Antle v. The Queen

Antle v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2009-09-18
Neutral citation
2009 TCC 465
File numbers
2005-1619(IT)G, 2005-1620(IT)G
Judges and Taxing Officers
Campbell J. Miller
Subjects
Income Tax Act
Decision Content
Citation: 2009 TCC 465
Date: 20090918
Docket: 2005-1619(IT)G
BETWEEN:
PAUL ANTLE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________________
Appeal heard on common evidence with the appeal of
Renee Marquis-Antle Spousal Trust, 2005-1620(IT)G
on March 9, 10, 11, 12 and 13, 2009,
at Vancouver, British Columbia
and on April 27, 28, 29 and 30, 2009, at Ottawa, Ontario,
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Joel A. Nitikman and Michelle Moriartey
Counsel for the Respondent:
Robert Carvalho, Eric Douglas
and Johanna Russell
___________________________________________________________________
JUDGMENT
The appeal from the reassessment made under the Income Tax Act for the 1999 taxation year is dismissed, with one set of costs to the Respondent.
Signed at Ottawa, Canada, this 18th day of September, 2009.
“Campbell J. Miller”
C. Miller J.
Citation: 2009 TCC 465
Date: 20090918
Docket: 2005-1620(IT)G
BETWEEN:
RENEE MARQUIS-ANTLE SPOUSAL TRUST,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
___________________________________________________________________
Appeal heard on common evidence with the appeal of Paul Antle,
2005-1619(IT)G on March 9, 10, 11, 12 and 13, 2009,
at Vancouver, British Columbia
and on April 27, 28, 29 and April 30, 2009, at Ottawa, Ontario,
By: The Honourable Justice Campbell J. Miller
Appearances:
Counsel for the Appellant:
Joel A. Nitikman and Michelle Moriartey
Counsel for the Respondent:
Robert Carvalho, Eric Douglas
and Johanna Russell
___________________________________________________________________
JUDGMENT
The purported appeal from the reassessment made under the Income Tax Act for the 1999 taxation year is quashed, with one set of costs to the Respondent.
Signed at Ottawa, Canada, this 18th day of September, 2009.
“Campbell J. Miller”
C. Miller J.
Citation: 2009 TCC 465
Date: 20090918
Docket: 2005-1619(IT)G
2005-1620(IT)G
BETWEEN:
PAUL ANTLE and
RENEE MARQUIS-ANTLE SPOUSAL TRUST,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Miller J.
[1] Tax practitioners delight in attaching labels to tax transactions – rollovers, bumps, freezes, loopholes. These cases concern a transaction known in the tax community as a capital property step-up strategy. Briefly, this strategy involves a shifting of capital property (with an accumulated gain) from husband to a Barbados spousal trust, and in this case, the trust then selling the property to the beneficiary wife, the wife selling the property to a third party purchaser using the proceeds to pay off the trust, the trust then distributing the funds to the wife as beneficiary and the trust then dissolving. Result – no tax, as there is no capital gain taxable in Canada, as there would have been had the husband sold the capital property directly to the third party. The capital gain arises in the trust in Barbados where there is no tax on capital gains. The Respondent takes exception to this strategy implemented by the Antles on a number of fronts:
(i) The trust is a sham;
(ii) The trust has not been properly constituted;
(iii) Requirements of subsection 73(1) of the Income Tax Act (the “Act”) have not been met;
(iv) Subsection 69(11) of the Act; and
(v) The application of GAAR.
[2] If the capital property step-up strategy is considered acceptable tax planning, then there would be two tiers of taxation of capital gains in Canada: one tier for those whose capital gain can justify professionals’ fees to implement the strategy, in which case there is no tax on a capital gain in Canada; the second tier for everyone else, in which case capital gains are subject to tax in accordance with Part I of the Act. This is an unacceptable result to the Respondent. The real question before me is whether it is for the legislators to introduce legislation to defeat such a result, or can existing legislation and jurisprudence be relied upon by the Courts to do so?
Facts
[3] There were many days of testimony by several witnesses, including Mr. Antle and his wife, their professional advisors and the Trustee from Barbados, aptly named Mr. Truss. The key facts to review are those in connection with the sale of the capital property in question, the establishment of the Trust, the closing of the transactions and the subsequent events.
