CANADIAN BIJURALISM AND THE INCOME TAX ACT

Author: Catherine Brown

I Overview

II Response to Questions Posed

1. What does each of the following concepts mean at common law: beneficial ownership, beneficial owner, beneficially owned, beneficial interest, beneficially interested, beneficial entitlement?

2. Is the meaning different in an estate law context? Trust law? Property law? Securities law? Corporate law? International tax law? The expression beneficial ownership is also used in the OECD Model Tax Convention as well as in many tax conventions. Is its meaning different in an international law context?

3. Do these expressions have the same meaning in each of the contexts/provisions of the I.T.A.?

Canadian Bijuralism and the Income Tax Act: Overview

I Purpose of Report

The purpose of this report is to analyze the meaning and the use of certain equitable expressions in the I.T.A. with a view to harmonizing these with the laws of the Province of Quebec.

II Conclusions of Report

In my view the expressions under review, and in particular expressions referring to beneficial ownership, pose problems in both the civil and common law as the intended meaning is no longer obvious. If the goal is harmonization of legislative provisions in the I.T.A., the first task should be clarifying the intended meaning of these expressions as currently used in the legislation, starting with beneficial ownership.

The expression beneficial ownership was coined as a colloquialism to refer to the rights of a beneficiary, as recognized in equity, to beneficial enjoyment of trust property. The expression is often employed in statutes and conveys a meaning that strays far from that originally intended meaning. This is particularly apparent in the Income Tax Act, where multiple meanings for this expression are found and credible legal argument leads to a conclusion that multiple persons may be simultaneously considered beneficial owners of a property.

If the meaning of the expression beneficial ownership is clarified in the I.T.A. by language that more precisely conveys the meaning intended, it is my view that many of the current problems attributable to the use of this equitable concept, particularly as it relates to the taxation of trusts and their beneficiairies, will be resolved in both the civil and common law.

To achieve this goal the following steps should be considered.

1. The meaning of the expressions beneficial owner, beneficial ownership or beneficially owned as used in each context in the I.T.A. should be defined.

2. If a change in beneficial ownership is considered relevant to a tax result, when a change will occur should be specified. Examples of such deeming provisions are already included in the provisions affecting qualifying disposition.

3. Where the words owner or beneficial owner are not used, but the tax result is based on who is the owner, who is considered the owner, and for what reason should be made clear in the legislation.

III Summary of Responses

The following provides a summary of the questions posed by the Department of Justice and the answers provided.

1. What does each of the following concepts mean at common law: ‘beneficial ownership,’ ‘beneficial owner,’ ‘beneficially owned,’ ‘beneficial interest,’ ‘beneficially interested,’ ‘beneficial entitlement’? The following provides a brief overview and general framework for understanding each of these concepts in Canadian law.

§ The meaning of each concept can only be understood in the context in which the expression is used and the equitable cause of action and remedy applicable. This point is of such fundamental importance, that in my view, any attempt to find a meaning for these concepts, without an examination of the context in which the concept is being used yields little useful information.

§ Each of these expressions is drawn from the law of equity and brings with them a rich history of equitable remedies, defenses and causes of action. They import with them notions of a fiduciary obligation, an obligation that has been enforced in equity through nine centuries, first by the King through the Lord Chancellor, later through the courts of Chancery, and since the 1880's in Canada by the superior courts of each province. The role of equity at each of these stages has been to bring justice and fairness to the common law. The fiduciary obligation or duty was the main reason for equity’s intervention with the common law.

§ Most provinces in Canada enacted Judicature Acts by the 1880's.[1] This legislation effectively reformed the Canadian court structure and resulted in the transfer of total jurisdiction over equitable matters to the courts of common law (in Canada, the Supreme Courts of the provinces). As a result, equitable remedies, defenses and causes of action are available in the common law courts.

§ The major rights and remedies available to a beneficiary remain in personam or against the trustee to enforce the terms of the trust. The beneficiary also has rights against third parties who acquire the property with notice of the trust, or in some situations where the property is acquired through the fraud of the trustee. In strict legal theory a beneficiary's rights with respect to trust property are not considered to be proprietary or in rem [2].

§ What a beneficiary owns if at all, is an interest in the trust. Thus, although we often regard or refer to the beneficiary of a fixed trust as the ‘beneficial owner’ of the property, this was not true at common law and is not strictly true in equity other than as a short way of describing the beneficiary’s interest in the trust and recognized right to seek the enforcement of the trust terms.

§ Originally the use or trust related only to land. The trustee’s role in this situation was straight forward: to hold the fee simple (legal title) to the land, to turn over the profits to the cestui que trust, to dispose of the land in accordance with his instructions, and to take all necessary proceedings to protect or recover the land.[3]

§ When one considers the simplicity inherent in this method of splitting legal title from beneficial enjoyment of property, it is not surprising that the cestui que trust (beneficiary) came to be thought of as the real owner of the property, or, as sometimes stated in modern terminology, as the ‘beneficial owner’ of the property. However, the right of the beneficiary in equity was and continues to be primarily a right against the trustee to enforce the terms of the trust.[4] The transparency of the beneficiary’s right, and the property to which it led, is obvious in the transfer of land to a trustee in fee simple for the benefit of an identified beneficiary. It is from this simple structure that the concept of beneficial owner can most clearly be seen. The cestui qui trust was considered the beneficial owner in equity. The trustee was considered the legal owner at common law.

§ Now, it may no longer be apparent on a practical level who the ‘real’ or ‘beneficial owner’ of trust assets is. There may be multiple beneficiaries. These beneficiaries may have vested or contingent interests. The trustee may have wide discretion in selecting the trust beneficiaries or the amounts of income or capital they each will receive. A trustee may also have powers such as a power of appointment to select additional beneficiaries. As a result, language such as ‘legal’ and ‘beneficial owner,’ which may have been useful as an abbreviated way to describe the beneficiary’s right on a simple transfer to a trustee (nominal title holder) for the benefit of the cestui que trust (beneficiary), may not be a useful description in the context of many modern trusts and in particular discretionary trusts, the obvious problem being the difficulty in determining who has beneficial enjoyment of the trust property.

2. Is the meaning of the concepts ‘beneficial ownership,’ ‘beneficial owner,’ ‘beneficially owned,’ ‘beneficial interest,’ ‘beneficially interested,’ and ‘beneficial entitlement’ different in an estate law, trust law, property law, securities law, corporate law, or international law context? The expression ‘beneficial ownership’ is also used in the OECD Model Tax Convention as well as in many tax conventions. Is its meaning different in an international context?

§ These expressions, in particular those referring to beneficial ownership have been interpreted and applied in the context of specific legislative provisions, and been given distinct meanings under the relevant statute. For example, one sees the expression “beneficially enjoys directly or indirectly” as a defined term in the Ontario Business Corporations Act. One also sees it as an undefined term in the new Canada Business Corporations Act. (C.B.C.A.) In both cases the intended meaning does not appear to be restricted to the one who beneficially enjoys the trust property. The expression beneficial owner in the context of shareholder remedies in the C.B.C.A. has also been given a very broad interpretation to include one who claimed that the corporation should have issued shares to her.

§ The concept of beneficial ownership remains a significant issue in international law and in the context of tax treaties. Various approaches have been adopted to determine the intended meaning in this context. Canada interprets the expression based on domestic law.

3. A list of all the provisions of the I.T.A. in which these common law concepts ‘beneficial ownership,’ ‘beneficial owner,’ ‘beneficially owned,’ ‘beneficial interest,’ ‘beneficially interested,’ and ‘beneficial entitlement' are used is attached as Schedule A. Do these expressions have the same meaning in each of the contexts/provisions of the I.T.A.?

§ In my view, the short answer to this question is no. The various meanings that may attach where these expressions are used are listed below.

§ Another important question that is addressed is how important the concept of beneficial ownership is for the purposes of the I.T.A. where the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ are not used, and how beneficial ownership would be determined in such circumstances. For example, if an interest in a Canadian partnership is held by a trust, who is the relevant person for the purpose of determining whether the definition of a Canadian partnership in subsection 102(1) is met: the trustee, the trust, or the beneficiary? Similarly, if shares are held by a trust, who is considered to own or control the trust property when deciding whether a corporation is a Canadian controlled private corporation (CCPC), or whether persons are related affiliated, or at arm’s length?

§ The answer to each of these questions depends on how parties to the trust relationship are viewed for the purpose of the specific tax provision, but generally also depends on who is considered to be the beneficial owner of the trust property. Since the concept of ‘beneficial ownership’ permeates the I.T.A. it is important to determine the precise meaning of this concept(s) in the context of the legislation, whether the words are used expressly or implicitly in a particular provision. This report opines that that the answer is not provided in the I.T.A. or in private law.

§ The expressions Beneficial Ownership, Beneficial Owner, Beneficially Owned are used in approximately 33 places in the I.T.A.

At least four basic meanings may attach where the expressions:‘ beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ are used. These are listed below.

1. The owner is the beneficial owner.

§ ‘Beneficial ownership’ includes ownership by the legal title holder if that person also has beneficial enjoyment of the property. In short, the expression ‘beneficial owner’ also includes the owner, and property is considered as ‘beneficially owned’ by that person.

2. The beneficiary is considered the beneficial owner as a result of tax decisions and the operation of the I.T.A. owner.

§ The expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ include ownership by a person where a bare trustee, agent, or other intermediary holds legal title to the property [5]. Thus if an agent holds legal title for a taxpayer, it is the taxpayer and not the agent who would be considered the ‘beneficial owner.’ This result occurs since the trust relationship is ignored for the purposes of subdivision k of the I.T.A. in these circumstances. It should be recognized, however, that case law about whether a trust is a bare trust has focused on whether subdivision k applies to the trust. If so, subsection 108(5) operates to prevent the deduction of, for example, capital cost allowance, terminal losses, or capital losses by the beneficiary. Thus, the case law has generally addressed only whether the trust is subject to subdivision k, and not the broader question of who owns or beneficially owns the trust property for other purposes of the I.T.A. However, if the trust is to be ignored, it can probably be assumed that the beneficiary of a bare trust or subsection 104(1) arrangement (discussed below) would be considered the beneficial owner for all purposes of the Act.

§ A beneficiary of a trust described in a subsection 104(1) “arrangement” is also considered to be the beneficial owner, since the trust is ignored for tax purpose. That subsection provides that a trust is deemed “not to include an arrangement under which the trust can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust property.” This would include a trust arrangement involving beneficiaries other than the settlor and extends the notion of when a trust will be ignored under the Act considerably beyond former arrangements that were considered to be bare trusts under Technical News #7.There may also be more than one beneficiary under a subsection 104(1) arrangement, resulting in a number of taxpayers being viewed together as the beneficial owner(s).

§ It is not clear after the 2001 Technical Amendments, if the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ would be interpreted by the courts to include beneficial ownership by the beneficiary of a self-benefit (subparagraph 73(1.02)(b)(ii)) or Q.D. trust (subsection 107.4(1). This conclusion is based on the statutory requirement that a transfer to such a trust must not result in a change in beneficial ownership. It follows that if there is no change in beneficial ownership on the transfer to the trust, those provisions which refer to the beneficial owner or beneficial ownership would include, in the absence of any indication to the contrary, ownership through the trust by the very persons who transferred the property to it. Unlike subsection 104(1) arrangements, self-benefit and Q.D. trusts remain subject to subdivision k.

§ Case law also suggests that if a resulting or constructive trust is found, the person for whom property is held is the beneficial owner of the property

§ There is some case law support for the view that a beneficiary is the beneficial owner of or has an interest in specific trust property for tax purposes.

§ Deeming provisions are also sometimes used to treat the beneficiary as the owner of trust property for some tax purposes.

3. The beneficiary is the beneficial owner of trust property based on private law principles.

§ The beneficial owner or person with beneficial ownership is the person who is recognized in the law of trusts as the one who has a right to beneficial enjoyment of the trust property.

4. The trust is the owner of trust property.

§ Deeming rules in the I.T.A. determine who is the owner. The basic structure of subdivision k (sections 104-108) is based on the fiction that the trust is an individual and for at least the purpose of calculating capital gains and losses, income or claiming tax deductions, is the owner of trust property. Whether the trust as an individual should or will be considered the ‘owner’ or ‘beneficial owner’ of trust property for other tax purposes is, in my view, a matter of conjecture under the current structure of the I.T.A.[6].

This is one of the most obvious points at which private law concepts conflict with the statutory fiction that the trust is an individual. The trust is clearly treated as the owner of trust property for tax purposes in a number of provisions in the I.T.A. The assumptions underlying the 2001 Technical Amendments are, however, based on the premise that the beneficiary of a trust is the beneficial owner [7]. It would appear that what is meant by the use of the expression ‘beneficial owner’ in the context of these amendments is that the beneficiary is one who both before and after the transfer of the trust beneficially enjoys or has beneficial enjoyment of the trust property. An important task for tax planners and legislators alike will be differentiating between who the beneficial owner is considered to be for purposes of the disposition provisions, who the owner is for purposes of calculating gains and losses, income, and tax deductions of trust property (the trust), and who the beneficial owner or owner is for other purposes under the Act. It will be important to ascertain the circumstances in which the trust will NOT be considered the owner for some tax purposes. A related and equally important concern is who the owner will be considered to be among the trustee, trust, and the beneficiary in those circumstances.

