Garron Family Trust v. The Queen

Garron Family Trust v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-09-10
Neutral citation
2009 TCC 450
File numbers
2006-1405(IT)G
Judges and Taxing Officers
Judith Woods
Subjects
Income Tax Act
Decision Content
Docket: 2006-1405(IT)G
BETWEEN:
MYRON A. GARRON and BERNA V. GARRON,
as Trustees of the GARRON FAMILY TRUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Berna V. Garron (2006‑1407(IT)G), Myron A. Garron (2006‑1408(IT)G), Fundy Settlement (2006‑1409(IT)G), Andrew T. Dunin (2006‑1410(IT)G) and Summersby Settlement (2006-1411(IT)G) from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no part of the capital gain realized by Fundy Settlement on the disposition of shares of 1287333 Ontario Ltd. should be included in the income of the appellant.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
The Registry is directed to change the style of cause to conform with this judgment.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods”
Woods J.
Docket: 2006-1407(IT)G
BETWEEN:
BERNA V. GARRON,
Appellant,
And
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Garron Family Trust (2006‑1405(IT)G), Myron A. Garron (2006‑1408(IT)G), Fundy Settlement (2006‑1409(IT)G), Andrew T. Dunin (2006‑1410(IT)G) and Summersby Settlement (2006-1411(IT)G)
from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no part of the capital gain realized by Fundy Settlement on the disposition of shares of 1287333 Ontario Ltd. should be included in the income of the appellant.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods”
Woods J.
Docket: 2006-1408(IT)G
BETWEEN:
MYRON A. GARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Garron Family Trust (2006‑1405(IT)G), Berna V. Garron (2006‑1407(IT)G), Fundy Settlement (2006‑1409(IT)G), Andrew T. Dunin (2006‑1410(IT)G) and Summersby Settlement (2006-1411(IT)G)
from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no part of the capital gain realized by Fundy Settlement on the disposition of shares of 1287333 Ontario Ltd. should be included in the income of the appellant.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods”
Woods J.
Docket: 2006-1409(IT)G
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the FUNDY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Garron Family Trust (2006‑1405(IT)G), Berna V. Garron (2006‑1407(IT)G), Myron A. Garron (2006‑1408(IT)G), Andrew T. Dunin (2006‑1410(IT)G) and Summersby Settlement (2006-1411(IT)G) from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is dismissed.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
The Registry is directed to change the style of cause to conform with this judgment.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods"
Woods J.
Docket: 2006-1410(IT)G
BETWEEN:
ANDREW T. DUNIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Garron Family Trust (2006‑1405(IT)G), Berna V. Garron (2006‑1407(IT)G), Myron A. Garron (2006‑1408(IT)G), Fundy Settlement (2006‑1409(IT)G) and Summersby Settlement (2006-1411(IT)G)
from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no part of the capital gain realized by Summersby Settlement on the disposition of shares of 1287325 Ontario Ltd. should be included in the income of the appellant.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods”
Woods J.
Docket: 2006-1411(IT)G
BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the SUMMERSBY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on common evidence with Garron Family Trust (2006‑1405(IT)G), Berna V. Garron (2006‑1407(IT)G), Myron A. Garron (2006‑1408(IT)G), Fundy Settlement (2006‑1409(IT)G) and Andrew T. Dunin (2006‑1410(IT)G) from July 21 - August 6, 2008 at Toronto, Ontario
By: The Honourable Justice Judith Woods
Appearances:
Counsel for the Appellant:
Douglas H. Mathew
Matthew G. Williams
Counsel for the Respondent:
Elizabeth Chasson
Margaret Nott
Martin Beaudry
____________________________________________________________________
JUDGMENT
The appeal with respect to an assessment made under the Income Tax Act for the 2000 taxation year is dismissed.
The respondent is entitled to costs, with one set of counsel fees for all appeals heard under common evidence.
The Registry is directed to change the style of cause to conform with this judgment.