Sale of Shares of PM Environmental Holdings Ltd. (“PM”)
[4] Mr. Paul Antle and Mr. Mukesh Kapila incorporated PM in Newfoundland to acquire shares of SCC Environmental Group Inc. (“SCC”) from an arms length company, Stratos Global Corporation (“Stratos”). Mr. Antle owned some shares in Stratos. He owned 2,390,000 shares of PM. In 1998, PM acquired the SCC shares from Stratos in exchange for Stratos receiving preferred shares, debt and a right to 50% of profits in the event of a future sale by the new owners (the 50-50 clause). The share certificate for Mr. Antle’s shares of PM was endorsed in blank by him and held as security by Stratos.
[5] In August 1999, Mr. Antle entered discussions with MI Drilling Fluids Canada Inc. (“MI”), a subsidiary of the American company MI Drilling Fluids, for a possible sale of PM to MI. It was evident that part of the deal would include buying out any remaining obligations to Stratos. Mr. Antle obtained a letter from Stratos on September 28, 1999 indicating that it would be prepared to accept $797,000 for its preferred shares and $2.2 million for the debt, plus accrued interest to settle all outstanding obligations.
[6] In a letter of September 30, 1999 from MI to Mr. Antle, MI indicated it “would like to make the following offer for the purchase of the SCC Group”. The letter went on to provide:
- This was to be a purchase of all shares for $3.7 million and assumption of debt up to $4.8 million;
- Mr. Antle and Mr. Kapila were to provide non-competition agreements for $1.5 million;
- Mr. Antle and Mr. Kapila were offered employment contracts; and
- The parties would use their best efforts to negotiate and execute a definitive agreement by October 31, 1999.
Mr. Antle agreed and accepted this offer as a principal of the SCC group on October 1, 1999.
[7] Lawyers for MI prepared a first draft of a purchase and sale agreement dated October 12, 1999, in which Mr. Antle and Mr. Kapila were described as the sellers of the PM shares. Mr. Antle commented on this draft in an email to Mr. Chandler, MI’s in-house counsel, that the deal structure was obviously not finalized “due to taxation matters”, though was clear in his evidence this was not a reference to the capital step-up strategy specifically.
[8] By the end of October, it was clear that Stratos was aware of the potential sale and in November, Mr. Antle’s lawyer, Mr. Chalker, and Mr. Wood, President of Stratos, discussed the possibility of Stratos invoking their 50‑50 clause to capture half of the profits from the sale. Mr. Antle advised Mr. Wood that the share price was $2,763,000. Stratos would not provide its consent and release without receiving half that amount, or $1,381,500, as additional consideration over and above the payments for the preferred shares and debt. Indeed, in mid-November, Mr. Antle believed that due to Stratos’ position, the deal with MI was dead. But on November 23, Stratos consented to the sale of shares in consideration for the $2,997,000 plus interest, plus 50% of the purchase price, being $1,381,500. MI had drafted a form of release to be signed by Stratos, which acknowledged that Mrs. Antle and Mrs. Kapila, would ultimately be the vendors, though there was no mention of any trust arrangement. Similarly, Stratos’ consent of November 23rd only referred to a transfer of shares from Mr. Antle and Mr. Kapila, but no mention of spouses or a trust. Mr. Chalker corrected this on December 3, 1999 requesting the consent be amended to reflect a transfer from husbands to wives, again with no mention of a trust arrangement. According to Mr. Antle, Stratos was not interested in this personal planning. Mr. Wood, President of Stratos, testified he was unaware shares would go through a trust to the spouses, notwithstanding Mr. Antle’s testimony to the contrary.
[9] Mr. Antle had told Stratos by letter on November 22nd that part of the deal included a $1.5 million non-compete and “for tax purposes the additional income may be structured with a portion allocated to the purchase price”. Mr. Antle confirmed with MI by letter of December 9th that the agreed portion of the purchase price for the sellers (Mr. Antle and Mr. Kapila) was $1,381,500, but that they would transfer $500,000 of their non-compete payment to the purchase price for a revised price of $1,881,500, and that Mr. Antle alone would transfer a further $274,200 of his non-compete payment to the purchase price, to bring the final price to $2,155,700. The day before closing, December 13th, Stratos provided written acknowledgment that it had no further interest in the revised purchase price beyond the additional $1,381,500.
[10]Meanwhile, throughout November, the Purchase and Sale Agreement was being finalized through negotiations between the parties, so that by early December a closing date of December 14th had been agreed upon. In early December, Stratos was made aware that the shares would be sold by Mrs. Antle, not Mr. Antle.