II RESPONSE TO QUESTIONS POSED

ISSUE ONE: What does each of the following concepts mean at common law: 'beneficial ownership,' 'beneficial owner,' 'beneficially owned,' 'beneficial interest,' 'beneficially interested,' 'beneficial entitlement'? The following provides a brief overview and general framework for understanding each of these concepts in Canadian law and highlights where legal uncertainty or disagreement exist.

I PRELIMINARY POINTS

Before beginning a discussion of these concepts it is important to clarify several points. First, each of these concepts is drawn from the law of equity and brings with them a rich history of equitable remedies, defenses and causes of action.

Second, the meaning of each concept is best understood in the context in which the expression

is used and the equitable cause of action and remedy applicable. This point is of such fundamental importance, that in my view, the search for a meaning for these concepts without examining the context in which the concept is being used, yields little useful information. For example, in modern terminology a person may be described as the 'beneficial owner' in property law, or in trust law, though for entirely different reasons. In the case of property law, for example, a purchaser under an agreement of purchase and sale is referred to as the beneficial owner because the remedy of specific performance may be available. In trust law, the use of the expression 'beneficial ownership' results from a recognition of the beneficiary's to compel the trustee to duly administer the trust. In both cases however, the expression 'beneficial owner' attaches because the courts recognize the claimant's equitable right and provide an equitable remedy.

Third, since at least the 1880's there has been heated debate among trust authorities over the use of the word 'owner' in describing a beneficiary's interest in trust property.[8] The owner at common law was simply the owner, enjoying all the rights of property ownership. A trust imposed a duty on the common law owner to hold the property for the benefit of someone else. Thus one of the key rights of ownership ‑the enjoyment of the property‑ no longer belonged to the titleholder. Equity provided the person intended to benefit with a means to enforce the right of enjoyment. This was a personal right or right in personam against the trustee. It was not a

proprietary right with respect to the trust property itself.[9] Thus, although the expressions beneficial or equitable owner are commonly used, the expressions in my view have no meaning other than as a short hand reference to describe a beneficiaries equitable right to property and the ability to enforce that right through the equitable jurisdiction of the court.

Fourth, many of the most significant Canadian decisions around the meaning of these expressions have been in the context of tax statutes for the purpose of revenue collection.[10]

Finally, different terminology is often used to describe the same concept; for example, one might see expressions such as the 'beneficial' or 'equitable' owner or a 'beneficial' or 'equitable'

interest.'[11] Both of the words 'beneficial' or 'equitable' describe the same concept: the beneficiary

has a right that is recognized in equity and that will be enforced by the courts under its equitable

jurisdiction.

These matters are discussed further below.

II INTRODUCTION: A HISTORICAL OVERVIEW OF EQUITY AND THE COMMON LAW

Expressions that include the words 'beneficial owner,' 'entitlement,' or 'interest(s)' have their

roots in the body of English law known as equity. These expressions import with them notions

of a fiduciary obligation, an obligation that has been enforced in equity through nine centuries,

first by the King through the Lord Chancellor, later through the courts of Chancery, and since the 1880's in Canada by the superior courts of each province. The role of equity at each of these stages has been to bring justice and fairness to the common law. The fiduciary obligation or duty was the main reason for equity's intervention with the common law.

Equity had at its roots petitions by dissatisfied medieval litigants to the king. Petitioners generally alleged that justice had not been done, not because of a defect in the law itself but in the law's administration. The Chancellor, to whom the King generally referred these petitions, often held high ecclesiastical office and training in Roman law, canon law, or both. Drawing from these principles, the Chancellor intervened not to rewrite the common law, but rather to prevent its strict application if such application would be unjust. This intervention frequently took the form of a prohibition or injunction against enforcing a common law court judgment if, for example, the judgment was improperly obtained.

The Chancellor and later the Courts of Chancery also became active in the equitable administration of uses (trusts). The Chancellor's role in this area dates back as early as 1225, and was critical to the enforcement of the trust. Specifically, the Chancellor insured that the trustee (foefee to uses) did or did not do anything with the trust property other than what was agreed with the settlor. For example, at common law, if A transferred land to B (feofee to uses) to hold for the use or benefit of C (cestui que trust), the common law courts viewed B as possessing the sole interest in the land, and did recognize the beneficial claim that A wanted C to have in the property. Equity filled this gap. The Courts of Chancery, in exercising their equitable jurisdiction would find persuasive ways, such as threats of imprisonment, to persuade B to live up to his promise with respect to the land.

The use (trust) became very popular as a way to avoid creditors and other feudal responsibilities and the rights of the cestui que trust were well recognized and enforced in equity through the 13th, 14th and 15th century. By the end of the 15th century, most people regarded the equitable interest of the cestui qui trust as something akin to what we call “equitable title” or “beneficial ownership” today.[12] This equitable title was also enforced by the Courts of Chancery.

By the 18th century the use of equitable remedies to resolve legal disputes through the Courts of Chancery was well established. In 1873, by virtue of the Judicature Act, the jurisdiction of the Court of Chancery was transferred to a new Supreme Court of Judicature and for the first time law and equity were administered in England by one court.

Most provinces in Canada enacted similar Judicature Acts by the 1800's.[13] This legislation effectively reformed the Canadian court structure and resulted in the transfer of total jurisdiction over equitable matters to the courts of common law (in Canada, the Supreme Courts of the provinces). As a result, equitable remedies, defenses and causes of action were available for the first time in the common law courts.

At the time that the Judicature Acts came into effect in Canada it was generally believed that the “fusion” of law and equality was procedural and not substantive.[14] There would continue to be two bodies of law, equity and common law, but one court would now administer these. The fused Canadian courts would therefore recognize and enforce both the trustee’s legal title to trust property and the equitable interest of the trust beneficiary if the trustee attempted, for example, to transfer the property to a third party [15] or fraudulently retain it for himself. In a conflict between the rules of equity and the rules of the common law, most Judicature Acts

specifically provide that equity will prevail.[16] Thus the rights of the beneficiary in equity to the trust property are recognized and continue to be enforced by Canadian courts.

Equity is therefore very much alive in the modern common law, enforcing rights and remedies with respect to the trust property. The major remedy available to the beneficiary remains in personam or against the trustee to enforce the terms of the trust. The beneficiary also has rights against third parties who acquire the property with notice of the trust, or in some situations where the property is acquired through the fraud of the trustee. The enforcement of these third party rights generally resulted in the return of the trust property to the trust. In strict legal theory this right to recover the trust property is not considered to be proprietary or in rem with respect to the trust property.[17] What the beneficiary owns, if at all, is an interest in the trust. Although we often regard or refer to the beneficiary of a non‑discretionary trust as the 'beneficial owner' of the property, this was not true at common law and is not strictly true in equity other than as a short way of describing the beneficiary's interest in the trust and recognized right to seek the enforcement of the trust terms.

A second significant development in the evolution of uses and trusts was the adaptation of the equitable (beneficial) interest for much more elaborate purposes. Originally the use or trust related only to land. All that was required to create an enforceable right for the beneficiary in equity was that the land be conveyed unto and to the use of the trustee in fee simple, in trust for the cestui que trust (beneficiary). The trustee's role in this situation was straight forward: to hold the fee simple (legal title) to the land, to turn over the profits to the cestui que trust, to dispose of the land in accordance with conveyor's instructions, and to take all necessary proceedings to protect or recover the land.[18]

When one considers the simplicity inherent in this method of splitting legal title from beneficial enjoyment of property, it is not surprising that the cestui que trust (beneficiary) came to be thought of as the real owner of the property, or, as sometimes stated in modern terminology, as the 'beneficial owner' of the property. However, the right of the beneficiary in equity was and continues to be primarily a right against the trustee to enforce the terms of the trust.[19] The transparency of the beneficiary's right, and the property to which it led, is obvious in the transfer of land to a trustee in fee simple for the benefit of an identified beneficiary. It is from this simple structure that the concept of beneficial owner can most clearly be seen. The cestui qui trust was considered the beneficial owner in equity. The trustee was considered the legal owner at common law.

Matters soon became much more complicated than this. The fact that the trustee held legal title or the fee simple to land did not prevent trusts from being declared with respect to the holders of the equitable estate. For example, one might be given use of the land for life or a term of years, with a gift of the remainder of the property to someone else. One's interest might also be contingent or based on the happening of an event such as marriage or the birth of a child.

The role of the trustee also began to change. Originally, the trustee was a mere nominee or "man of straw" who performed a passive role in holding legal title to trust property: "the foefee was a dormant instrument compelled by equity to obey the direction of the cestui que trust”.[20] However, over time the law permitted "the creation of special trusts under which the trustee might perform such duties as the sale of land, the accumulation of profits, the management of estates and so”.[21]

The subject matter of the trust also changed: whereas the 'use' only applied to land, virtually

any asset can now be transferred to a trust.[22] Thus trust arrangements evolved far beyond what we today refer to as a bare trust to include active duties on the part of the trustee, and complex interests in the beneficiaries.

As a result of these many developments, it may no longer be clear on a practical level who the ‘real' or 'beneficial owner' of trust assets is. There may be multiple beneficiaries. These beneficiaries may have vested or contingent interests. The trustee may have wide discretion in selecting the trust beneficiaries or the amounts of income or capital they each will receive. A trustee may also have powers such as a power of appointment to select additional beneficiaries. As a result, language such as 'legal' and 'beneficial owner’, which may have been useful as an abbreviated way to describe the beneficiary's right on a simple transfer to a trustee (nominal title holder) for the benefit of the cestui que trust (beneficiary), may not be useful in describing ownership in the context of many modern trusts and in particular discretionary trusts, the obvious problem being the difficulty in determining who has beneficial enjoyment of the trust property.

An appreciation of this history of equity and its enforcement is important in understanding the use of terminology such as 'beneficial owner,' 'interest' and 'entitlement' in contemporary Canadian law. As one author has aptly noted "the peculiar development of the equitable jurisdiction in English legal history, and the reception into Canada, casts long shadows over the modern law".[23]

In this paper I refer to the terms 'beneficial ownership,' 'beneficial owner,' 'beneficially owned,' 'beneficial interest,' 'beneficially interested,' and 'beneficial entitlement' as either equitable principles or as part of the modern common law.

III THE CONCEPTS

OWNERS/OWNERSHIP

To understand the meaning of the concepts underlying “beneficial owner' and 'beneficial ownership’, beginning with commonly understood meanings of 'owner' and 'ownership' is useful.[24]

Black's Law Dictionary, Sixth Edition defines an 'owner' as "one who has the right to possess, use and convey something; a proprietor".[25] It follows, according to Black's, that ownership is 'the collection of rights allowing one to use and enjoy property, including the right to convey it to others'.[26] Ownership also infers the "right to possess a thing despite any actual or constructive control’.[27]

In their text on Canadian property law, Mendes Da Costa, Balfour and Gilles describe 'ownership' as "an enforceable bundle of rights that links a person to a thing." According to these authors the "rights can be grouped under three headings: the right to physical use, the right to enjoyment (e.g., income and services) and the right to management (sales, lease, devise and mortgage)”.[28] Professor A.M. Honoré is somewhat more elaborate in his description, identifying eleven elements that he claims provide the most complete conception of property:

Ownership comprises the right to possess, the right to use, the right to manage, the right to the income from the thing, the right to the capital, the right to security, the rights and incidents of transmissibility and absence of term, the duty to prevent harm, liability to execution, and the incident of residuarity.[29]

Ziff [30] in his text reduces this list of key elements of 'ownership' to four:

(i) possession, management and control;

(ii) income and capital;

(iii) transfer inter vivos and on death; and

(iv) protection under law.

Other descriptions begin by assuming that the 'owner' is generally the 'beneficial owner':

Most property, of course, is held both legally and beneficially, i.e., the person with title also has the right to use and enjoyment. Indeed so much is that taken for granted that it would be odd to describe the owner of a fee simple interest in real property as the 'beneficial owner,' or to say that he has the 'beneficial enjoyment,' or owns the 'beneficial estate,' or is 'beneficially entitled' to ownership; he is just 'the owner' and that he owns it for himself is just assumed.[31]

BENEFICIAL OWNER/OWNERSHIP

The adjective 'beneficial,' when added to the word 'owner,' is widely used in legal contexts "to distinguish a right or power one possesses for his own use and enjoyment from one possessed for the use and enjoyment of another”.[32] As indicated above, the primary locus for this distinction is found in the law of trusts: the trustee has legal title to the trust property, but he holds it for the beneficiary of the trust, the latter having the 'beneficial interest' or beneficial enjoyment of it.[33]

If one resorts to legal dictionaries one can also find some general descriptions of who is considered a 'beneficial owner.' Black's Law Dictionary, Sixth Edition, for example, defines 'a beneficial owner' as "one who does not have title to property but has rights in the property that

is the normal incident of owning the property.[34] The Seventh Edition defines 'a beneficial owner' as "the one recognized in equity as the owner of something because use and title belong to that person, though legal title may belong to someone else”.[35]

These commonly vernacular definitions, however, do little but simply restate well‑recognized equitable principles. More detailed and specific definitions for these expressions can be derived from other sources.