Signed at Ottawa, Canada this 10th day of September 2009.
“J. M. Woods”
Woods J.
Citation: 2009 TCC 450
Date: 20090910
Dockets: 2006-1405(IT)G
2006-1407(IT)G
2006-1408(IT)G
2006-1409(IT)G
2006-1410(IT)G
2006-1411(IT)G
BETWEEN:
MYRON A. GARRON and BERNA V. GARRON,
as Trustees of the GARRON FAMILY TRUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
BERNA V. GARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
MYRON A. GARRON,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the FUNDY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
AND BETWEEN:
ANDREW T. DUNIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent;
AND BETWEEN:
ST. MICHAEL TRUST CORP.,
as Trustee of the SUMMERSBY SETTLEMENT,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Woods J.
[1] These appeals concern assessments made under the Income Tax Act (the “Act”) in respect of dispositions of shares of Canadian corporations by Barbados trusts. All assessments relate to the 2000 taxation year.
I. Background
[2] In 1998, in the course of a reorganization of the share structure of PMPL Holdings Inc. (“PMPL”), two trusts (“Trusts”) with Canadian beneficiaries were settled by an individual resident in the Caribbean island of St. Vincent. The sole trustee of each Trust was a corporation resident in Barbados.
[3] As part of the reorganization, the Trusts subscribed for shares of newly-incorporated Canadian corporations and the corporations in turn subscribed for shares of PMPL. These transactions were effected at nominal consideration.
[4] In 2000, as part of an arm’s length sale of PMPL, the Trusts disposed of the majority of the shares that they held in the holding companies. Capital gains of over $450,000,000 were realized.
[5] Amounts on account of potential tax on the capital gains had been remitted to the government pursuant to the withholding procedures in section 116 of the Act. In income tax returns filed for the 2000 taxation year, the Trusts sought a return of the amounts withheld, claiming an exemption from tax pursuant to the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the “Treaty”).
[6] The exemption relied on, Article XIV(4) of the Treaty, provides:
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.
[7] The Minister has taken the position that this exemption does not apply, and has issued assessments to each of the Trusts in respect of the gains.
[8] In addition to assessing the Trusts, the Minister also assessed four Canadian residents with respect to the same gains. These persons all had interests in PMPL, either directly or through a holding company, prior to the 1998 reorganization. In these reasons, this group will be referred to collectively as the “Other Appellants.”
[9] The assessments issued to the Other Appellants were made as a protective measure only, there being no intent to tax the same gains more than once. In oral argument, counsel for the Minister clarified that the assessments issued to the Trusts should take priority over these assessments.
[10] All of the assessments have been appealed, and the appeals were heard together on common evidence over a three-week period.
II. Summary of issues
[11] The appeals involve several relatively complex legislative provisions and many arguments have been raised.
[12] I would mention that the arguments made by counsel for the Minister following the presentation of evidence varied slightly from the arguments that were in the Minister’s replies. I have limited the discussion below to those issues that were made in argument, either orally or in writing.
[13] There is one exception to this, which relates to the interplay between subsection 75(2) of the Act and Article XIV(4) of the Treaty. This was an issue that I raised during oral argument, and for which written submissions were subsequently received.
[14] Below is a brief summary of the issues that will be discussed. The relevant legislative provisions have been reproduced in an appendix.
[15] First, the Minister submits that the exemption in Article XIV(4) of the Treaty does not apply because the Trusts are resident in Canada. Although the corporate trustee of each Trust is acknowledged to be a resident of Barbados, the Minister submits that the management and control of each Trust is in Canada.
[16] Alternatively, the Minister submits that the Trusts are deemed residents of Canada by virtue of having received property from beneficiaries resident in Canada. The relevant provision is paragraph 94(1)(c) of the Act.
[17] The Minister also submits that the gains are taxable to the Other Appellants pursuant to an attribution rule in subsection 75(2) of the Act.
[18] Further, the Minister seeks to invoke the general anti-avoidance rule (the “GAAR”) in section 245 of the Act in support of all of the assessments.