[11]MI certainly knew that Mr. Antle was considering an arrangement such that the shares would be sold by Mrs. Antle. The Purchase and Sale Agreement was amended to reflect that fact, and Mr. Antle entered the agreement as a co‑covenantor only, with respect to representations and warranties contained in the Purchase and Sale Agreement. Mr. Pritchard, the Calgary lawyer who represented MI, could not recall any reference to a Barbados trust, only that the shares would ultimately be sold by the spouses. He had no concern with that.
The Trust
[12]Mr. Kapila’s accountant, Mr. Thakar, contacted Mr. Antle’s accountant, Mr. Power, in October 1999 in connection with the potential PM share sale, suggesting that Mr. Power get in touch with Mr. Myron Brown at Probity International Capital Corp. in the Bahamas. This suggestion led to a conversation and an email from Mr. Brown to Mr. Power on October 18, 1999 enclosing a standard engagement letter outlining the capital property step-up strategy. Mr. Power understood the strategy was that Mr. Antle would establish a spousal trust in Barbados (the “Trust”) for his wife and transfer the PM shares into it. Mr. Power advised Mr. Antle that such an arrangement would involve relinquishing control of his PM shares. Mr. Power was well aware at this stage that Mr. Antle was in the process of selling the PM shares and acknowledged the trust arrangement was tied to the potential sale. He advised Mr. Antle that if Mrs. Antle ultimately received funds from the Trust, it had to be clear those proceeds were hers. He explained that the tax advantage was that Mrs. Antle would not be taxable, and that the trust also would not be taxable on any capital gains in Barbados. Mr. Antle indicated he wanted to give something in the form of a liquid investment to his wife for her family’s support earlier in his career (Mrs. Antle’s father had lent Mr. Antle $200,000 at a crucial time in Mr. Antle’s career: such funds had subsequently been repaid) and this would be a way of accomplishing that.
[13]Mr. Power spoke to Mr. Chalker, Mr. Antle’s lawyer, around October 19th, after which Mr. Chalker wrote to Mr. Nitikman[1] with Fraser Milner, who had provided a legal opinion on the capital property step-up strategy, copying this to Mr. Brown and Mr. Butalia, an accountant with BDO Dunwoody, who was the original strategist of the plan. Mr. Chalker states in part:[2]
On September 30, 1999 Messrs. Antle and Kapila signed an Offer Letter under which they agreed to sell their shares in PM Environmental to M-I or its designee for a total purchase price of $3.7 M, and assumption of debt up to $4.8 M. …
… I am of the view that the Offer Letter is not a binding agreement, but is merely an agreement to agree. …
Should Messrs. Antle and Kapila decide to proceed with the “Capital Property Step-Up”, the following steps are proposed:
(1) The Offer Letter would be cancelled and superseded by a new offer letter naming the wives of each of Antle and Kapila as the sellers of the shares in PM Environmental.
(2) A Barbadian trust would be established, and my client would gift his shares in PM Environmental to this trust. Mr. Antle’s wife would be the sole beneficiary of the trust.
(3) The trust would sell the shares to my client’s wife at a fair market value which would be 74% of $3.7 M or $2,738,000 ($2,738 M), and my client’s wife would sign a promissory note in favour of the trust for that amount.
(4) The trust would wind-up, and the promissory note would be distributed to my client’s wife, as the sole beneficiary of the trust.
(5) Mrs. Antle would then sell the shares in PM Environmental to the designee or M-I for the purchase price of $2,738 M.
(6) Mrs. Antle could subsequent to the closing of the M-I transaction gift the cash proceeds received by her to her husband. There would be an agreement to do so, but there is a possibility that such a transaction would take place. …
This series of steps accords with the testimony of Mr. Butalia, who I would describe as the mastermind behind the strategy. Mr. Butalia did not use the term “step-up strategy” to describe the plan, but simply referred to the plan as the Barbados Spousal Trust. He confirmed the strategy was developed to step up the cost base of shares so when they are sold by the spouse, there would be no Canadian tax liability. That was the whole purpose.
[14]Mr. Power discussed the strategy with Mr. Antle, including the sale of shares by the Trust to Mrs. Antle, and the plan that she would pay for the shares from the proceeds of a subsequent sale to the third party. On October 26th, Mr. Brown provided a more specific engagement letter to Mr. Power, who forwarded it on to Mr. Antle. The engagement letter[3] stated in part:
You have indicated to me that your primary purpose for pursuing this special planning is its application as part of your long-term personal financial and estate plans. …
[15]Mr. Brown acknowledged that the engagement letter was a standard form of letter.