For example, a meaning for these words can be found in decisions dealing with their use in a specific context, for example a statute. The Dictionary of Canadian Law, Second Edition, defines a 'beneficial owner' in part by drawing from two Canadian decisions, both of which attempt to determine the meaning of the expression in the context of specific legislative provisions. The Dictionary of Canadian Law states as follows:

! A 'beneficial owner' is one who is the real owner of property though it is in someone else's name. The nominal owner has legal title to the property but the real owner can require the nominal owner to convey the property to him and transfer legal title to him ‑Csak vs. Ammon (1990) 69 DAR. 567 at 570;

! As I see it, the expression 'beneficial owner' serves to include someone who stands

behind the registered owner in situations where the latter functions merely as an

intermediary, like a trustee, a legal representative, or an agent

- Mount Royal/Walsh Inc. v. Ship 'Jensen Star' et al, (1989) 99 N. R. 42 at 47.

Neither of these decisions may be of any assistance, however, in determining the meaning of the words in any context other than the one in which their meaning was explored in these decisions.[36]

The meaning of 'beneficial owner' in the context of a Canadian tax statute can also be found in several decisions including MacKeen v. Nova Scotia (Minister of Finance).[37] In MacKeen, Hart J. described a 'beneficial owner' in the context of the Successions Duty Act of Nova Scotia in the following manner:

It seems to me that the plain, ordinary meaning of the expression 'beneficial owner' is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the 'beneficial owner' is the one who can ultimately exercise the rights of ownership in the property.

The judgement of Hart J. was sustained on appeal. Chief Justice MacKeigan who delivered the judgement of the Court of Appeal [38] said in his reasons:

The real owner, the person "beneficially entitled" to it, can require the nominal owner to let him use or have possession of the property, or to give him the income from it, or otherwise to let him have the benefit and enjoyment of it. He usually can require the nominal owner to convert the property into another form or to transfer the legal title to some other nominal owner. Above all, he is able unless restricted by the terms of a specific trust, to call on the nominal owner to convey the property to him and to transfer its legal title to him, the real owner. If he does so, he will then fully acquire the property by achieving full ownership and will cease to be merely beneficially entitled to it.

The meaning of beneficial owner, as seen, is tied to the meaning of beneficially entitled in this decision. At issue was whether a corporation, by reason of the death of the deceased acquired or became beneficially entitled to property of the deceased. If so each of the shareholders of the corporation was deemed to be a successor of property of the deceased to the extent of the

amount by which the value of his shares in the corporation increased by the corporation

acquiring or becoming beneficially entitled to the property.[39] This meaning of beneficial ownership should therefore be viewed as restricted to these facts or the wording in this legislation.

'Beneficial ownership' follows from the definition of a 'beneficial owner'. The 'beneficial owner' of property enjoys 'beneficial ownership' of it. According to the Dictionary of Canadian Law, 'beneficial ownership' includes "ownership through a trustee, legal representative, agent or other intermediary." Black’s Seventh Edition, shares this view but includes in the definition of 'beneficial owner' a person "for whom property is held in a trust ‑ also termed equitable owner”.[40]

The U.S. Supreme Court provides the following description of 'beneficial ownership':

The expression, beneficial use or beneficial ownership or interest, in property is quite frequent in the law, and means in this connection such a right to its enjoyment as exists where the legal title is in one person and the right to such beneficial use or interest is in another, and where such right is recognized by law, and can be enforced by the courts, at the suit of such owner or of someone in his behalf.[41]

Of these general descriptions, that provided by the U.S. Supreme Court is probably the most accurate. The distinguishing aspect of this description is the statement that beneficial use,

ownership or interest exists where "such right is recognized by law." This statement recognizes that a right must be both recognized and enforceable before beneficial use or enjoyment can be found. It also distinguishes between types of beneficial interests. For example, it plainly cannot be said that all beneficiaries of a discretionary trust have full beneficial enjoyment of the trust property, as matters such as whether the beneficiary's interest is vested, contingent, subject to a future interest and so on, all operate to deny this notion. The best that can be said is that all of the beneficiaries, regardless of the nature of their interest, when viewed in their entirety, beneficially enjoy or own the trust property.[42]

In contrast, many are of the view that a beneficiary of a bare trust is effectively the 'beneficial owner of trust property. The term a 'bare trust' is generally used to describe a trust arrangement in which the trustee has no significant powers other than to hold legal title, and the beneficiary has the right to call for the trust property at any time. This form of trust arrangement is often used by a partnership or group of investors for convenience to hold legal title to property. Bare trusts have also been ignored for tax purposes for some time and the beneficiaries are treated as the beneficial owners of the property where that expression is used in the I.T.A.

Aside from a bare trust arrangement, determining who is the beneficial owner of trust property can only be done contextually. The House of Lords, for example, held that a sole income beneficiary of a fixed trust is the beneficial owner of trust interests and dividends for purposes of the British Income Tax Act.[43] Other Canadian decisions have found that a beneficiary may n have an interest in specific trust assets, again for tax purposes.[44] Common to all of these examples is that either the courts or legislation have found or deemed the beneficiary to beneficially own specific trust property. Outside of such a finding it is inaccurate, in my view, to

suggest that a beneficiary of a trust generally has beneficial ownership of trust property, other than to use this language as a short form for describing the beneficiary's right to enforce the trust against the trustee and any third party other than a bona fide purchaser for value without notice of the trust.

Summary Conclusions

The distinction between a legal title holder at common law and one who has beneficial enjoyment of or a beneficial interest in property is well established in equity and forms a critical role in the modern common law. Often we see this precise legal terminology translated into expressions such as 'legal ownership' and 'beneficial ownership.' The meaning of these expressions, which most accurately describes the simple transfer of property to A for the use of B or, or in modern day language, the transfer of property to an agent, another intermediary, or to a bare trustee, is well entrenched in the legal thinking of common law lawyers.[45] Thus in most legislation and in the jurisprudence, unless the context requires otherwise, the words 'beneficial owners' are used and the meaning assumed as self‑evident. It is perhaps for this reason that encountering a discussion of the meaning of a 'beneficial owner' in statute or in case law is rare.

However, notwithstanding that the distinction between the legal title holder of property and those who beneficially enjoy it is well established in the modern common law, the use of language that generally describes the beneficiary of a trust as the beneficial ownership of trust property is imprecise and in many cases overly broad. As a result, expressions such as beneficial owner or beneficial ownership as used in some legislation may be subject to different interpretations. This, as we have seen, is a particular problem in the context of the Income Tax Act.

BENEFICIALLY ENTITLED/ BENEFICIAL ENTITLEMENT

To understand the meaning of 'beneficial entitlement' one must also look to the context in which the expression is used. Its history lies in determining rights under an estate or trust. In that context, 'beneficially entitled' is generally used to describe a person who has both an equitable

interest in property and the right to compel payment. The word 'entitled' requires the existence of a right enforceable by a court and the word 'beneficially' distinguishes an equitable right or interest from a legal right or interest. The test for 'beneficial entitlement' has been summarized by the courts as the ability to 'sue for and recover' the property in question. A partial history of this 'sue for and recover' test is described in the Supreme Court of Canada decision Covert v. Nova Scotia[46] by Dickson J. in his dissent:

If one resorts to legal dictionaries in search of the meaning to be attributed to such words and phrases as 'entitled,' 'beneficial,' 'beneficially entitled,' 'beneficial interest,' and the like, it soon becomes apparent their meanings are almost invariably drawn from cases concerned with the construction of wills or succession duty statutes. The phrases naturally take their colour from the word 'beneficiary' who is, after all, the target of the tax. Whether we like it or not, this takes us into the formidable body of jurisprudence built up by the Courts of Chancery. The Nova Scotia Act deals with subject matter formerly administered by the courts of equity and it uses phrases long familiar to those courts. At least in the pure wills or trust situations, 'beneficially entitled' refers to an interest that would be recognized by, and enforceable in, a court of equity. See Waters, 'Law of Trusts in Canada' (1974) at 833-35.[47]

In support of his analysis of the meaning of 'beneficial entitlement,' Dickson J. cites British precedent:[48]

The leading modern British authority is Uniacke v Attorney‑General (In Re Miller's Agreement), [1947] Ch. D. 615, in which Wynn‑Parry, J had to determine whether the plaintiffs were 'beneficially entitled' to certain annuity payments which partners of the retiring (and since deceased) partner covenanted to pay the plaintiffs, family of the former partner.

In the clearest statement of the law on this point, the learned trial judge said (at 625):

The word 'entitled,' as used in this section, appears to me necessarily to carry the implication that for a person to be entitled to property under this section it must be capable of being postulated of him that he has a right to sue for and recover such property.

Dickson J. also referred to American authorities on the meaning of 'beneficially entitled' to indicate the uniformity of jurisprudence in this area. He states as follows:

... a case often cited is People v. McCormick (1904), 208 111 R 437. This case makes it clear that the phrase is a compendious expression denoting the types of interests recognized by courts of equity. In Montana Catholic Missions v. Missoula County (1905), 200 US 118, the Supreme Court of the United States expressly included in its definition the element of the ability to sue to enforce the rights".[49]

In summary, the meaning of 'beneficially entitled' was plain in equity and consistently applied by the Canadian courts until the two Supreme Court of Canada decisions involving revenue collection, the first in 1958 and the other in 1980. Until those decisions, the phrase 'beneficially entitled,' according to the authorities, required that a beneficiary have a right and imported the requirement that the right would be enforced by the courts.

Tax Cases: An explosion of trust law principles?

As will be seen in Montreal Trust [50] and Covert[51] (both discussed below), the Supreme Court of Canada may have considerably expanded the range of those who are considered 'beneficially entitled' to property for the purpose of revenue collection under Succession Duty legislation. Whether this expanded meaning extends to other areas of the law or even other tax statutes where the expression 'beneficial entitled' is used is not clear. What is clear is that the Supreme Court of Canada has had much to say on the subject of equitable principles and their role in the context of tax statutes.[52]

The first of the two Supreme Court of Canada decisions, Montreal Trust (Torrance Estate)[53] generally followed the well established 'sue for and recover' test: one is beneficially entitled if one has an equitable interest and the right to compel payment. In Montreal Trust, however, the test was modified somewhat: one would be beneficially entitled if 'one may receive a benefit and has the means of enforcement.' Put differently, in Montreal Trust the Supreme Court of Canada held that "one is beneficially entitled to property if the property could be applied to one's benefit by resort to an effective cause of payment."

In Montreal Trust the issue was whether by reason of the will the legatees became beneficially entitled to any property upon the death of the testator within the meaning of the Succession Duty Act. The testator left funds to a charity on condition that the charity pay the applicable duties. If the charities failed to pay the duties, the Charity Fund would be reduced by that amount. The court held that on the true construction of the will, the Charities Fund was impressed with a trust in favour of the legatees. The trust bound the trustees to hold the fund as security to insure payment of the duties. All three judges of the Supreme Court found that a court of equity would enforce the performance of this trust at the suit of the legatees. As a result the legatees were found 'beneficially entitled' to an interest in the Charities Fund.

The appellants argued before the Supreme Court that there was a distinction between (i) the mere conferring of a benefit upon a beneficiary, and (ii) causing a beneficiary to become beneficially entitled to property. Rand J. made the following observation:[54]

Mr. Marler for the appellants urged as the test to determine whether a successor had become 'beneficially entitled to any property” that formulated by Wynn‑Parry, J., in In re Miller's Agreement, Uniacke v. Attorney‑General, [1947] 1 Ch. 615. The test was that 'it must be postulated of him [the successor] that he has a right to sue for and recover the property.' If the word 'recover' extends to the application of money to one's benefit, and 'sue for' to an ultimate or alternative resort as the effective cause of payment, I am disposed to accept it.

Montreal Trust has been cited with approval in subsequent tax decisions. One of the more important approvals was in MacKeen v. Nova Scotia (Minister of Finance),[55] a decision later endorsed by the majority of the Supreme Court of Canada in Covert.[56] In that case, Mr. Justice Hart, the trial judge, also distinguished between one who is the 'beneficial owner' of property from one who is 'beneficially entitled' to it. He stated as follows:

I believe that the other expression 'beneficially entitled to' has a slightly different meaning from that of 'beneficial owner. The person 'beneficially entitled' to property may be further removed from the exercise of ultimate ownership of the property than the 'beneficial owner,' but as long as that person has the right to legally establish the exercise of the rights of ownership over the property then it may be said that he is 'beneficially entitled' thereto.[57]

Hart, J. took an unprecedented view of the meaning of the words 'beneficially entitled' in the context of that statute.[58]

In my opinion the Legislature of Nova Scotia in using the expression 'Where a corporation... becomes beneficially entitled to property of the deceased' it was using it in the broad sense to cover the situation where the corporation is put in a position to ultimately exercise the rights of ownership over property of the deceased. It would be unnecessary to use additional words such as 'directly or indirectly' or 'is controlled by' to effect its purpose. 'Becomes beneficially entitled to' is broad enough to cover situations in which the property is registered in another name or held in trust or placed in the form in which the corporation can legally recover the property for its own benefit. (Emphasis added)

The judgment of Hart J. was sustained on appeal.[59] Chief Justice MacKeigan, who delivered the judgment of the Court of Appeal,[60] said in his reasons:

I agree that being 'entitled' to property means being able to 'legally recover' it, that is, in the present context, to have the right and power, by lawful means, to fully enjoy the property. The adverb 'beneficially' indicates that the person entitled to enjoyment of the property may not have full legal title.