[19] Finally, the Minister submits that the allocation of the sale proceeds in the arm’s length sale was not reasonable and that the proceeds should be partially reallocated from the Trusts to the Other Appellants. The legislative provision relied on is section 68 of the Act.
[20] For completeness, I would mention two other arguments that were raised by the Minister in the replies but were not pursued in argument. The first is an argument that the Trusts were not validly constituted. The second is that the result sought by the appellants was an abuse of the Treaty without resort to the GAAR.
III. Facts
A. Introduction
[21] In 1992, PMPL was incorporated as a holding company for a Canadian corporation that was in the business of manufacturing and assembling parts for the automotive industry. PMPL also held shares in a small corporation that manufactured tools for the main operating company. The specialty of the business was interior automotive systems, such as consoles.
[22] The main subsidiary was Progressive Moulded Products Inc. (“Progressive”). The other was called Progressive Tools Limited (“Tools”).
[23] The Other Appellants are Andrew Dunin, Myron Garron, Berna Garron, and a trust called the Garron Family Trust.
[24] Immediately prior to the 1998 reorganization, the shares of PMPL were owned equally by Mr. Dunin and a holding company that was wholly-owned by the remaining Other Appellants.
[25] The 1998 reorganization was similar to a typical estate freeze in which (1) an existing shareholder converts common shares to fixed value redeemable and retractable preference shares, and (2) new common shares are issued for nominal consideration to, or for the benefit of, children and other issue of the former common shareholder.
[26] Counsel for the Minister emphasized that the 1998 reorganization was not really an estate freeze, as that term is commonly used, because the new common shares were not held exclusively for children and other issue. The parents also had an interest. Counsel suggests that the term “non-freeze” would be more accurate.
[27] The main steps in the reorganization were these. The owners of common shares of PMPL converted these shares to fixed value preference shares. Newly-issued common shares of PMPL were then issued for nominal consideration to newly-incorporated Canadian holding companies. The Trusts each subscribed for shares in the holding companies for nominal consideration. As a result, the holding companies were wholly-owned by the Trusts.
[28] In 2000, PMPL was sold in an arm’s length transaction in which PMPL was valued at approximately $532,000,000. As part of the sale, the Trusts disposed of the majority of the shares of the holding companies.
[29] The parties filed an agreed statement of facts (“ASF”) which includes many of the detailed steps in the 1998 reorganization. The ASF is part of my factual findings and is reproduced in an appendix.
[30] Attached to the ASF are schematic diagrams that depict the relevant corporate structure both before and after the 1998 reorganization. The ASF also includes a schedule which summarizes the amounts that have been assessed. This schedule has not been reproduced.
B. List of witnesses
[31] Testimony for the appellants was provided by:
· Andrew Dunin, one of the two principals of PMPL;
· Myron Garron, the other principal of PMPL;
· Ian Hutchinson, a resident of Barbados who is currently president of St. Michael Trust Corp. (“St. Michael”), the trustee of the Trusts;
· Mary Mahabir, a solicitor with Lex Caribbean Law Offices in Barbados. Ms. Mahabir provided expert testimony as to whether the Trusts were resident in Barbados;
· Peter Hatges, president of KPMG Corporate Finance Inc. in Toronto. Mr. Hatges provided expert testimony as to the value of PMPL at the time of the reorganization.
[32] The only witness for the Minister was Howard E. Johnson, of Campbell Valuation Partners Limited. Mr. Johnson provided expert testimony as to the value of PMPL at the time of the reorganization.
[33] Mr. Johnson also testified as to the value of a hypothetical option to acquire all the shares of PMPL immediately after the 1998 reorganization. This evidence was presented to support the position of the Minister that the shares held by the Trusts had significant value at the time of the 1998 reorganization. Mr. Johnson’s opinion was limited to the hypothetical option. He did not provide an opinion as to the value of the shares held by the Trusts.