[16]Mr. Power testified that, given the players involved, he was satisfied with the legitimacy of the plan and believed a real trust would be established to effect the plan. He also relied on Mr. Nitikman’s prior opinion and on advice that he sought from KPMG.
[17]Mr. Antle discussed the concept with his wife, whose view was that receiving such significant funds would give her some financial freedom, as well as saving taxes. She also felt that as Mr. Antle was vetting everything through Mr. Power and Mr. Chalker, long-time respected advisors, she thought no more of it: with no disrespect to Mrs. Antle, my impression of her testimony was that she had little appreciation of the mechanics of the strategy, but was, understandably, more interested in the outcome. As she testified, she knew she was a beneficiary in 1999 because “my husband told me so”.
[18]Probity, through Mr. Brown, engaged the services of a Calgary lawyer, Mr. DeVries, to deal with the Canadian corporate commercial side of the step-up transaction. Mr. DeVries described the strategy as one whereby a spousal trust would be settled with a Barbados trustee, “with intent to have as a result the avoidance of the capital gain tax in Canada”. Mr. DeVries, Probity and BDO Dunwoody were to split the fee that Probity negotiated on the step-up strategy on a 1/3, 1/3 and 1/3 basis. The fee was divided into a minimum fee based on the percent of the capital gain tax avoided, and a success or reserve fee, if the strategy accomplished what was intended. In this case, that latter fee will depend on the outcome of this litigation. The minimum fee, according to Mr. Brown, would be earned upon completion of the transaction, including the settlement of the shares in the Trust, the transfer of shares to Mrs. Antle, and the subsequent sale by her to the third party and the paying off of the promissory note to the trust from such proceeds. As Mr. Brown indicated, it was an all or nothing proposition.
[19]In late October, Mr. DeVries provided documents to Mr. Chalker to implement the strategy including PM Director’s Resolutions, Bill of Sale and Promissory Note dated November 1st. Mr. Chalker responded that he was awaiting the consent of Stratos to the sale, so the dating was premature. To that point, Mr. Antle was still hoping for an October 31st closing. He signed a Memorandum of Wishes dated October 27, 1999, but did not in fact settle the trust at that point due to the Stratos problem. Mr. DeVries replied to Mr. Chalker on November 15th that the date of the transaction could be changed, and that there was no need for a step-by-step outline as the documents are simply executed in sequence. Mr. DeVries was well aware there was a third party sale involved.
[20]Probity, again through Mr. Brown, was at the same time engaging the services of Mr. Truss, a Barbados lawyer, whom he had come to know through Mr. Butalia. Mr. Truss, recently admitted to the Barbados Bar, was prepared to act as Trustee. Neither Mr. Antle, Mr. Chalker, nor Mr. Power knew Mr. Truss. On October 27th, Mr. Brown provided Mr. Truss with a client information checklist, from which Mr. Truss prepared a first draft of a Trust Deed. Mr. Truss acknowledged that he had standard trust documents from prior transactions and was therefore able to provide drafts the same day, along with his invoice of $3,300 US for “Creation of one Barbados Trust”. Mr. Truss explained that the fee was not only to prepare the trust documents but also to provide trustee services for one calendar year.
[21]Mr. Truss had done research into the law of trusts and satisfied himself that he could avoid any potential liability by ensuring that all decisions he made were in the best interests of the beneficiary. Consequently, if he had the beneficiaries’ consent to a decision, he was satisfied he had mitigated any risk. For this reason he had no issue with the beneficiary, Mrs. Antle, buying the shares from the Trust. He confirmed that he had every intent to act as Trustee and would not engage in any fake or sham arrangement. He acknowledged that a goal of the trust was to obtain a tax benefit, though he never quite understood what the advantage was, although he did believe there was some rush to complete the transaction by the end of the year due to impending Canadian tax law amendments.
[22]On November 2nd, Mr. Truss sent the trust documents to Mr. Chalker, who, with a minor modification, found them acceptable. Mr. Antle relied upon Mr. Chalker and did not review the Trust Deed in detail. On November 3rd, Mr. Truss advised the Barbados Exchange Control Authority of the Trust, seeking permission to hold foreign property. The Authority approved this on November 8th. Mr. Truss did not advise the Authority that the Trust was not actually established until some time later. The Trust Deed is dated December 5th, notwithstanding Mr. Truss initially signed it on October 27th, and Mr. Antle did not sign until December 14th.