In the modern sense of the phrase, a person is 'beneficially entitled' to property if he is the real or beneficial owner of it, even though it is in someone else's name as nominal owner. The nominal owner of the property, whether real property, chooses [sic] in action or other personal property, has legal title to it. The real owner, the person 'beneficially entitled' to it, can require the nominal owner to let him use or have possession of the property, or to give him the income from it, or otherwise to let him have the benefit and enjoyment of it. He usually can require the nominal owner to convert the property into another form or to transfer the legal title to some other nominal owner. Above all, he is able, unless restricted by the terms of a specific trust, to call on the nominal owner to convey the property to him and to transfer its legal title to him, the real owner. If he does so, he will then fully acquire the property by achieving full ownership and will cease to be merely 'beneficially entitled' to it.

This interpretation of the words 'beneficially entitled' was adopted and further expanded by the Supreme Court of Canada in 1980 in Covert,[61] again in the context of interpreting succession duty legislation.[62] In that case Mr. Jodrey, in order to avoid the imposition of succession duties on the grandchildren beneficiaries on his death, devised a scheme whereby ultimately the estate property was bequeathed in the will to a subsidiary company, whose parent company was wholly owned by the deceased's grandchildren. When Mr. Jodrey died, duty was assessed against the grandchildren on the basis that they were successors to the rest and residue of the deceased's estate under subs. 2(5)(b) of the Nova Scotia Successions Act.[63] The case rested on the meaning to be attributed to the words 'beneficially entitled' in that Act. The taxpayers argued that the meaning to be attributed to the words 'beneficially entitled' should be the meaning which has been given by courts of equity, that the word 'entitled' requires the existence of a right enforceable by a court of law or equity, and that the word 'beneficially' is used to distinguish an equitable right or interest from a legal right or interest. The Court, per Martland, Pigeon, Beetz and Chouinard JJ., did not accept this view, finding instead that in tax cases "the courts should not be rigidly bound, in interpreting the words 'beneficially entitled,' by rules of equity evolved in the courts of chancery in connection with trusts".[64]

In the circumstances, it is my view that the parent company was beneficially entitled to the residue of the estate within the meaning of subs. 2(5). Although it is not a named beneficiary under the will, the corporate scheme evolved by the deceased has clothed it with total control over the named beneficiary, the subsidiary company, and has enabled it legally to compel the subsidiary company to turn over the residue of the estate to it.

Martland later stated about the meaning of 'beneficial ownership,' after quoting extensively and with approval from the comments of Hart J. in MacKeen:

In my view, the corporation is no less 'beneficially entitled' when the property is held by its wholly owned subsidiary as when it is held in trust for it. Its legal entitlement is even more immediate as it does not have to call upon a third party to perform its obligation as trustee. It only has to exercise its rights as a sole shareholder of its subsidiary.

In his view therefore, "in considering the application of subsection 2(5) to the unusual facts of this case, the Court should not feel itself rigidly bound, in interpreting the words 'beneficially entitled' by rules of equity evolved in the courts of chancery in connection with trusts”.[65] No doubt the conclusion of the Supreme Court in this case was strongly influenced by the fact that the obvious purpose of the scheme adopted by the testator was that the subsidiary company turn over to the parent company the residue of the estate so that it could, in turn, divide the residue among its shareholders, the grandchildren of the deceased. That this scheme was offensive to the four Supreme Court judges is clear in their comments: "this was eminently a case in which the Court should examine the realities of the situation and conclude that the subsidiary company was bound hand and foot to the parent company and had to do whatever its parent said. It was a mere conduit pipe linking the parent company to the estate”.[66]

Three of the Supreme Court judges ‑ Ritchie, Dickson and McIntyre JJ.‑ disagreed. Their dissent was based on the reality that the meanings of the words 'beneficially entitled' are almost invariably drawn from cases concerned with the construction of wills or succession duty statutes which are found in the jurisprudence built up by the Courts of Chancery.

... in the light of the interpretation given to these words by Courts of Chancery and of equity, the parent company cannot be said to be 'beneficially entitled' for it has no standing or capacity to 'sue for and recover' the estate assets. It perhaps has the power, through its share control, to compel the subsidiary company to take steps against the trustees but it has no independent claim and no claim to beneficial entitlement which it can assert. There is nothing in the particular statute or in any rule of statutory construction that permits one to climb up the corporate hierarchical ladder by applying s. 2(5) time and again. That is the very

gap in the legislation of which the testator took advantage.[67]

Covert was a 4:3 decision that may be restricted to its facts, or to tax statutes or to statutes

imposing succession duty. It does not appear to have been followed in subsequent tax decisions [68] on the matter of when one would be 'beneficially entitled' to trust property. It is nonetheless important for two reasons. First, it provides the most recent and authoritative statement on the meaning of 'beneficially entitled' in the context of a taxing statute. Its meaning in that context is clearly much broader than that formerly understood in trust law. Second, it is important for its conclusion that "one who is beneficially entitled to property is in reality the beneficial owner of it", at least for purposes of succession duty legislation.

Later decisions, both tax and non‑tax, refer to the more traditional tests used in MacKeen and Montreal Trust. For example, in Canada v. LeBlanc,[69] a case for judicial review of an umpire's decision under Unemployment Insurance Regulations, the court first quoted MacKiegan C.J.N.S. in MacKeen and the 'sue for and recover' test, and then quoted the modification by Rand J. in Montreal Trust "if the word 'recover' extends to the application of money to one's benefit, and “sue for” to an ultimate and alternative resort as the effective cause of payment, I am disposed to accept it”.[70]

Taking those cases into account, the Court of Appeal found that during the time the vacation pay was held by the employer it was outside Mr. LeBlanc's control; LeBlanc was entitled to receive payment of it only as the collective agreement provided. The money had to be retained by the employer and be paid out as vacation pay at the time specified in that agreement and not before. In short, Mr. LeBlanc was not entitled to 'sue for and recover' the money. Therefore, the court held that he was not 'beneficially entitled' to the vacation pay money in the strict sense, even though his interest in it ripened into one of full ownership when he received it. The meaning of 'beneficially entitled' was also discussed in Griffin v. Charles M. Stewart [71] in the context of a beneficiary's rights to assets of an estate. In that case McQuaid J. stated "he who is beneficially entitled to any property does not have ... an estate in that property, as would

have a beneficial owner, whether in possession or not. He has but the right to require that the estate in property now vested in another as trustee be transferred to and be vested in him. Until

that prerogative is exercised, all he has is a chose in action”.[72] Such a person would not have an estate or interest in the real estate and would not be considered a beneficial owner.

In summary, the meaning of 'beneficially entitled' in trust law, at least until 1958, was that one had a right to receive something, a right enforceable in the courts. The Supreme Court of Canada in both Montreal Trust and Covert may have extended this meaning for succession duty purposes. Specifically, for the purposes of interpreting and applying Succession Duty legislation, the Supreme Court has held that (i) one is beneficially entitled to property if the property could be applied to one's benefit by resort to an effective cause of payment and (ii) to include the control of a parent over its wholly owned subsidiary. In particular, for the purpose of interpreting and applying the Nova Scotia Succession Duty Act, the Supreme Court held that a parent company is considered 'beneficially entitled' to the assets held by its wholly‑owned subsidiary. The extended meaning of 'beneficially entitled' found in Covert does not appear to have been followed. As indicated above, the extended meaning of 'beneficially entitled' adopted in Montreal Trust has been applied in other contexts".[73]

BENEFICIAL INTEREST/BENEFICIALLY INTERESTED

The expressions 'beneficial interest/interested” must also be construed in the context in which they are used. The following provides a general description of the underlying concepts. A trust permits a division of the beneficial enjoyment of the trust property among different beneficiaries. Such a division may create different 'beneficial interests' in the trust which are set out in the trust deed. For example a beneficiary may have an income or capital interest in the trust. The trust document may also give the trustee a wide discretion to create or extinguish a beneficial interest or to shift beneficial interests among different beneficiaries. In consequence, 'beneficial interests' under a trust are capable of many variations. There are joint and common interests, and there are successive interests; there are interests of the born and unborn, there are vested and contingent interests. When a beneficiary becomes entitled to a particular interest, that interest is said to have vested in the beneficiary. One who is 'beneficially interested' in a trust has a hope or expectancy of receiving property from the trust and a right to compel the trustee to perform the terms of the trust, but does not necessarily have a right to the trust property.[74] Consider for example, a beneficiary of a discretionary trust. Such a person would be described as having a 'beneficial interest' in the trust but not a 'beneficial entitlement' to the trust assets (unless the trustee exercises discretion in that individual's favor). The important distinction is that a beneficiary of a discretionary trust may not have an equitable right to trust property that would be enforced by the courts. A person beneficially interested in the trust may only have the right to bring an action to have the trustee perform the terms of the trust and to exercise their discretion if required by the trust.

The distinction between 'beneficial interest' and 'beneficial entitlement' is further explained in Black’s Law Dictionary, Seventh Edition. It defines a 'beneficial interest' as "a right or expectancy in something (such as a trust or estate) as opposed to legal title to that thing. For example, a person with a 'beneficial interest' in a trust receives income from the trust but does not hold legal title to the trust property.[75]

A number of decisions have reviewed the meaning of 'beneficial interest' or 'interest' in a trust in

the context of specific legislation.[76] They may therefore be of limited value outside that context.

Beneficial Interest

For example, the meaning of 'beneficial interest' was discussed in Ontario (Ministry of Community and Social Services) v. Henson.[77] The Ontario Court of Appeal held that a beneficiary of a discretionary trust did not have a 'beneficial interest in assets held in trust' for the purposes of the $3,000 liquid assets test in regulation 318 under the Ontario Family Benefits Act.

The Trustee Acts of eight of the provinces use the phrase 'beneficially interested' in the sense of a beneficiary or successor with such an interest as would be recognized and enforced by the courts; someone who, by definition, is competent to seek relief in the event, for example, of default on the part of the executors and trustees of the estate, or whose consent is required before a trust will be varied.[78]

In the Income Tax Act, the expression 'beneficially interested' is defined and given a very broad meaning that includes both those interested at common law (and equity) as well as a much broader class of persons under the Act.[79]

Specifically, subsection 248(25) of the I.T.A. provides that a person (or partnership) is 'beneficially interested' in a trust if that person has any right, whether contingent, absolute, immediate, future, conditional, or otherwise, as a beneficiary under a trust to receive any of the income or capital. In addition, a person not otherwise 'beneficially interested' in a trust may be deemed to be 'beneficially interested' where, under the terms or conditions of the trust or any arrangement, the person may, because of the exercise of any discretion by anyone, become beneficially interested at a later time. Under this part of the deeming rule, the trust must have acquired property from the particular person, a person not dealing at arm's length with the person, a controlled foreign affiliate, or a nonresident corporation that would be a controlled foreign affiliate if it were a corporation resident in Canada. The definition also includes a person who has given any guarantee on behalf of the trust or provided any other form of financial

assistance.

As a result of this definition, if the trustee has a discretionary power to allocate income or capital amongst a group of people named in the trust, the named persons are 'beneficially interested' in the trust for tax purposes.

Interest

In McCreath, the Supreme Court of Canada discussed the meaning of 'interest'/for purposes of the Succession Duty Act [80] of Ontario. Dickson J., writing for the majority, held that a person who is a possible object of a discretionary power of appointment has an interest in the trust assets even though the trustees are not compelled to distribute to him.[81] The Supreme Court expressly stated its desire to widen the net for policy reasons by expanding the meaning of 'interest. As Dickson C.J. states:

The fact that a discretionary object may have no interest in property law terms because she has no 'right' to a definable amount of income is irrelevant. I do not believe that the niceties and arcana of ancient property law should be fastened upon with mechanical rigidity to determine the effect of a modern taxation statute whose purpose is plain.[82]

Dickson J. held in that case that Mrs. McCreath retained an interest in the trust property for purposes of s. 1(p)(viii) of the Succession Duty Act[83] by making herself one of the possible objects of the discretionary trust. The objects of the trust were 'the Settlor and her issue from time to time alive.' Dickson J. found that Mrs. McCreath could apply to the Court to require the trustee to respect the terms of the trust if he refused to exercise his discretion. For that reason he found that "the fact that a discretionary object may have no interest in property law terms because she has no 'right' to a definable amount of income is irrelevant."