C. The principal transactions
[34] By 1990, the plastic moulding business carried on by Progressive was struggling. The principal of the corporation, Myron Garron, approached Andrew Dunin with a view to convincing him to join the company as its general manager.
[35] Mr. Dunin, who had a business background and experience in the automotive industry, took up the challenge. Over time, he converted Progressive’s business from one that manufactured a variety of plastic moulded products into one that specialized in producing automotive interior systems.
[36] Over the course of a decade, the business had grown exponentially and Progressive had become a significant supplier to major automotive companies, especially General Motors.
[37] When Mr. Dunin joined Progressive in 1990, Mr. Garron promised him an equity interest in the company. The terms of this were settled in 1992 and were reflected in a shareholders’ agreement. Under that agreement, Mr. Dunin could earn up to 50 percent of the equity, depending on the earnings of the business.
[38] To facilitate this agreement, PMPL was incorporated in 1992 to hold the shares of the two operating companies, Progressive and Tools.
[39] Shortly after the 1992 shareholders’ agreement was entered into, Mr. Dunin became unhappy with its terms and he attempted to renegotiate it. Mr. Garron agreed, but only after Mr. Dunin had earned the maximum 50 percent equity interest. This was achieved in 1996.
[40] By 1996, 50 percent of the shares of PMPL were held by Mr. Dunin and the remaining 50 percent were held by Garron Holdings Limited (GHL). The shareholders of GHL were Mr. Garron, his spouse Berna Garron, and a family trust known as the Garron Family Trust. Mr. and Mrs. Garron were the trustees of the trust.
[41] Following protracted and difficult negotiations between Mr. Garron and Mr. Dunin, a new arrangement was implemented in April 1998. By this time, Mr. Garron was no longer playing an active role in the management of the business.
[42] The new arrangement was quite comprehensive. It included a reorganization of the share structure of PMPL, an increased equity ownership and salary for Mr. Dunin, an amendment to the buy/sell provisions in the shareholders’ agreement, and terms under which Mr. Dunin could manage the business, including its disposition.
[43] The revised shareholders’ agreement contains a number of provisions that purport to affect the shares held by the Trusts (sections 6.2, 6.4, 6.6), but the Trusts are not parties to the agreement.
[44] The steps undertaken as part of the reorganization, in brief, are:
· Mr. Dunin transferred his common shares[1] of PMPL to a newly-incorporated holding company, Dunin Holdings Inc. (DHI). Mr. Dunin was the sole shareholder of DHI;
· the common shares of PMPL, which were then equally owned by DHI and GHL, were converted into voting, redeemable preference shares. The redemption amount was equal to the fair market value of the common shares immediately prior to the conversion. The amount was to be determined by PMPL, and was set at $50,000,000. The redemption amount was subject to adjustment in the event that the valuation was determined to be incorrect by a taxing authority or by a court;
· non-voting common shares of PMPL were issued for nominal consideration to two newly-incorporated Canadian corporations, 1287325 Ontario Ltd. (“325”) and 1287333 Ontario Ltd. (“333”). The shares issued to 325 had slightly greater rights of participation than the shares issued to 333; and
· shares of 325 were issued to Summersby Settlement (a Dunin family trust) and shares of 333 were issued to Fundy Settlement (a Garron family trust), both for nominal consideration.
[45] On or about December 1998, an unsolicited expression of interest in buying PMPL was made to Mr. Dunin. The prospective buyer was owned by a Swiss company, Sarna Knuststoff Holding AG (“Sarna”).
[46] Mr. Dunin informed the representative for Sarna that he was interested in pursuing sale negotiations. Upon being asked what the business was worth, Mr. Dunin suggested $400,000,000.
[47] Negotiations with Sarna were conducted over the next several months. They did not lead to a sale, however, because Sarna walked away shortly before the intended closing. As a result, Mr. Dunin had some concern that Sarna never truly was interested in buying the company.