[23]Mr. Truss did not hear anything further regarding the Antle Trust until December. He was unaware of anything going on with respect to a third party sale and the need for the Stratos consent. He asked Mr. DeVries on December 8th for a copy of the Trust Deed, presuming the Trust was already in place. He testified that he likely found out around December 5th that the Trust was probably settled at that time (although, in fact, it was not), as he would then have inserted the December 5th date on the parchment copy of the Deed. Indeed, Mr. DeVries indicated on December 9th by letter to Mr. Chalker, the sequencing of events:
- The Trust was settled on December 5th;
- The sale from the Trust to the spouse was December 8th; and
- The repayment of the promissory note was to take place after the third party sale on December 14th (Mr. DeVries requested funds be wired to him.).
[24]With respect to the signing of the Trust Deed itself, it appears Mr. Truss signed when he prepared it on October 27th, though later changed the date on the front page to December 5th. It was not until closing on December 14th that he actually saw Mr. Antle’s signature on a copy. Mr. Antle was not certain when he actually signed the Trust Deed, but given he was still suggesting to Mr. Brown on December 12th that the Trust must be finalized, I conclude he likely did not sign the Trust Deed until closing on the 14th of December. The Trust Deed he signed would have been dated December 5th. I note that Mr. Antle never met or communicated with Mr. Truss.
[25]Notwithstanding Mr. DeVries’ request, Mr. Antle saw no need for funds to have to go to Mr. DeVries’ office. He was concerned about the time this would take. It was agreed by all concerned, including Mr. Truss, that all transfers of funds would simply be handled through Mr. Antle’s lawyer’s trust account in Canada.
[26]Mr. DeVries testified that he understood the trust was settled December 5th so he decided December 8th would be an appropriate date for the sale from the Trust to Mrs. Antle, the beneficiary, acknowledging that there had not actually been an agreement between the Trust and Mrs. Antle that day. Mr. DeVries explained that the parties were ad idem as to what was going to occur and the date was not that relevant as long as it was before the closing of the third party sale on December 14th. One of the documents signed by Mr. Antle on December 14th was a PM Director’s resolution effective December 5th, approving the transfer of the shares from Mr. Antle to the Trust.
[27]Mr. DeVries provided documents by fax (Bill of Sale, Promissory Note, etc.) on December 13th to Mr. Truss, who signed and returned them. This included a document[4] which read:
The Trust hereby distributes all its capital property to the beneficiary …
Dated as of this 14th day of December, 1999 as at 1:10 p.m.
And also a Direction to Pay[5]:
I, the undersigned Trust, hereby direct that you pay to Renee Marquis Antle (the “creditor”) the amount of $1,641,145.76 which you hold to my credit in your trust account. Dated as of this 14th day of December, 1999 as at 1:15 p.m.
[28]Mr. DeVries faxed these signed documents to Mr. Chalker the next day, December 14th, the day of closing.
[29]Mr. Truss had no issue with signing the documents. He felt no need to investigate the value of shares as the Trust was selling to the beneficiary, who would be entitled in any event to the property. He saw no risk as Trustee. Further, he signed the documents as they were consistent with his understanding of the transaction, not because he felt obliged to do so. He also relied on Mr. DeVries. If the sale had been from the Trust to a third party, he testified that he would have either got the beneficiary’s consent or investigated the fair market value of the property.
Closing and Subsequent Events
[30]The closing of the sale of the PM shares took place on December 14th at Mr. Chalker’s office. The MI representatives arrived around three or four in the afternoon for the closing of the sale of the shares from Mrs. Antle. The Antles arrived before noon to sign the documents in connection with the Trust. Mr. Antle signed the Trust Deed. Mrs. Antle signed the Bill of Sale, Promissory Note and a receipt dated the 14th day of December as at 1:20 p.m. Mr. Truss was faxed and signed the Distribution of capital property, which indicated on its face a time of 1:10 p.m., the Acknowledgment in full of the Promissory Note, indicating a time of 1:10 p.m., and the Direction to Pay to Mr. Chalker of the $1,645,145 to Mrs. Antle timed at 1:15 p.m..