In McCreath, Dickson J cited [84] with approval the following comments of Lord Reid's in Gartside v. Inland Revenue Commrs.:

If 'interest' were given a narrow or technical meaning it would be very easy to defeat the obvious purpose of the provision by setting up a discretionary trust and choosing trustees who might be expected to exercise their discretion in favour of the settlor.

In McCreath, the meaning of an 'interest' in property was given a very broad meaning in order to tax the value of the property held by the trust on Mrs. McCreath's death. Does this meaning extend beyond succession duty legislation? The answer is unclear. In Sachs v. R [85], Thurlow C.J. distinguished both the McCreath and Gartside decisions in the following rather strong terms:

While these cases are illuminating as to the rights there in question, in relation to the particular taxing provisions under consideration I do not regard them as applicable or of assistance in resolving the very different questions that arise under subsection 75(l) [of the Income Tax Act].

Heald J. also distinguished McCreath on its facts with respect to the terms used in the trust deed but held that by completing a preferred beneficiary election and distributing dividends pursuant thereto, the trustees had created a vested interest in the property forming the subject matter of the trust and concluded " . . . on the basis of the rationale of the McCreath case, if the beneficiaries have an interest in the income of the trust, a fortiari, they also have an interest in the property forming the subject matter of the trust"[86]. That interest, in Heald J's view was sufficient to render applicable the attribution rules in then subsection 75(1 )[87] of the Act. Although the Sachs decision has been widely criticized as confusing the law in this area, and mercifully has not been followed, it remains the most recent judicial statement about when a

beneficiary will be considered to have an interest in trust property for tax purposes.

IV CONCLUSIONS

The expressions 'beneficial ownership,' 'beneficial owner,' 'beneficially owned, ''beneficial interest' 'beneficially interested' and 'beneficial entitlement' have their roots in equity. Their meaning is well entrenched in the thinking of common law lawyers.

The most apt description of a 'beneficial owner' in a modern context is the legal relationship created when the trustee is a bare trustee; the trustee is a person who holds property in trust at the absolute disposal and for the absolute benefit of the beneficiary.[88] A 'beneficial owner' may also be included as the one for whom an agent holds legal title for a special purpose, for example for the purpose of selling the property. These meanings describe the common situation where a nominee, agent or other legal representative holds legal title. However, even in this simple situation there is dispute among some trust authorities over the appropriateness

of describing the beneficiary as the beneficial owner of trust property.[89] Clearly however, in everyday language, we do consider the real owner of property to be the trust beneficiary in this situation. Some may also describe a beneficiary as the beneficial owner of property notwithstanding that the trustee has active duties with respect to the trust property or there is more than one beneficiary or the beneficiaries' interests are not fixed. In my view use of expressions such as beneficial ownership in these circumstances is legally imprecise and may obfuscate the meaning.

As discussed, the meaning of 'beneficial entitlement' in contexts other than succession duty legislation was clear and succinctly described as the ability to sue for and recover property. The expansion of the meaning of this expression by the Supreme Court of Canada may be limited to succession duty cases and the meaning of 'beneficial entitlement' in the context of that statute.

In modern terminology, when a person is referred to as having a beneficial interest in property, the reference provides a short description for one who has a hope or expectancy of receiving

property generally from a trust. The rights of a person with a beneficial interest in property may fall short of either beneficial entitlement or beneficial ownership, depending on the specific beneficial interest.

ISSUE TWO: Does the meaning of certain equitable expressions change depending on the context?

Is the meaning of the concepts “beneficial ownership”, “beneficial owner”, “beneficially owned”, “beneficial interest”, “beneficially interested”, and “beneficial entitlement” different in an estate law, trust law, property law, securities law, corporate law, or international law context? The expression “beneficial ownership” is also used in the OECD Model Tax Convention as well as in many tax conventions. Is its meaning different in an international context?

Although each of these expressions have their roots in equity, their meanings can be found only in the context in which they are used. One should also keep in mind that many of these expressions have been interpreted and applied in the context of specific legislative provisions, and been given distinct meanings under the relevant statute.

I Beneficial ownership/beneficially owned/beneficial owner

Estate Law

For purposes of this discussion, “estate law” is interpreted to mean the law applicable to the estate of a person, or put differently, property that one can leave to others.

Many of the expressions under discussion including “beneficial interest”, “beneficially interested”, and “beneficial entitlement” have their roots in equity and in particular in the equitable rules applicable to the interpretation of wills.

As Dickson J. pointed out in his dissent in Covert[90], if one looks for “the meaning to be attributed to such words and phrases as “entitled”, “beneficial”, “beneficially entitled”, “beneficial interest”, and the like, it soon becomes apparent their meanings are almost invariably drawn from cases concerned with the construction of wills or succession duty statutes”. Since this is the very source of their meaning, it follows that these meanings in the context of an estate are consistent with equitable principles.

The important issue when applying these expressions to the estate of a deceased person (in particular expressions inferring beneficial ownership) is in distinguishing the specific rights of beneficiaries in the estate, especially an unadministered estate, from those of a beneficiary under a trust. A beneficiary of an unadministered estate clearly has only a personal right against the personal representative until the administration of the estate is complete. The beneficiary cannot, therefore, be regarded as either a “beneficial owner” or “beneficially entitled” to estate assets [91]. The most that can be said is that the beneficiary has a “beneficial interest” in the assets of the estate [92]. It follows that such a beneficiary cannot demand payment from the estate and that amounts cannot be considered paid or payable to them for tax purposes until administration is complete [93].

In Re Steed and Raeburn Estates, [1949] S.C.R. 453, Rand J. considered the nature of a beneficiary's interest in an estate in a matter concerning whether or not property was situated in Canada:[94]

But in addition to his capacity of representing the deceased, the executor in equity is looked upon as quasi‑trustee for the beneficiaries; and the beneficiary is entitled to resort to that court to have the duty of the executor enforced. The “interest” in property that is transmitted results from that right and becomes, therefore, an equitable interest, subject to the rules which underlie equitable administration.

Trust Law

The primary locus for the distinction between a legal and beneficial interest is found in the law of trusts. The starting point for understanding use of the terminology beneficial ownership in this context is in the example of a transfer of property to A to hold for the benefit of B. A holds legal title. B is considered to “beneficially enjoy” or have a “beneficial interest” in the property. As will be discussed further, some authors and tax cases have introduced the notion that B (the beneficiary) may also “beneficially own” or have an interest in specific trust assets [95]. However, this view has not been accepted in the conventional teaching on the nature of the cestui qui trust’s rights as it asserts that the cestui que trust has a right in rem, i.e. that he is the “equitable owner” of the trust property. Conventional doctrine views the cestu’s rights as rights in personam, as against the trustee to enforce the terms of the trust.

A number of modern authors have provided useful summaries of both sides in this debate [96]. The following outlines one of these summaries.[97] The British author Gray differentiates the two main views: the “orthodox” view and the “wider” view. He describes the orthodox view as follows:[98]

The more generally accepted view of the nature of beneficial rights is that once expressed by Professor J.B. Ames, who observed that

A cestui que trust is frequently spoken of as an equitable owner of the land. This, though a convenient form of expression, is clearly inaccurate. The trustee is the owner of the land, and, of course, two persons with adverse interests cannot be owners of the same thing. What the cestui que trust really owns is the obligation of the trustee; for an obligation is as truly the subject matter of property as any physical res[99].

Maitland went further in his efforts to maintain that equitable estates and interests are not rights in rem. According to Maitland, the trustee is “the owner, the full owner of the thing, while the cestui que trust has no rights in the thing”[100]. In Maitland’s view, it was simply not true to say that “whereas the common law said that the trustee was the owner of the land, equity said that the cestui que trust was the owner”.

Those individuals holding the “wider view” take a very different position about the rights of the cestui que trust as the following indicates [101]:

To other jurists it has seemed plausible to maintain that the rights of the cestui que trust comprise more than mere rights in personam. This wider view attributes greater significance to substance than to form. It recognizes that the legal estate of the trustee is in most cases a mere “shadow” following the equitable estate “which is the substance”[102]. Support for this view may be found in the range of third parties against whom the cestui can enforce his rights. With the sole exception of the bona fide purchaser without notice, all third parties are bound by the trust, and in this sense the cestui is able to assert an “equitable ownership” of the trust property against almost all the world [103]. Thus for Salmond

If we have regard to the essence of the matter rather than to the form of it, a trustee is not an owner at all, but a mere agent, upon whom the law has conferred the power and imposed the duty of administering the property of another person. In legal theory, however, he is not a mere agent but an owner. He is a person to whom the property of someone else is fictitiously attributed by the law, to the extent that the rights and powers thus vested in a nominal owner shall be used by him on behalf of the real owner. As between trustee and beneficiary, the law recognizes the truth of the matter; as between these two, the property belongs to the latter and not to the former. But as between the trustee and third persons, the fiction prevails. The trustee is clothed with the rights of his beneficiary, and is so enabled to personate or represent him in dealings with the world at large [104].

Gray’s conclusions, like those of many Canadian trust authors are inconclusive and unhelpful in bringing resolution to the debate. He states:[105]

Ultimately the question whether a cestui que trust has rights in rem or rights in personam may simply be a matter of emphasis and perspective. From the earliest times there has been a willingness to concede that the cestui holds at the very least the benefit of an obligation and that this benefit may well, in some sense, comprise a form of “equitable ownership”. This view receives support from an altogether more modern and more radical conception which sees the very enforceability of a claim to be the essence of a property right.

Although not helpful in resolving the issue of whether a beneficiaries rights are in personam/in rem, Gray’s comments are helpful in pointing out that the more generally accepted view is that of Ames and Maitland: the beneficiary’s right is against the trustee and not in the trust property itself. Thus it cannot generally be said that for trust law purposes that a beneficiary is the beneficial owner of trust assets, except as a short form for describing the right of the beneficiary to enforce the terms of the trust against the beneficiary and any third parties to whom the law recognizes that beneficial rights extend.

Trusts and Beneficial Ownership in the Canadian Context

As stated, many are of the view that the expression “beneficial ownership” should not be used to describe a beneficiaries interest in trust property. Nonetheless it is apparent that Canadian courts have found particularly, but not exclusively, for purposes of revenue collection that a beneficiary may have a “beneficial interest” in, or “beneficial ownership” of, specific trusts assets.

Canadian courts have had, however, an uneasy battle with this issue. Starting with the decision in Trans-Canada Investments Corp[106], the Supreme Court of Canada held that for purposes of the I.T.A., the mere imposition of a trust between a dividend paying company and the “beneficial owner” of the shares did not change the character of the sum. This view was expressed despite the fact that there were multiple beneficiaries and the fact that the trustees had wide investment powers, thus negating an argument that this was a bare trust [107]. Other tax decisions have also examined the relationship between income earned by a trust and its characterization in the beneficiaries hands [108], and concluded that despite the imposition of a trustee, the income retained its character.

Perhaps to end debate on the “source of trust income” in a beneficiary’s hands, subsection 108(5) was introduced to the Act effective for tax years commencing after November 1981 [109]. That provision specifically states that income derived from a trust is income from property and not income from any other source.

The introduction of subsection 108(5) did not, however, resolve the issue of who the beneficial owner of trust assets is, or the issue of when a beneficiary might be viewed as having an interest in specific trust property for tax purposes. That this issue is important in a tax context can be seen in the former debate about who the beneficial owner of assets of a bare trust is, a debate finally resolved in the March 2001 amendments to the I.T.A.[110]. Its importance will also no doubt be seen in the interpretation of the words no change in beneficial ownership:, introduced in the definition of disposition in subsection 248(1).[111] And seen throughout the new rollover provisions governing amendments in the context of self benefit trusts and qualifying dispositions.

“Beneficial interest”, “beneficially interested”

A trust permits a division of the beneficial enjoyment (beneficial ownership) of the trust property among different beneficiaries. Such a division may create different beneficial interests in the trust property, which are set out in the trust deed. For example, a beneficiary may have an income or capital interest in the trust. The trust document may also give the trustee a substantial amount of discretion to create or extinguish a beneficial interest or for the shifting of beneficial interests among different beneficiaries. In consequence beneficial interests under a trust are capable of many variations. There are joint and common interests, and there are successive interests; there are interests of the born and unborn; there are vested and contingent interests. When a beneficiary becomes entitled to a particular interest, that interest is said to have vested in the beneficiary.

One who is “beneficially interested” in a trust has a hope or expectancy of receiving property from the trust and a right to compel the trustee to perform the terms of the trust, but does not necessarily have a right to any of the trust property [112]. Consider, for example, a beneficiary of a discretionary trust. Such a person would be described as having a “beneficial interest” in the trust but not a “beneficial entitlement” to the trust assets (unless the trustee exercises discretion in that individual’s favor). The important distinction is that a beneficiary of a discretionary trust may not have an equitable right to trust property that would be enforced by the courts. Instead, a person “beneficially interested” in the trust may only have the right to bring an action to have the trustees perform the terms of the trust and to exercise their discretion if required by the trust.

Property Law

Equitable principles also operate in property law. In the modern common law system, property rights may be legal or equitable [113]. This distinction is very important in determining property rights. A person may acquire an equitable interest in property in a number of ways [114] including as a beneficiary under a trust.