[48] Immediately after the Sarna deal fell through around June 1999, Mr. Dunin instituted a process to facilitate the sale of PMPL. He thought that this made sense because PMPL was doing well and the work necessary for a due diligence process had just been completed for the Sarna negotiations.
[49] Mr. Dunin selected Timothy W. Carroll of the Chicago office of Arthur Anderson to manage the sale process. Arthur Anderson estimated a value for PMPL of approximately $500,000,000.
[50] Mr. Carroll attempted to find potential buyers for PMPL from its competitors and from equity firms. An equity firm based in New York, Oak Hill Capital Partners, L.P. (“Oak Hill”), expressed an interest and eventually bought the business.
[51] The sale to Oak Hill was completed in August 2000 at a value for PMPL of approximately $532,000,000. The consideration was paid in the form of equity shares of the buyer, as to the amount of $50,000,000, and the balance was paid in cash.[2]
[52] As part of the negotiations, Mr. Dunin agreed to continue to work for PMPL for a period of time.
D. Summersby and Fundy
(1) General trust terms
[53] Summersby and Fundy were each established as irrevocable trusts on April 2, 1998. The terms of the trusts are similar.
[54] The beneficiaries of Summersby are Mr. Dunin, his spouse, children and other issue, and any trust established for the benefit of any of them. When Summersby was established, Mr. Dunin had two children, aged 2 and 4.
[55] The beneficiaries of Fundy are Mr. Garron, his spouse, his children and other issue, and any trust established for the benefit of any of them. Mr. Garron has two children, who were 31 and 35 years of age when Fundy was established.
[56] In accordance with the trust indentures, distributions of income or capital could be made at any time in the trustee’s discretion to one or more beneficiaries.
[57] At a “division date,” defined as 80 years from the date of the trust indentures or such date prior to that as selected by the trustee, the trust property is to be distributed as follows:
(a) for Summersby, if Mr. Dunin is living the trust property is to be distributed to him, and if he is deceased the property is to be distributed to his issue; and
(b) for Fundy, the trust property is to be distributed to the issue of Mr. Garron and his spouse.
[58] Each of the trust indentures provides for the appointment of a protector, who has the ability to remove and replace the trustee at any time.
[59] Further, under each of the trust indentures the protector may be replaced at any time by a majority of the beneficiaries who have attained a certain age. That age is 35 in the case of Summersby, and 40 in the case of Fundy.
[60] The trust indentures each specify that the protector has full discretion with respect to his powers. The relevant provision is reproduced below:
8.4 Protector not Agent. The Protector shall not be subject to any fiduciary duty in favour of any person in the exercise of his powers hereunder and shall not be regarded as a trustee of the Trust nor as the agent or nominee of any person. The exercise of any discretion by the Protector hereunder shall be absolute and uncontrolled. No provision of this Trust Indenture shall impose on the Protector a duty of any kind to act in accordance with any provision in this Trust Indenture. The Protector shall not be liable for any loss to the Trust Property arising out of decisions made or actions taken (or not taken) by the Trustee.
(2) The trustee, settlor and protector
[61] The sole trustee of each Trust is St. Michael Trust Corp. (“St. Michael”). St. Michael is incorporated and licensed in Barbados and is regulated by the central bank of Barbados.
[62] St. Michael began operations around 1987. At that time, its shares were owned by the partners of a Barbados accounting firm called Price Waterhouse. Subsequently, this firm merged with another Barbados accounting firm, Coopers & Lybrand, and thereafter St. Michael became owned by the partners of the merged Barbados firm which operated under the name PricewaterhouseCoopers. It is not exactly clear from the evidence when the merger took place but nothing turns on this. For convenience, I will refer to the firm both before and after the merger as PwC-Barbados.
[63] In 2002, PwC-Barbados sold the shares of St. Michael to Oceanic Bank & Trust, a bank located in The Bahamas. In January 2008, it was sold again to Premier Bank International NV, a bank located in Curacao.