[31]At 2:55 p.m., Mr. Chalker faxed Mr. Truss asking him to sign off the share certificates, though not the original share certificate in Mr. Antle’s name, which he did and returned by fax. Clearly the documents were prepared to reflect a certain sequencing, notwithstanding the timing of the actual signing. As Mr. Antle indicated, there were a number of parties involved, it was very complex and not every date was gone over meticulously, but he indicated “what I do recall is all the documents were signed in the sequence in which we had the authority to transfer and to sell and to offer and so on”. He understood Mr. Truss would follow through with all the required steps as it was in the best interests of the beneficiary to do so. Mr. Antle was not concerned Mr. Truss would do anything other than sell the shares and ultimately make a cash distribution to Mrs. Antle. He acknowledged it was difficult to reconcile some of the dating of documents, for example, share certificates reflecting a December 8th change of ownership while the Bill of Sale for such transfer was dated December 13th.
[32]Later in the afternoon of December 14th, the MI representatives arrived for the closing of the share sale from Mrs. Antle to them. All monies went through Mr. Chalker’s trust account. MI directed Mr. Chalker to pay $4,426,376.71 to Stratos, $1,636,782 to Mrs. Antle, $518,918 to Mrs. Kapila and $275,000 to Mr. Antle (shareholder’s loan). Mr. Chalker’s trust account summaries show the payments coming from Mrs. Antle into the spousal trust. Mr. Chalker paid $95,700 to Mr. DeVries for the professional fees and ultimately paid out to Mrs. Antle $1,542,227.76, which she deposited in her bank account.
[33]There was some follow-up in the couple of days after closing to ensure originals of documents, rather than just faxed copies, were signed, including the Trust Deed. Mr. Truss filed the Trust Deed with the Stamp Duty Office in Barbados on January 31, 2000. Fraser Milner provided a legal opinion with respect to the transaction on April 11, 2000. Mr. Antle was not aware the trust dissolved shortly after the transaction.
[34]On December 7, 1999, Mr. Antle incorporated Koli Enterprises: he was the sole shareholder and director. On December 15th, Mrs. Antle used the sale proceeds to lend $1.4 million to Koli, asking her husband to manage the money for her. There was no loan documentation. Koli acquired a GIC. According to Mr. Power, Mrs. Antle would earn interest on the loan based on the interest Koli would earn on its investment. Mrs. Antle received income from Koli both in the form of interest and salary. In 2005, Koli repaid part of the loan to Mrs. Antle and she provided $200,000 to Mr. Antle to assist with the payment of taxes in connection with this matter.
[35]Mr. Antle later successfully sued Stratos for the additional $1,381,000 Stratos had received out of this deal on the basis Mr. Antle had agreed to that under duress.
Issues
[36]There are two Appellants: Mr. Antle and the Renee Marquis-Antle Spousal Trust. The issue is whether the Minister has properly included the taxable capital gain from the sale of the PM shares in Mr. Antle’s income or, in the alternative, in the Trust’s income, on the basis that the Trust was a Canadian resident. The questions to be addressed in resolving this issue are as follows:
(i) Was there a valid trust?
(ii) Were the transactions undertaken by the Trust and the settlement of the Trust itself a sham?
(iii) Where was the Trust resident?
(iv) Was the rollover under subsection 73(1) of the Act effective?
(v) Does subsection 69(11) of the Act apply to deem Mr. Antle to have disposed of the shares at fair market value?
(vi) Do the General Anti-Avoidance Rules (“GAAR”) in subsections 245(2) and (5) apply to Mr. Antle or the Trust?
(vii) Can the Minister reassess the Trust?
[37]As will become clear, it is unnecessary for me to address all the issues raised by the parties. Indeed, I intend to reorder and limit the issues. I will explain why.
[38]This case deals with tax planning; an ingenious strategy devised by clever tax practitioners and adopted by Mr. Antle. Tax planning is on a continuum. At one end of the spectrum is the type of avoidance planning found acceptable by the Duke of Westminster, entitling a taxpayer to arrange affairs to minimize tax payable. Moving along the spectrum is avoidance planning which runs afoul of the GAAR legislation as it is found to be abusive. And then, at the other end of the spectrum is avoidance planning that is evasive, and subject to criminal charges. The Respondent’s main argument was that the Trust was a sham. A finding of sham requires a finding of an element of deception (see for example, Faraggi v. the Queen[6] and Stubart Investments Limited v. The Queen[7]) on the part of both the settlor and trustee. This moves the matter further along the continuum than the Parties perhaps contemplated, as how far apart are wilful evasion and intentional deception? No, I would rather not go down that very serious path, and indeed I see no need to do so. If there has been a deception, I would describe it as self-deception, albeit innocent, on the part of Mr. Antle and Mr. Truss. The latter was a young pawn in a masterful game of chess by some experienced chess masters. The former did not fully appreciate what a Trust even was, as evidenced by his question two years after the Trust had been dissolved as to whether it was still in place to be used.