In property law, the terminology “beneficial owner” may also be used to describe a vendee under a contract for the sale of real property even though the vendor still holds legal title [115]. In these circumstances, the vendor may also properly be regarded as “trustee for the purchaser as beneficial owner,” according to Schroeder, J.A., in Buchanan, a decision of the Ontario Court of Appeal [116].

The court in Buchanan also states that a valid contract for sale changes the nature of the estate in equity. Gray and Symes [117] explain that the change in ownership results from the availability of the equitable remedy of specific performance to the purchaser in the event that the vendor fails to convey the legal estate in accordance with the terms of the contract of sale.

A person may also be described as having a “beneficial interest” in property in property law. For example, a mortgagor’s beneficial interest in a property includes an “equity of redemption” being the mortgagor’s right to redeem his property from default. While it exists, the mortgagor would have the right to block any action taken by the mortgagee by bringing the mortgage back into good standing. This right would normally exist until foreclosure proceedings are initiated or the mortgagor otherwise gives up or loses that right, for example, as a result of a quit claim.

Corporate Law

An examination of the expressions “beneficial owner/ownership, interest and entitlement” across all provincial and federal corporate legislation is a formidable and doubtlessly needless task for purposes of this discussion. Relevant sections of the Canada Business Corporations Act (CBCA)[118] have therefore been selected but should be considered as illustrative only. It should also be noted that there appears to be a strong influence of U.S. law in the use and meaning of the expressions in this Act.

The new CBCA includes a number of definitions relating to both beneficial ownership and beneficial interests. For example:

“Beneficial ownership” as defined in section 2 includes ownership through any trustee, legal representative, agent or other intermediary;

“Beneficial interest”, also defined in section 2, means an interest arising out of the beneficial ownership of securities. [Both of these terms are sprinkled liberally throughout the CBCA. I have summarily reviewed the provisions listed in Appendix A and the context in which the expressions are used.]

In my view, the use of these terms in this legislation is generally consistent with their modern common law meaning, with some notable exceptions.

“Beneficial Ownership”

An extensive review of case law in this area is required to provide a complete answer to the differences in the meaning and in the use of this expression in the CBCA. The following highlights some of the obvious differences.

First, the definition of “beneficial ownership” in the CBCA specifically includes ownership through a trustee. The inclusion of beneficial ownership through a trustee in the definition may result in a broadening of the expression’s meaning in the legislation. As indicated earlier, it is not well settled that a beneficiary of a trust beneficially owns trust assets. Even if one accepts that a beneficiary may beneficially own trust property, a determination of who is the owner is not obvious in the case of a discretionary trust. This CBCA definition implies that beneficial ownership may arise in these circumstances. It may also be inferred since the definition in the CBCA employs the word “includes”, it may also be inferred that beneficial ownership in this legislation is restricted to beneficial ownership through a bare trustee or agent. In my view, in this context is not clear what is intended by the words beneficial owner.

Second, the expression “beneficial owner” might be given a broader meaning for purposes of some provisions in the CBCA (and equivalent corporate law legislation), in particular for purposes of shareholder remedies, than that generally understood under common law in relation to interests in trust or property. For example one category of complainants for the purposes of the oppression remedy is “a registered holder or beneficial owner of a security.”

In Csak v. Aumon[119], the court addressed whether applicants claiming a right to become security holders were complainants under the CBCA. The court noted that the CBCA was remedial legislation and contemplates a “large and . . . sweeping jurisdiction”[120] such that, in the absence of some reason inherent in the legislation or policy, the meaning of “beneficial owner” should be interpreted broadly. Lane J. stated as follows:

In my opinion, the phrase “beneficial owner” in s. 238 is capable of bearing either of the meanings attributed to it by counsel in this case. It could be restricted to situations where issued shares are registered in someone else's name and the applicant is the acknowledged beneficial owner thereof, or it could refer to situations in which applicants claim to be beneficial owners of shares which ought to have been issued to them (emphasis added). The Act is remedial legislation and contemplates a large and somewhat sweeping jurisdiction. Unless there is some reason inherent in the legislation or of policy to restrict the meaning of beneficial owner to that contended for by the respondent, it would be in accord with the remedial nature of the Act to give the section the broader meaning.

An examination of the Act persuades me that there is no inherent reason to restrict the term “beneficial owner” to the narrower view.

Csak has been followed in a number of subsequent decisions [121].

Third, the words “beneficial owner” might be given a broader meaning is in paragraphs 126(2)(a) and 131(1)(d) of the CBCA [122] than that commonly understood in property or trust law. These provisions, which apply to insider trading, refer to a person who “beneficially owns, directly or indirectly” shares in the corporation. According to the commentary, these words were added to widen the scope of those who would be considered insiders and to harmonize the CBCA definitions on insider trading with those in provincial securities legislation [123]. The precise meaning of the words “beneficially owns, directly or indirectly” as used in this context is unclear. I assume that one situation to which the wording may apply is to a trust beneficiary if the trust owns the shares in the corporation. This requires that one accept the view that the beneficiary is the beneficial owner of the trust assets, a point that not well settled in Canadian law [124]. The wording could also apply to shares held by an agent or other intermediary where legal title is held for the beneficial owner’s behalf.

A third meaning for the expression beneficially owns, directly or indirectly may be gleaned from tax statutes where the words “directly or indirectly” are used to describe control of a subsidiary, through for example, share ownership in a parent corporation. Tax language, however, does not attach the word “beneficially owns” to this expression.[125] If the words beneficially owns, directly or indirectly apply to beneficial ownership of shares of a subsidiary through ownership in a parent corporation, this would add a new meaning very different than that at common law, to the expression. As Ritchie J. correctly stated in his dissent in Covert, “the general principle is that a company is not the beneficial owner of the assets of its own subsidiary and that a shareholder has no proprietary interest in the assets of a company in which he holds shares, otherwise than upon a winding up”[126]. Notwithstanding that the majority in Covert held that a parent corporation was “beneficially entitled” (within the meaning of s.2(5) of the Nova Scotia Succession Duty Act) to the assets of its subsidiary by virtue of its total control over the subsidiary. This finding of the Supreme Court does not deny the separate legal existence of both the parent and the subsidiary, a result that would follow if the words “beneficially owns” included ownership of shares through a subsidiary.

Oddly, the former provisions in paragraphs 126(1)(c) and (d)[127] of the CBCA clarified both the meaning of the expression “beneficially owns directly or indirectly” and deemed this very result. Specifically, paragraph 126(1)(c) provided that “a person is deemed to own beneficially shares beneficially owned by a body corporate controlled by him directly or indirectly,” and paragraph (d) provided that “a body corporate is deemed to own beneficially shares beneficially owned by its affiliates.” These deeming provisions add meaning to the expression “beneficially owns directly or indirectly” by making it clear that the corporate veil is to be ignored for the purpose of ascertaining beneficial ownership in this context. The same conclusion is by no means obvious in the new Act, which simply refers to “a director or officer that beneficially owns directly or indirectly, shares of a distributing corporation”[128].

“Beneficial Interest”

The expression “beneficial interest” is defined in subsection 2(1) of the CBCA to mean an interest arising out of beneficial ownership. In my view this definition is much narrower than the general meaning of beneficial interest in trust law, which does not require beneficial ownership as a prerequisite to a determination that a beneficiary has a beneficial interest in property.

Corporate Law and Securities Law

The words beneficially owns, directly or indirectly are also found in the Ontario Business Corporations Act [129] and The Ontario Securities Act [130]. In both statutes deeming provisions are used to determine who beneficially owns securities. For example, in the Ontario Business Corporations Act an “insider” is defined as a person who beneficially owns directly or indirectly more than 10% of the voting securities of the corporation. The legislation then goes on to provide that “a person is deemed to own beneficially voting securities beneficially owned by a body corporate controlled by the person directly or indirectly; and a body corporate is deemed to own beneficially voting securities beneficially owned by its affiliates”. In subsection 1(5) of the Ontario Securities Act a person is deemed to own “beneficially securities beneficially owned by a company controlled by the person or by an affiliate of such company,” and subsection 1(6) deems a company “to own beneficially securities beneficially owned by its affiliates”. These additional definitions bring meaning to the words “directly or indirectly”[131] in the context of this legislation. Noticeably absent in the CBCA are the equivalent deeming provisions used in both pieces of Ontario legislation.

II International law and the OECD Model Tax Convention: Is the meaning of “beneficial ownership” different in an international context?

Articles 10-12 of the OECD Model Treaty address the taxation of dividends, interest and royalties [132]. On point with our discussion, the reduced rates of withholding tax apply only if the recipient is the beneficial owner. Similarly the UN Model treaty refers to “the beneficial owner of the payment”. The International Bureau of Fiscal Documentation believes that the terms “beneficial owner” and “economic owner” can be equated, in contrast to “legal owner”[133].

To analyze whether the meaning of “beneficial ownership” is different in an international law context, it may be useful to pose more specific questions. For example, (1) is the meaning to others different, as understood under the OECD Treaty, than that understood under Canadian law? (2) Is the meaning different to Canadians in an international context from the meaning used in the Canadian domestic context? (3) Better yet, is the meaning of beneficial owner different depending on what country is applying a tax treaty?

The expression “beneficial ownership” is not defined in the OECD model convention [134]. The commentary merely states that treaty benefits are not available “when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the contracting State”[135]. Since the term is undefined in the treaty both Canada and the United States have looked for the meaning of the expression under domestic law. In the Canadian context this resort to Canadian domestic law is simply assumed. See for example, Lessard et al[136] who state:

We thus have to refer to the jurisprudence in order to determine its meaning. In Covert et al v. Minister of Finance (N.S.) the Supreme Court of Canada defined the beneficial owner of property as the real or true owner thereof. In essence it is the person who can ultimately exercise the rights of ownership in the property.

Thus, in the context of the application of Canadian treaties, at least by Canadians, the meaning of the term “beneficial owner” appears to be the same as that used in a domestic context.

The U.S. also takes the view that the meaning of the term “beneficial owner” is to be determined under the domestic laws of the country imposing the tax [137]. The technical explanation to the 1996 U.S. Model defines the “beneficial owner” of dividends, interest, or royalties as the individual or entity to whom the residence country will attribute the payment for tax purposes [138]. According to some authorities, a second definition may also apply if the tax treaty is based other than on the U.S. model. That definition looks to who has dominion or control over a payment to determine whom the beneficial owner is [139].

The German author Vogel is, however, of a very different view of how the expression “beneficial owner” should be interpreted and applied. He views it as an autonomous treaty concept and states that the term must be “interpreted with reference to the context of the treaty and particularly with a view to the purpose pursued by the restriction”[140]. His reason for not interpreting the term with reference to domestic law is that none of the national tax systems (French, English, German) offer a precise definition of the term “beneficial owner”. In Vogel’s view the issue to be resolved is therefore a matter of substance: who is the real owner? Thus, treaty benefits should not be granted with a view to the formal title.

Vogel summarizes his position as follows:

The substance of the right to receive certain yields has a dual aspect. The first is the right to decide whether or not a yield should be realized ‑i.e. whether the capital or other assets should be used or made available for use ‑the second is the right to dispose of the yield. Ownership is merely formal, if the owner is fettered in regard to both aspects either in law or in fact. On the other hand, recourse to the treaty is justified . . .if he who is entitled under private law is free to yield at least one of the powers referred to. Hence, the beneficial owner is he who is free to decide (1) whether or not the capital or other assets should be used or made available for use by others or (2) on how the yields there from should be used or (3) both.[141]

The expression “beneficial owner” was added to the OECD Model treaty to prevent treaty shopping and to provide treaty benefits only to those who one would consider the true economic owner of the underlying asset. The intent was to prevent an intermediary, such as an agent or nominee, from being interposed between the beneficiary and the payer. American author Joni Walser gave the following description of the term “beneficial owner” as a treaty-based concept:[142]

In principle a person should be considered a mere nominee or agent and thus not a beneficial owner from the treaty perspective if he has only title to property but no other economic, legal or practical attributes of ownership. To be a beneficial owner, one must have the right to deal with the property or income at least to some extent as his own. This is referred to as “dominion and control” over property. In addition to dominion and control, another important component of beneficial ownership is some economic interest in the property. That is, some interest in the risks and rewards of its fluctuating value and/or the value of the income that it generates. Having said that, I have to point out that the role of economics and the identification of the beneficial owner is not entirely straightforward. This is due in part to the possibility that the economic attributes of property can be separated from the right to own it, possess it, deal with it, or dispose of it. Financial products can separate economics and control in this way [143].

As can be expected when both civil and common law countries apply the expression, there may be some variations in result. In my view, however, despite their different approaches the Canadian, U.S.[144], and German interpretations are consistent with the well-understood meaning and purpose of the expression “beneficial owner” [145]. Nonetheless Vogel has urged that the expression “beneficial owner” is not a term that needs defining under Article 3 but rather should be viewed “as a more fundamental treaty principle with respect to which there ought to be bilateral consensus”[146].

III “Beneficial Entitlement”

The meaning of this expression was discussed extensively in Issue One. The change in meaning in contexts other than tax statutes was not reviewed in detail, but in my view is not significant.