[64] During the period of ownership by PwC-Barbados (1987 – 2002), the accounting firm operated St. Michael through its trust division. St. Michael had no employees of its own.
[65] The persons at PwC-Barbados who in 1998 were in charge of Summersby and Fundy for St. Michael were Peter Jesson, a tax partner of PwC-Barbados and a director of St. Michael, and Jim Knott, who was the general manager of St. Michael.
[66] Mr. Jesson left PwC-Barbados some time ago. He practiced with PricewaterhouseCoopers in Canada for a time, and then retired. It is not clear from the evidence when Mr. Jesson ceased to be involved with the Trusts.
[67] Mr. Knott was involved with Summersby and Fundy until his retirement on June 30, 2003. His role was then taken over by Ian Hutchinson.
[68] Mr. Hutchinson is currently the president of St. Michael and a director. He also remains the person primarily responsible for Summersby and Fundy on behalf of St. Michael.
[69] Mr. Hutchinson’s background is as an accountant with Coopers & Lybrand in Barbados. In 1999, he moved into the trust division of PwC-Barbados and had only minor involvement with Summersby and Fundy before assuming Mr. Knott’s role in 2003.[3] Mr. Hutchinson described his pre-2003 activity as “investment recording.”
[70] The settlor of each Trust was Paul Ambrose, a friend of Mr. Garron’s who lives on St. Vincent, an island relatively close to Barbados.
[71] The protector of each Trust is Julian Gill, another friend of Mr. Garron’s who also lives on St. Vincent.
(3) Memoranda re intentions of trustee
[72] Shortly after the Trusts were established, Mr. Jesson prepared an internal memorandum for each Trust that sets out the trustee’s intentions. The memoranda are reproduced in full in Appendix III.
(4) Transactions undertaken by the Trusts
[73] The appellants did not provide detailed evidence regarding all the transactions undertaken by the Trusts. The following is a general summary of the main transactions as far as I could determine.
Transactions by Summersby:
· April 1998 – acquisition of shares of 325 for nominal consideration;
· August 2000 – sale of majority of shares of 325 to Oak Hill for cash proceeds of $240,366,978. Summersby retained an equity interest valued at $25,000,000;
· August 2000 – cash proceeds received from sale were deposited in a bank account at UBS (Bahamas) Ltd.;
· August 2000 – retained shares in 325 were distributed to a new trust with the same beneficiaries as Summersby. St. Michael was the trustee of that trust;
· Late in 2000 – approximately 90 percent of cash proceeds received by Summersby and income earned thereon was distributed to a new trust, Sandfield Settlement, with the same or similar beneficiaries as Summersby. The trustee of Sandfield was Abacus Bank and Trust Ltd., which was also owned by the partners of PwC-Barbados. Sandfield qualified as an international trust in Barbados with the result that it was exempt from tax in Barbados on investment income;
· 2000 – 2003 - the cash held by Summersby was invested in government bonds and similar instruments based on advice from Graham Carter of CAP Advisers Inc. in Toronto;
· Around 2004 – Cranston, Gaskin, O’Reilly & Vernon (CGOV) in Toronto became the investment manager for Summersby. The investment policy that CGOV followed was developed by Mr. Dunin and Colin Carleton, a consultant based in Toronto.
Transactions by Fundy:
· April 1998 – acquisition of shares of 333 for nominal consideration;
· August 2000 – sale of shares of 333 for cash proceeds of $217,118,436;
· August 2000 – cash proceeds received from sale were deposited with Barclays Bank PLC (Barbados);
· Late in 2000 – approximately 90 percent of cash received by Fundy and income earned thereon was distributed to a new trust, Tidal 2000 Trust, with the same or similar beneficiaries as Fundy. The structure of Tidal 2000 was similar to Sandfield;
· Around 2001 – the property of Fundy became managed by a team of investment managers overseen by Doug Farley of Guardian Capital Advisers Inc. in Toronto.