[39]Notwithstanding the parties’ detailed, multi-issue approach to this case, my view is that it hinges on two issues:
(i) Was there a validly constituted Trust?
(ii) If so, does GAAR apply to the capital property step-up strategy, or as Mr. Battalia would prefer, the Barbados Spousal Trust?
As the parties spent a considerable amount of argument on the concept of sham, I will also address that issue.
Analysis – Validity of Trust
[40]To establish a valid trust, there must be three certainties: the certainty of intention, the certainty of subject matter, and the certainty of objects. Also, given that a Trust is simply a means of holding property, there must be a transfer of property to the Trust to effectively constitute the Trust. The Respondent argues that the arrangement before me lacks two of the certainties: the certainty of intention to create a Trust and the certainty of subject matter.
[41]First, with respect to certainty of intention, it is the Respondent’s position that the settlor, Mr. Antle, never intended Mr. Truss to have discretion to deal with the shares, but rather intended to use the Trust as a conduit to avoid tax. This is somewhat circuitous reasoning as the arrangement was only effective to avoid tax if it was a valid Trust. Mr. Antle certainly intended a Trust for the purpose of accomplishing his goal of avoiding tax.
[42]The Trust Deed is clear that a Trust is intended. And it is pointed out by Gillese and Milczynski in The Law of Trusts[8]:
Certainty of intention is a question of construction; the intention is inferred from the nature and manner of the disposition considered as a whole. The language employed must convey more than a moral obligation or a mere wish as to what is to be done with certain property. The language used need not be technical, so long as the intention to create a Trust can be found or inferred with certainty.
The express language of the Trust is supported by Mr. Antle’s and Mr. Truss’ testimony, which was unequivocal. According to the Appellant, the language of the Trust Deed is imperative and that is conclusive of certainty of intention. He argues that subjective intention plays no role in ascertaining the certainty of intention: it is only to be derived from the language of the Trust Deed itself.
[43]The Respondent argues that the language of the Deed is insufficient if it does not accord with Mr. Antle’s actions, which suggest that he never intended to give Mr. Truss any control or discretion over the subject matter of the Trust. In the case of Patricia M. Fraser v. Her Majesty the Queen,[9] Justice Reed, in addressing the issue of the certainty of intention, indicated:
And in any event, intention is determined by all of the evidence, including the conduct of the parties and the terms of their written documentation which flowed between them, and not merely on the basis of one person’s subjective view. I have little doubt that the requirement of certainty of intention existed.
[44]There has been considerable jurisprudence on the issue of parol evidence. In this case, however, it is not so much a question of interpretation of a contract, but the determination of the certainty of intention to create a trust. The Trust is a relationship. It is not a contract for consideration. The Trust Deed is to define the rights and responsibilities of those in that relationship. To suggest that only the words in the document can be relied upon to define the relationship is presuming the arrangement is a negotiated contract between two parties where each side has provided consideration to get to a mutually acceptable deal. Those are very different circumstances from a trust, especially where, as in this case, one party, the Trustee, provides the document, a standard trust deed he has created in cookie-cutter fashion, which the settlor, at best, paid little attention to. In this situation, I am not prepared to limit the search for certainty of intention to that document alone. It would be a vacuous inquiry.
[45]Further, I analogize this situation to something I see often: an employer and employee entering an independent contractor agreement, yet continuing to behave as employer/employee. They state their intention is to be in an independent contractor relationship, yet scrape the surface just a little and it is clear the true intention is to not to have to pay and remit source deductions: entering an independent contractor arrangement is simply the means to accomplish this. But this Court must determine if the actions of the parties are consistent with those of the independent contractor arrangement and thus support the intention to truly be in such a relationship, or whether the real employer/employee relationship is simply masked to meet the underlying intention to avoid source deductions. I see no reason why a determination of intent, for purposes of the establishment of a trust, cannot be subjected to similar scrutiny.
