The case of Antle v The Queen, 2009 TCC 465, 2010 FCA 280 (Can LII) (“Antle”) has been a much talked about decision. The appeal to the Federal Court of Appeal was dismissed just recently, on October 21, 2010.
Antle deals with the legality of a “capital property step-up strategy” whereby capital property with an accumulated gain (shares in a company) was shifted from the husband to a Barbados spousal trust. The trust sold the property to the beneficiary wife in exchange for a promissory note. The wife then sold the property to a third party purchaser and used the proceeds to pay off the promissory note. The trust distributed the funds to the wife as beneficiary, after which the trust was dissolved.
This scheme was apparently designed to result in no tax because there was 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 arose in the trust in Barbados where there was no tax on capital gains.
While one might say that the case deals with the residency of the trust, the penultimate issue was whether a trust was created at all in the circumstances.
In order for a trust to be valid, there must be three certainties, namely, certainty of intention to create a trust, certainty in the subject matter of the trust, and certainty in the objects of the trust.
In this case, the Minister focused on the lack of certainty of intention to create the trust and the lack of certainty in the subject matter of the trust. The decision of the Minister was appealed to the Tax Court of Canada (“Tax Court Judge”). The decision of the Tax Court Judge was then appealed to the Federal Court of Appeal.
The Tax Court Judge found that there was no certainty of intention. The husband never intended to lose control of the shares or the money resulting from the sale and never intended to create a trust. The Tax Court Judge found that the husband’s actions and the surrounding circumstances could not support a conclusion that signing the Trust Deed reflected any true intention to settle shares in a discretionary trust, no matter how clear the language in the Trust Deed itself. It simply did not reflect his intentions.
The Tax Court Judge also found that there was no certainty of subject matter. The shares purportedly settled on the trust were in the possession of an unrelated party who claimed a beneficial interest in them. The unrelated party was paid out an amount of money on the final sale to the third party purchaser. The husband later successfully sued the unrelated party and recouped $1.38 million. The husband thereby retained an interest in the shares purportedly settled on the trust. If the husband transferred anything to the trustee, the Court found that it was not his full interest in the shares because there was an element of his ownership in the shares that did not pass. This created a lack of certainty of subject matter.
The Tax Court Judge also found that the trust was never constituted. It never came into existence because the shares were never transferred to the trust and were never in possession of the trustee. The shares remained in Canada throughout and no money ever reached the trustee. The timing and execution were such that the intended steps were not carried out sequentially so as to properly constitute the trust.
Notwithstanding the above findings, the Tax Court Judge determined that the above circumstance was not a sham, as also alleged by the Minister, as the transactions themselves were not disguised.
In an interesting twist, the Federal Court of Appeal concluded “that the Tax Court judge was bound to hold that the Trust was a sham based on the findings that he made”, and dismissed the appeal.
Enjoy the weekend,
Craig R. Vander Zee – Click here for more information on Craig Vander Zee.