[74] The investments were not always made by Summersby and Fundy directly. At some point, the investments were made by corporations incorporated in the British Virgin Islands (BVI). Summersby and Fundy owned common and preference shares in those corporations.
[75] Very few details about the BVI corporations were provided. According to one of the exhibits, the corporation that invested Fundy’s property was incorporated on April 12, 2001, and Mr. Knott and Mr. Hutchinson were directors of this corporation at the time of Mr. Knott’s retirement (Ex. R-1, Tab 135).
[76] In addition to the above investments, part of the cash proceeds received by Summersby was transferred to other trusts for the benefit of Mr. Dunin and his family at Mr. Dunin’s request. The funds were used for:
· a $20,000,000 real estate investment consisting of land adjacent to the Dunin family home near Toronto; and
· two real estate investments consisting of islands in the Bahamas, which were purchased for a total of $5,000,000. These properties are being held for the personal use of the Dunin family and for investment purposes.
E. Value of PMPL at time of 1998 reorganization
[77] The appellants and the respondent each led evidence as to the fair market value of all the shares of PMPL on April 6, 1998, the date at which the common shares of PMPL were converted to fixed value preference shares.
[78] In making the assessments, the Minister assumed that the fair market value of the preference shares of PMPL on April 6, 1998 was substantially greater than $50,000,000.
[79] The valuations expert for the Minister, Howard E. Johnson of Campbell Valuation Partners Ltd., determined a value for all the shares of PMPL at $102,000,000. He did not value the different classes of shares.
[80] I would mention that this valuation was subject to several restrictions, qualifications and assumptions. In particular, Mr. Johnson’s report noted that certain information was provided to him by management and was not independently verified (Campbell Valuation Report, Appendix F).
[81] The valuation expert for the appellants was Peter Hatges, president of KPMG Corporate Finance Inc. in Toronto. He was of the opinion that the fair market value of all the shares of PMPL as at April 6, 1998 was $50,000,000.
[82] Mr. Hatges’ opinion was based largely on a valuation that he had prepared in 1998 for the purpose of assisting PMPL in setting the redemption amount of the preference shares as required by the share terms in the Articles of Amendment.
[83] The valuations of both experts are far lower than the valuations used for purposes of subsequent arm’s length negotiations. In December 1998, Mr. Dunin suggested a value of $400,000,000 to Sarna. In August 1999, a report by Arthur Anderson stated the following (Ex. R-1, Tab 69 – 2):
Based on our due diligence and further analysis, we continue to believe that Progressive could achieve an equity value of greater than $500 million.
[84] Notwithstanding this difference, counsel for the Minister did not suggest that the value of PMPL was in excess of $102,000,000 as at April 6, 1998. I would note that the expert for the Minister provided a detailed explanation as to the reason for the large discrepancy. At the relevant time PMPL was a corporation in transition, and as it turned out PMPL was on the cusp of a meteoric rise that was not entirely foreseeable at April 6, 1998.
[85] I would note in particular that the 1998 reorganization took place at a time that PMPL was in the process of launching two significant business lines for General Motors. The products were consoles referred to as the GMT800 and the GMT425. At the time of the 1998 reorganization, there were business risks associated with these new lines.
[86] I now turn to the opinion of Mr. Hatges, whose factual assumptions were in part supported by the testimony of Mr. Dunin.
[87] I did not find Mr. Hatges’ opinion to be convincing. Overall, his report and testimony appeared to significantly over-emphasize PMPL’s business challenges and under-emphasize the business opportunities.
[88] Mr. Hatges’ view of the GMT800 and GMT425 new business lines is an example of this. It was Mr. Hatges’ opinion that a potential purchaser would not put a positive value on the profit potential for either business line. I am not satisfied based on the evidence as a whole that this was a reasonable view to take.
[89] The GMT800 contract had been awarded by General Motors approximately three years earlier, and at the time of the valuation the business line was a few months away from an expected launch. I accept that there were business risks associated with this business line at the relevant time, but I am not satisfied that Mr. Hatges gave sufficient weight to its profit potential.