[46]Unlike the concept of a sham trust, which I will soon address, which requires a deception on the part of both the settlor and trustee, the certainty of intention requirement only looks to the intention of the settlor. There is no question Mr. Antle intended to avoid capital gains tax in Canada. His professional advisors told him this could only be accomplished by means of settling a Barbados Spousal Trust, therefore, he intended the trust. But let us explore exactly what he did in "settling" the trust.
[47]Notwithstanding the Trust Deed was dated December 5th, I find Mr. Antle did not sign the Deed until December 14th and only then could the Trust have been created. Recall that on December 12th, Mr. Antle was contacting Mr. Brown suggesting that the Trust must be finalized. Mr. Antle and Mr. Truss never communicated on or before December 14th, so December 14th would be the first time both settlor and trustee saw their respective signatures on the Trust Deed. What were the circumstances then on December 14th that might shine a light on Mr. Antle’s true intentions?
- Mr. Truss had already signed a Bill of Sale on December 13th transferring the shares on to Mrs. Antle;
- Mr. Truss had already signed on December 13th a Capital Property Distribution and a Direction to Pay;
- Mr. Antle’s request that funds be handled only through his lawyer’s trust account was acceded to;
- Mr. Antle had inquired into the need for share certificates to go to Barbados and told it was unnecessary;
- Mr. Antle had agreed to the additional consideration for Stratos under duress, maintaining his right to sue Stratos personally for $1.38 million;
- It was not Mr. Truss’ idea to sell the property to the beneficiary and distribute the proceeds back to her;
- Mr. Antle understood Mr. Truss would follow through with all steps of the strategy as they were all in the best interests of the beneficiary; there was no reason (commercial, economic, fiduciary or otherwise) to do anything other than what the strategy stipulated, effectively stripping him of discretion;
- Mr. Antle understood all steps in the strategy had to be completed for a successful avoidance result;
- Mr. Antle was aware that MI had been concerned about the need for Stratos’ consent on release, which was in hand, removing any impediment to the closing of the sale: the Trust was never mentioned as an impediment;
- Mr. Antle had never spoken to Mr. Truss; and
- Nothing in the body of the Trust Deed itself operates to settle the shares in the Trust.
[48]Under these circumstances, on December 14th Mr. Antle signed a Trust Deed dated December 5th claiming, in the preamble, to have transferred the shares. This is not illustrative of an intention to settle a trust. If Mr. Antle intended any role for Mr. Truss, it may at best have been as agent in a gift from him to his wife.
[49]I reach the inevitable conclusion that Mr. Antle did not truly intend to settle shares in trust with Mr. Truss. He simply signed documents on the advice of his professional advisers with the expectation the result would avoid tax in Canada. I find that on December 14th, he never intended to lose control of the shares or the money resulting from the sale. He knew when he purported to settle the Trust that nothing could or would derail the steps in the strategy. This is not indicative of an intention to settle a discretionary trust. Frankly, I have not been convinced Mr. Antle even fully appreciated the significance of settling a discretionary trust, beyond an appreciation for the result it might provide. I conclude that his actions and the surrounding circumstances cannot support a conclusion that signing the Trust Deed, as worded, reflects any true intention to settle shares in a discretionary trust. I do not find that Mr. Antle is saved by the language of the Trust Deed itself, no matter how clear it might be. It does not reflect his intentions. Paragraph 2.1 of the Trust Deed states:
“2.1 The purpose of the… Trust is to create a means for holding investment and business interests for the benefit of the Beneficiaries…”
This was not the purpose, which was for the Trustee to immediately sell the trust property to the Beneficiary and distribute proceeds back to the Beneficiary to perfect the Antles’ tax avoidance strategy.
[50]Next, I will deal with the certainty of subject matter. The Respondent’s position is that while the Trust Deed was clear that the PM shares were the subject matter of the Trust, title to those shares was never transferred to, and consequently held by, the Trustee, and therefore, there was no certainty of subject matter. I believe the Respondent may be confusing certainty of subject matter with the requirement for an effective constitution of the Trust by the transfer of property.
[51]The issue with respect to certainty of subject matter, however, arises around the determination of just what Mr. Antle thought he was passing on to Mr. Truss, and in effect, to Mrs. Antle. Mr. Antle retained some kind of interest in the shares so that he could get back from Stratos $1.38 million of the additional consideration deducted from the value of the shares, purportedly transferred to Mr. Truss. So what interest was Mr. Antle attempting to transfer to Mr. Truss? It was clear Mr. Antle had carved out an amount from the value of the shares to pay out Stratos, effectively removing any charge against the shares to b