andrew Dunin.
[33] On April 2, 1998, Mr. Julian Gill, another friend of Mr. Garron and the person named as the protector for the Trusts, lent each Trust US$7,190. The terms of the loans stipulated a 10% rate of interest. The loan to the Dunin Trust was repayable upon the sale of its shares of New Dunin Co or the receipt of a dividend from New Dunin Co. The loan to the Garron Trust was repayable upon the sale of its shares of New Garron Co or the receipt of a dividend from New Garron Co. The events triggering the Trusts’ obligations to repay the loans (described below) occurred in August, 2000, and the loans were repaid with interest at that time.
[34] On April 3, 1998, the Garron Trust acquired 1,000 Class A and 1,000 Class B shares of New Garron Co, and the Dunin Trust acquired 1000 Class A and 1000 Class B shares of New Dunin Co.
[35] On April 6, 1998, the following transactions occurred. The reorganization of the share capital of PMPL was completed as described above. 1000 Freeze Shares of PMPL were issued to replace the original common shares owned by Garron Holdings and Dunin Holdings, so that Garron Holdings and Dunin Holdings each became the owner of 500 Freeze Shares of PMPL. New Garron Co subscribed for 800 New Common Shares of PMPL for $80. New Dunin Co subscribed for 100 Special Value Shares of PMPL for $10 and 800 New Common Shares of PMPL for $80.
[36] The value of the common shares of PMPL immediately before the April 6, 1998 reorganization was the subject of conflicting expert opinion in the Tax Court. For purposes of the reorganization the parties had valued them at $50 million, based on a valuation opinion they obtained early in 1998. The Minister assumed, when reassessing the appellants, that the fair market value immediately before the reorganization was substantially more than $50 million. The Crown’s expert valued them at $102 million.
[37] Justice Woods concluded, for reasons that are well explained, that the Minister’s assumption had not been rebutted, but she did not consider it necessary to determine the value. Therefore, for purposes of this appeal, it must be taken as a fact that the pre-reorganization value was substantially more than $50 million.
[38] As a practical matter, that means that the redemption value of the Freeze Shares was fixed at an amount, $50 million, that was less than their actual value, resulting in a shift in the value of PMPL from the holders of the Freeze Shares (Garron Holdings and Dunin Holdings) to the holders of the New Common Shares (the Trusts). The articles of incorporation of PMPL contain a provision that would have adjusted the redemption value of the Freeze Shares upon a determination by a taxing authority or a court that the fair market value of the Freeze Shares was some amount other than $50 million, but that clause was never in play because no such determination was made.
[39] After the reorganization, the companies owned by PMPL continued to operate, apparently with substantial success. During the first half of 1999, negotiations occurred in an attempt to sell PMPL to a Swiss company at Mr. Dunin’s then estimated value of $400 million, but those negotiations did not succeed. In approximately June of 1999, Mr. Dunin retained Mr. Timothy W. Carroll of the Chicago office of Arthur Anderson to find a buyer and manage the sale. An equity firm based in New York, Oak Hill Capital Partners, L.P., expressed an interest and, in August of 2000, acquired indirect interests in PMPL through a Canadian corporation, 1424666 Ontario Ltd. (the “Purchaser”). It is common ground that the Purchaser dealt at arm’s length with St. Michael Trust Corp., Mr. Dunin and Mr. Garron.
[40] It seems to have been accepted by all parties that in 2000, the value of PMPL was approximately $532 million. It was intended that the Purchaser would acquire indirect interests in PMPL for approximately $482 million, and Mr. Dunin and the Dunin Trust would retain indirect interests in PMPL valued in total at approximately $50 million.
[41] This was achieved through the following transactions. The Garron Trust sold all of its shares of New Garron Co to the Purchaser for approximately $217 million. The Dunin Trust sold 907 of its 1000 Class A shares and 907 of its 1000 Class B shares of New Dunin Co (90.7% of the shares) to the Purchaser for approximately $240 million. The shareholders of Garron Holdings (which owned 500 Freeze Shares of PMPL) sold all of their shares of Garron Holdings to the Purchaser for $25 million. Dunin Holdings exchanged its 500 Freeze Shares of PMPL for shares of the Canadian parent corporation of the Purchaser valued at $25 million.
[42] After these sales were completed, the Purchaser indirectly held substantially all of PMPL, for which it had paid approximately $482 million. Its indirect interests in PMPL were represented by all of the shares of Garron Holdings which owned 500 Freeze Shares of PMPL (valued at approximately $25 million), all of the shares of New Garron Co which owned 800 New Common Shares of PMPL (valued at approximately $217 million), and 907 Class A and 907 Class B shares of New Dunin Co which owned the 100 Special Value Shares and 800 New Common Shares of PMPL (valued at approximately $240 million).
[43] Mr. Dunin’s retained indirect interests in PMPL were represented by his continued ownership of the shares of Dunin Holdings, which owned newly issued shares of the Purchaser’s parent corporation (valued at approximately $25 million). That parent corporation in turn owned 500 Freeze Shares of PMPL and a controlling interest in the Purchaser, which in turn owned or controlled the remaining shares of PMPL. Mr. Dunin was also a discretionary beneficiary of the Dunin Trust, which retained a 9.3% equity interest in New Dunin Co valued at approximately $25 million (represented by 93 Class A and 93 Class B shares of New Dunin Co, which owned the 100 Special Value Shares and 800 New Commo