[90] As for the other new business line, the GMT425, this console was already in production but at the relevant time there was a pricing dispute between General Motors and PMPL. I accept that the pricing dispute would depress value, but I would conclude from the evidence as a whole that Mr. Hatges over-estimated the risk on this business line.
[91] I would also mention that I have concerns about the independence of Mr. Hatges in relation to his opinion. Mr. Hatges was with KPMG and/or KPMG Corporate Finance Inc. at all relevant times. KPMG had a significant business relationship with PMPL as PMPL’s auditors in 1998, and the firm had also provided tax advice to Mr. Dunin and Mr. Garron.
[92] A further concern is that in providing an opinion for purposes of these appeals, Mr. Hatges was essentially defending the valuation that he had previously prepared for PMPL to assist with the 1998 reorganization.
[93] I now turn to Mr. Johnson’s opinion. Mr. Johnson’s report and testimony impressed me as being unbiased and thorough.
[94] The appellants criticized Mr. Johnson’s opinion for taking into account information that was not available at the April 6, 1998 valuation date. One example is financial forecasts that were not available at the relevant time.
[95] Although I accept that the use of subsequent information is a weakness in Mr. Johnson’s methodology, it was appropriate for Mr. Johnson to take expected future profitability into account in some fashion. There is no reason for me to conclude that Mr. Johnson’s use of this information led to an unreasonably high valuation.
[96] Where does that leave us? The conclusion that I have reached is that the fair market value of all the shares of PMPL as at April 6, 1998 was substantially greater than $50,000,000. Since it is not necessary for this decision to determine an actual value, I will refrain from doing so.
F. Other facts
[97] The gains realized by the Trusts on the sale to Oak Hill were not subject to income tax in Barbados.
[98] Summersby and Fundy were subject to income tax in Barbados on income earned in a year (not capital gains) unless the income was distributed in the year. As mentioned earlier, in 2000 the Trusts distributed all but a small portion of their investment income.
[99] The preference shares of PMPL that were created in the 1998 reorganization were redeemable at the option of PMPL and their holders (DHI and GHL). If, however, one of the holders opposed a redemption of shares requested by the other, the preference shares would not be redeemed at that time. Instead all preference shares would begin to accrue a fixed dividend.
[100] As mentioned earlier, the Minister introduced evidence from Mr. Johnson regarding the value of a hypothetical option to acquire all the shares of PMPL. The option was valued in the range of $2,400,000 to $21,600,000.
[101] This evidence was provided to support the argument of the Minister that the common shares acquired by the Trusts had considerable value at the time that they were issued.
[102] I have some difficulty in making the leap suggested by the Minister that the value of an option is a proxy for the value of the shares acquired by the Trusts. I could understand the analogy better if the preference shares of PMPL were not immediately redeemable and retractable (or dividend-bearing). One of key assumptions that Mr. Johnson relied upon in valuing the option is the length of time that the option could be exercised.
IV. Issue 1 – Are the Trusts resident in Canada under general principles?
A. Overview of treaty exemption
[103] The appellants submit that the Trusts are entitled to the exemption provided in Article XIV(4) of the Treaty. It is worthwhile reproducing it again:
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.
[104] The expression, “resident of a Contracting State,” has a defined meaning for purposes of the Treaty. Article IV(1) of the Treaty provides:
1. For the purposes of this Agreement, the term “resident of a Contracting State” means any person who, under the law 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. The terms “resident of Canada” and “resident of Barbados” shall be construed accordingly.
[105] In light of the definition, each of the Trusts is a “resident of Canada” for purposes of the Treaty if it is liable to taxation in Canada by virtue of residence or by one of the other listed criteria.
[106] The test is the same in determining whether the Trusts are resident in Barbados.
B. Are the Trusts resident in Barbados?
[107] The appellants submit that the Trusts are resident in Barbados for purposes of the Treaty.
[108] The Minister has not taken a view one way or the other on the issue, noting that the residenc