IV “Beneficial Interest/ Beneficially Interested”

The commonly understood meaning of these concepts has been changed under some statutes. Two examples include the Canada Business Corporations Act and the Income tax Act. In the CBCA, the meaning of “beneficial interest” is much narrower than that commonly understood in the private law of trusts. Conversely, the meaning of “beneficially interested” is defined and much broader in the Income Tax Act.

V Conclusions

Beneficial owner, beneficial ownership, beneficially owned, beneficial interest, beneficially interested and beneficially entitled have their roots in equity. This terminology has now been included in statutes and interpreted by the courts in the context of the specific legislation. The meaning of the expressions must be determined and can only be properly understood in the particular context in which it is being used.

APPENDIX A

Canada Business Corporations Act Interpretation of “Beneficial Ownership, Owner, Interest”

Definitions

s. 2(1) In this Act

"associate", in respect of a relationship with a person, means

(a) a body corporate of which that person beneficially owns or controls, directly or indirectly, shares or securities currently convertible into shares carrying more than ten per cent of the voting rights under all circumstances or by reason of the occurrence of an event that has occurred and is continuing, or a currently exercisable option or right to purchase such shares or such convertible securities,

(c) a trust or estate in which that person has a substantial beneficial interest or in respect of which that person serves as a trustee or liquidator of the succession or in a similar capacity,

"beneficial interest" means an interest arising out of the beneficial ownership of securities;

31. (1) A corporation may in the capacity of a legal representative hold shares in itself or in its holding body corporate unless it or the holding body corporate or a subsidiary of either of them has a beneficial interest in the shares.

(2) A corporation may hold shares in itself or in its holding body corporate by way of security for the purposes of a transaction entered into by it in the ordinary course of a business that includes the lending of money.

(3) A corporation may permit any of its subsidiary bodies corporate to acquire shares of the corporation

(a) in the subsidiary's capacity as a legal representative, unless the subsidiary would have a beneficial interest in the shares; or

(b) by way of security for the purposes of a transaction entered into by the subsidiary in the ordinary course of a business that includes the lending of money.

Further interpretation

126 (2) For the purposes of this Part (Part XI Insider Trading):

Proposals

137. (1) Subject to subsections (1.1) and (1.2), a registered holder or beneficial owner of shares that are entitled to be voted at an annual meeting of shareholders may

(a) submit to the corporation notice of any matter that the person proposes to raise at the meeting (a "proposal"); and

(b) discuss at the meeting any matter in respect of which the person would have been entitled to submit a proposal.

Persons eligible to make proposals

137 (1.1) To be eligible to submit a proposal, a person

(a) must be, for at least the prescribed period, the registered holder or the beneficial owner of at least the prescribed number of outstanding shares of the corporation; or

Unanimous shareholder agreement - Declaration by single shareholder

146 (2) If a person who is the beneficial owner of all the issued shares of a corporation makes a written declaration that restricts in whole or in part the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation, the declaration is deemed to be a unanimous shareholder agreement.

PART XIII - PROXIES

Definitions

147. In this Part,

"solicit" or "solicitation"

(b) does not include

(iv) a solicitation by a person in respect of shares of which the person is the beneficial owner,

Duty of intermediary

153. (1) Shares of a corporation that are registered in the name of an intermediary or their nominee and not beneficially owned by the intermediary must not be voted unless the

intermediary, without delay after receipt of the notice of the meeting, financial statements, management proxy circular, dissident's proxy circular and any other documents other than the form of proxy sent to shareholders by or on behalf of any person for use in connection with the meeting, sends a copy of the document to the beneficial owner and, except when the intermediary has received written voting instructions from the beneficial owner, a written request for such instructions.

Restriction on voting

(2) An intermediary, or a proxyholder appointed by an intermediary, may not vote shares that the intermediary does not beneficially own and that are registered in the name of the intermediary or in the name of a nominee of the intermediary unless the intermediary or proxyholder, as the case may be, receives written voting instructions from the beneficial owner.

Instructions to intermediary

(4) An intermediary shall vote or appoint a proxyholder to vote any shares referred to in subsection (1) in accordance with any written voting instructions received from the beneficial owner.

Beneficial owner as proxyholder

(5) If a beneficial owner so requests and provides an intermediary with appropriate documentation, the intermediary must appoint the beneficial owner or a nominee of the

beneficial owner as proxyholder.

Constraints on shares

Regulations

174. (6) Subject to subsections 261(2) and (3), the Governor in Council may make regulations with respect to a corporation that constrains the issue, transfer or ownership of its shares prescribing

(d) the powers of the directors to require disclosure of beneficial ownership of shares of the corporation and the right of the corporation and its directors, employees and agents to rely on such disclosure and the effects of such reliance; and

Right to Dissent

190 (4) A dissenting shareholder may only claim under this section with respect to all the shares of a class held on behalf of any one beneficial owner and registered in the name of the dissenting shareholder.

PART XX - REMEDIES, OFFENCES AND PUNISHMENT

Definitions

238. In this Part,

"complainant" means

(a) a registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates,

Issue Three: Meaning of Certain Concepts in the Income Tax Act

A list of all the provisions of the I.T.A. in which these common law concepts -‘beneficial ownership,’ ‘beneficial owner,’ ‘beneficially owned,’ ‘beneficial interest,’ ‘beneficially interested,’ and ‘beneficial entitlement’ - are used is attached as Schedule A. Do these expressions have the same meaning in each of the contexts/provisions of the I.T.A.?

In my view, the short answer to this question is no. The various meanings that may attach where these expressions are used as well as who may be considered the beneficial owner are discussed below.

Another important question that will be addressed is how important the concept of beneficial ownership is for the purposes of the I.T.A. where the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ are not used, and how beneficial ownership would be determined in such circumstances. For example, if an interest in a Canadian partnership is held by a trust, who is the relevant person for the purpose of determining whether the definition of a Canadian partnership in subsection 102(1) is met: the trustee, the trust, or the beneficiary? Similarly, if shares are held by a trust, who is considered to own or control the trust property when deciding whether a corporation is a Canadian controlled private corporation (CCPC), or whether persons are related [147], affiliated [148], or at arm’s length?[149] The answer to each of these questions depends on how parties to the trust relationship are viewed for the purpose of the specific tax provision, but generally also depends on who is considered to be the beneficial owner of the trust property. Since the concept of ‘beneficial ownership’ permeates the I.T.A. it is important to determine the precise meaning of this concept(s) in the context of the legislation, whether the words are used expressly or implicitly in the meaning of a particular provision.

The following analyzes the meaning of these expressions as they are used throughout the I.T.A. Their meaning is taken from the Department of Finance Technical Notes, case law and private law where the expression is not defined. The meaning of these expressions as used in each of these provisions must be construed within the context of the particular provision. Nonetheless, to the extent that some of the provisions have common meanings, the provisions can be roughly grouped and their meanings considered together.

I ‘Beneficial Ownership,’ ‘Beneficial Owner,’ ‘Beneficially Owned’

A) Summary of Meanings

The expressions Beneficial Ownership, Beneficial Owner, Beneficially Owned are used in approximately 33 places in the I.T.A.

At least four basic meanings may attach where the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ are used. These are listed below.

1. The owner is the beneficial owner.

· ‘Beneficial ownership’ includes ownership by the legal title holder if that person also has beneficial enjoyment of the property. In short, the expression ‘beneficial owner’ also includes the owner, and property is considered as ‘beneficially owned’ by that person.

2. The beneficiary is considered to be the beneficial owner as a result of tax decisions and the operation of the I.T.A.

· The expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ include ownership by a person where a bare trustee, agent, or other intermediary holds legal title to the property [150]. Thus if an agent holds legal title for a taxpayer, it is the taxpayer and not the agent who would be considered the ‘beneficial owner.’ [151] This result occurs since the trust relationship is ignored for the purposes of subdivision k of the I.T.A. in these circumstances [152]. It should be recognized, however, that case law about whether a trust is a bare trust has focused on whether subdivision k applies to the trust. If so, subsection 108(5) operates to prevent the deduction of, for example, capital cost allowance, terminal losses, or capital losses by the beneficiary. Thus, the case law has generally addressed only whether the trust is subject to subdivision k, and not the broader question of who owns or beneficially owns the trust property for other purposes of the I.T.A. However, if the trust is to be ignored, it can probably be assumed that the beneficiary of a bare trust or subsection 104(1) arrangement (discussed below) would be considered the beneficial owner for all purposes of the Act.

· A beneficiary of a trust described in a subsection 104(1) “arrangement” is also considered to be the beneficial owner, since the trust is ignored for tax purposes [153]. That subsection provides that a trust is deemed “not to include an arrangement under which the trust can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust property.” This would include a trust arrangement involving beneficiaries other than the settlor and extends the notion of when a trust will be ignored under the Act considerably beyond former arrangements that were considered to be bare trusts under Technical News #7.There may also be more than one beneficiary under a subsection 104(1) arrangement, resulting in a number of taxpayers being viewed together as the beneficial owner(s).

· It is not clear after the 2001 Technical Amendments, if the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ would be interpreted by the courts to include beneficial ownership by the beneficiary of a self-benefit (subparagraph 73(1.02)(b)(ii)) or Q.D. trust (subsection 107.4(1). This conclusion is based on the statutory requirement that a transfer to such a trust must not result in a change in beneficial ownership. It follows that if there is no change in beneficial ownership on the transfer to the trust, those provisions which refer to the beneficial owner or beneficial ownership would include, in the absence of any indication to the contrary, ownership through the trust by the very persons who transferred the property to it. Unlike subsection 104(1) arrangements, self-benefit and Q.D. trusts remain subject to subdivision k.

· Case law also suggests that if a resulting or constructive trust is found, the person for whom property is held is the beneficial owner of the property [154].

· There is some case law support for the view that a beneficiary is the beneficial owner of or has a interest in specific trust property for tax purposes.[155]

· Deeming provisions are also sometimes used to treat the beneficiary as the owner of trust property for some tax purposes [156].

3. The beneficiary is the beneficial owner of trust property based on private law principles.

· The beneficial owner or person with beneficial ownership is the person who is recognized in the law of trusts as the one who has a right to beneficial enjoyment of the trust property [157].

4. The trust is the owner of trust property.

· Deeming rules in the I.T.A. determine who the owner is. The basic structure of subdivision k (sections 104-108) is based on the fiction that the trust is an individual and for at least the purpose of calculating capital gains and losses, income or claiming tax deductions, is the owner of trust property. Whether the trust as an individual should or will be considered the ‘owner’ or ‘beneficial owner’ of trust property for other tax purposes is, in my view, a matter of conjecture under the current structure of the I.T.A.[158].

This is one of the most obvious points at which private law concepts conflict with the statutory fiction that the trust is an individual. The trust is clearly treated as the owner of trust property for tax purposes in a number of provisions in the I.T.A. The assumptions underlying the 2001 Technical Amendments are, however, based on the premise that the beneficiary of a trust is the beneficial owner [159]. It would appear that what is meant by the use of the expression ‘beneficial owner’ in the context of these amendments is that the beneficiary is one who both before and after the transfer of the trust beneficially enjoys or has beneficial enjoyment of the trust property. An important task for tax planners and legislators alike will be differentiating between who the beneficial owner is considered to be for purposes of the disposition provisions, who the owner is for purposes of calculating gains and losses, income, and tax deductions of trust property (the trust), and who the beneficial owner or owner is for other purposes under the Act. It will be important to ascertain the circumstances in which the trust will NOT be considered the owner for some tax purposes. A related and equally important concern is who the owner will be considered to be among the trustee, trust, and the beneficiary in those circumstances.

B) Statutory Groupings of Meanings for ‘Beneficial Owner’/ ‘Beneficial Ownership’/ ‘Beneficially Owned’

The statutory provisions under review have been divided into categories where the meaning of the expressions used is common. An additional category has been added for rogue provisions that do not either fit neatly into a common meaning group or into one of the four broad categories of ‘meanings’ listed below.

The specific I.T.A. provisions under review involve property surrendered by a debtor to a creditor, property seized by a creditor, and property acquired by an insurer. The meaning of the expression ‘beneficial ownership’ in these provisions most obviously falls into category one, where the primary meaning of ‘beneficial ownership’ is ownership. The meaning of ‘beneficial ownership’ in categories two and four also may apply. Thus, the expressions ‘beneficial ownership,’ ‘beneficial owner,’ and ‘beneficially owned’ as used in these provisions could include the reacquisition of beneficial ownership through a bare trust, agent or other intermediary through a subsection 104(1) arrangement. It would also appear that the meaning of ‘beneficial ownership’ in these provisions would include the reacquisition of ownership by a trust, if the trust was the original creditor [160].

In appropriate circumstances a court might interpret ‘beneficial ownership’ in these provisions to include beneficial ownership of a beneficiary through a trust, if the property is reacquired by, for example, a fixed trust of which the creditor is the sole beneficiary particularly if the trust is a self benefit trust or the result of a qualifying disposition. This conclusion about the meaning of ‘beneficial ownership,’ as used in this context, is based on a potential legal argument that the beneficiary should be considered as the beneficial owner of trust property in these circumstances for tax purposes [161]. Conversely, if the trust is not a bare trust or a subsection 104(1) arrangement, a plausible legal argument is that the trustee is the beneficial owner in this context.

79(2) For the purposes of this section, a property is surrendered at any time by a person to another person where the beneficial ownership of the property is acquired or reacquired at that time from the person by the other person and the acquisition or reacquisition of the property was in consequence of the person's failure to pay all or part of one or more specified amounts of debts owed by the person to the other person immediately before that time.

79.1(2) Subject to subsection (2.1) and for the purpose of this section, a property is seized at any time by a person in respect of a debt where the beneficial ownership of the property is acquired or reacquired at that time by the person; and

138(11.93) Where, at any time in a taxation year of an insurer, the beneficial ownership of property is acquired or reacquired by the insurer in consequence of the failure to pay all or any part of an amount (in this subsection referred to as the insurer’s claim owing to the insurer at that time in respect of a bond, debenture, mortgage, hypothecary claim, agreement of sale or any other form of indebtedness owned by the insurer, the following rules apply to the insurer:

The meaning of ‘beneficial ownership’ in the second grouping of provisions fall within categories one, two and three. The provisions listed are those added to the I.T.A. in March 2001 that refer to “no change in beneficial ownership,” including the following: sections 69(1)(b)(iii), 69(1)(c), 73(1.02)(b)(ii), 104(4)(a.4), 107.4(1)(a), 107.4(2)(b), 122(2)(f)(iii), and 248(1) disposition, paragraphs (e), (f), (k) and 248(25.2). The meaning underlying these provisions rely on both I) the determination of who the beneficial owner is as a result of the application of specific I.T.A. provisions, such as subsection 104(1), and II) the private law concept of beneficial ownership, as that expression is used by some [162]. As well the owner is also considered to be the beneficial owner, a needed assumption if no change in beneficial ownership is to occur when property is transferred to a trust.

As noted above, the trust is deemed to be an individual and is treated as the owner of trust property for many purposes of the I.T.A.[163]. The technical notes to the provisions listed here suggest, however, that the meaning used is based on private law notions of beneficial enjoyment. For example, the Department of Finance’s Explanatory Notes state that “where the individual is the sole income and capital beneficiary of a trust during his or her lifetime, the retention of a general power of appointment by the individual on the transfer of property to such a trust would not be expected to result in a change in beneficial ownership of the property for the purpose of a transfer described in subparagraph 73(1.02)(b)(ii) (self benefit trust).” Beneficial ownership is assumed to belong to the transferor both before and after the transfer to the trust and not to the trust itself or to the trustee.

69(1)(b)(iii) to a trust because of a disposition of a property that does not result in a change in the beneficial ownership of the property; and

69(1)(c) where a taxpayer acquires a property by way of gift, bequest or inheritance or because of a disposition that does not result in a change in the beneficial ownership of the property, the taxpayer is deemed to acquire the property at its fair market value.

73(1.02)(b)(ii) the transfer does not result in a change in beneficial ownership of the property and there is immediately after the transfer no absolute or contingent right of a person (other than the individual) or partnership as a beneficiary (determined with reference to subsection 104(1.1)) under the trust; and

104(4)(a.4) where the trust is a trust to which property was transferred by a taxpayer who is an individual (other than a trust) in circumstances in which section 73 or subsection 107.4(3) applied, the transfer did not result in a change in beneficial ownership of that property and no person (other than the taxpayer) or partnership has any absolute or contingent right as a beneficiary under the trust (determined with reference to subsection (1.1)), the day on which the death of the taxpayer occurs;

107.4(1)(a) the disposition does not result in a change in the beneficial ownership of the

Property;

107.4(2)(b) where a trust (in this paragraph referred to as the "transferor") governed by a registered retirement savings plan or by a registered retirement income fund transfers a property to a trust (in this paragraph referred to as the "transferee") governed by a registered retirement savings plan or by a registered retirement income fund, the transfer is deemed to not result in a change in the beneficial ownership of the property if the annuitant of the plan or fund that governs the transferor is also the annuitant of the plan or fund that governs the transferee.

122(2)(f)(iii) no change in the beneficial ownership of the property resulted from the transfer.

248(1) disposition but does not include

(e) any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property, except where the transfer is

(f) any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property, where

(k) any transfer of the property to a trust as a consequence of which there is no change in the beneficial ownership of the property, where the main purpose of the transfer is

248(25.2) Except for the purpose of this subsection, where at any time property is transferred to a trust in circumstances to which paragraph (k) of the definition “disposition” in subsection (1) applies, the trust is deemed to deal with the property as agent for the transferor throughout the period that begins at the time of the transfer and ends at the time of the first change after that time in the beneficial ownership of the property.

Other provisions that take their primary meaning under category one and include the owner within the meaning of ‘beneficial owner,’ or rely on the private law concept of beneficial ownership (enjoyment) in category three, are grouped together. These include subparagraph 107.4(2)(a)(ii), which deems no change in beneficial ownership on a division of property among trusts if the economic ownership of property remains unchanged for the beneficiaries, and paragraph 107.4(3)(k), which addresses the situation where the transferor is a trust, in which a taxpayer’s beneficial ownership in the property ceases to be derived from the taxpayer’s capital interest in the transferor because of the qualifying disposition and no part of the taxpayer’s capital interest in the transferor was disposed of because of the qualifying disposition.

107.4(2)(a)(ii) as a consequence of the disposition, the value of each beneficiary’s beneficial ownership at the beginning of the period under the transferor trust in each particular property of the transferor trust (or group of two or more properties of the transferor trust that are identical to each other) is the same as the value of the beneficiary’s beneficial ownership at the end of the period under the transferor trust and the other trust or trusts in each particular property (or in property that was immediately before the disposition included in the group of identical properties referred to above); and

107.4(3)(k) where the transferor is a trust, a taxpayer’s beneficial ownership in the property ceases to be derived from the taxpayer’s capital interest in the transferor because of the qualifying disposition and no part of the taxpayer’s capital interest in the transferor was disposed of because of the qualifying disposition.

Some provisions rely both on the meaning of beneficial ownership resulting from the operation of the I.T.A. and the private law notion of beneficial enjoyment. The meaning of ‘beneficially owned’ would include the meanings found in categories one, two and four above; i.e. the property is considered to be beneficially owned by the owner in his or her personal capacity, by the taxpayer as beneficial owner, if held through a bare trust, agency or subsection 104(1) arrangement, and finally by a trust if the property is owned by a trust as a taxpayer [164]. The expression in this context could also arguably include shares that are ‘beneficially owned’ within the meaning of that expression as found in category three, i.e. by a beneficiary if the shares are held by a trust.

85.1(2)(b)(ii) beneficially owned shares of the capital stock of the purchaser having a fair market value of more than 50% of the fair market value of all of the outstanding shares of the capital stock of the purchaser,

85.1(6) Subsection (5) does not apply where

(b)(ii) beneficially owned shares of the capital stock of the foreign purchaser having a fair market value of more than 50% of the fair market value of all of the outstanding shares of the capital stock of the foreign purchaser;

87(9)(c)(ii)(II) the total of the adjusted cost bases to the parent of all shares of the capital stock of each predecessor corporation beneficially owned by it immediately before the merger

112(3.2)(a)(ii)(C)(II) the dividend was received while the trust, the beneficiary and persons not dealing at arm's length with the beneficiary, owned[165] in total less than 5% of the issued shares of any class of the capital stock of the corporation from which the dividend was received

115.2(2)(b)(iii) when the particular time is more than one year after the time at which the non-resident was created, the total of the fair market value, at the particular time, of investments in the non-resident that are beneficially owned by persons and partnerships (other than a designated entity in respect of the Canadian service provider) that are affiliated with the Canadian service provider does not exceed 25% of the fair market value, at the particular time, of all investments in the non-resident.

115.2(3)(b) a person or partnership is, at a particular time, a designated entity in respect of a Canadian service provider if the total of the fair market value at the particular time, of investments in the entity that are beneficially owned by persons and partnerships (other than another designated entity in respect of the Canadian service provider) that are affiliated with the Canadian service provider does not exceed 25% of the fair market value, at the particular time, of all investments in the entity.

133(8) non-resident-owned investment corporation means

(a) all of its issued shares and all of its bonds, debentures and other funded indebtedness were

(i) beneficially owned by non-resident persons (other than any foreign affiliate of a taxpayer resident in Canada),

(iii) owned by a non-resident-owned investment corporation, all of the issued shares of which and all of the bonds, debentures and other funded indebtedness of which were beneficially owned by non-resident persons or owned by trustees for the benefit of non-resident persons or their unborn issue, or by two or more such corporations

227(4.1) and is property beneficially owned by Her Majesty notwithstanding any security interest in such property and in the proceeds thereof, and the proceeds of such property shall be paid to the Receiver General in priority to all such security interests.

Other Meanings:

· The following discusses the meaning of the expressions in provisions that do not fit neatly into any of the above groupings. For example, subsection 146.3(1) relies on the meaning of ‘beneficial owner’ as the owner. Other provisions include deeming provisions to determine beneficial ownership, for example subsection 19(5). In addition, the meaning of “beneficial owner” in subsection 19(5) includes the meanings found in categories one, two, and four. Subsection 19(6), which is not listed, plays a unique role in determining ownership; specifically, if ownership of a newspaper is through a trust, subsection 19(6) effectively disqualifies the trust from meeting the Canadian ownership requirements for a Canadian newspaper unless all of the beneficiaries fall within an identified group in that provision. This obviates the need to look to any category for the meaning of ‘beneficial ownership.’

· Subparagraph 107.4(2)(a)(ii) refers to “the value of each beneficiary’s beneficial ownership at the beginning of the period under the transferor trust in each particular property of the transferor trust.” The meaning of “beneficial ownership” in this context infers that the beneficiary can and does enjoy beneficial ownership of each property of the trust. The method of meeting the requirement would appear to be the creation of an identical transferee trust, with identical properties and identical beneficiaries with identical interests as in the transferor trust [166]. There is no suggestion that the trusts must be bare trusts in these circumstances.

· Paragraph 107.4(3)(k) addresses the matter of when a taxpayer’s ‘beneficial ownership’ in the property ceases to be derived from the taxpayer’s capital interest. This provision employs the meaning of ‘beneficial ownership’ by looking to the asset that the beneficiary clearly owns (that being the beneficiary’s interest in the trust), rather than to the underlying trust assets.

· Subsection 146.3(1) is a provision dealing with RRIFs. By contract the RRIF is required to pay certain amounts each year to the RRIF annuitant. Some of the property held by the RRIF may be held by the RRIF holder as a trustee and some as the beneficial owner or owner. An annuitant under a RRIF would clearly not be considered to own property held by the RRIF.

· Paragraph 248(3)(e) is a deeming rule for purposes of the province of Quebec. Among other things it deems a beneficiary with a right under a trust to beneficially own the trust property. It states that this is the case in pursuance of the purposes of the Act. The meaning of the expression in this context would likely include category one, category two where applicable, and in some circumstances category three. In short, courts would probably interpret the provision as creating an equivalent result for beneficiaries whether under a trust or a trust governed by the laws of Quebec. There is no case law to support this view.

19(5) Canadian newspaper means a newspaper the exclusive right to produce and publish issues of which is held by one or more of the following:

(a) a Canadian citizen,

(b) a partnership

(i) in which interests representing in value at least 3/4 of the total value of the partnership property are beneficially owned by, and

19(5)(e)(iii)(B) a corporation of which at least 3/4 of the shares having full voting rights under all circumstances, and shares having a fair market value in total of at least 3/4 of the fair market value of all of the issued shares of the corporation, are beneficially owned by Canadian citizens or by public corporations a class or classes of shares of the capital stock of which are listed on a prescribed stock exchange in Canada, other than a public corporation controlled by citizens or subjects of a country other than Canada,

107.4(2)(a)(ii) as a consequence of the disposition, the value of each beneficiary’s beneficial ownership at the beginning of the period under the transferor trust in each particular property of the transferor trust (or group of two or more properties of the transferor trust that are identical to each other) is the same as the value of the beneficiary’s beneficial ownership at the end of the period under the transferor trust and the other trust or trusts in each particular property (or in property that was immediately before the disposition included in the group of identical properties referred to above); and

146.3(1) property held in connection with a retirement income fund means property held by the carrier of the fund, whether held by the carrier as trustee or beneficial owner thereof, the value of which, or the income or loss from which, is relevant in determining the amount for a year payable to the annuitant under the fund;

248(3)(e) For the purposes of the application of this Act in relation to the Province of Quebec,

(e) a person who has a right (whether immediate or future and whether absolute or contingent) to receive all or any part of the income or capital in respect of property referred to in paragraph (a), (b), (c) or (d) shall be deemed to be beneficially interested in the trust referred to in that paragraph; and shall, notwithstanding that such property is subject to a servitude, be deemed to be beneficially owned by the person at that time.

C) Category Three: Detailed explanation

i.‘Beneficial owner.

The 2001 Amendments introduce throughout the I.T.A. the notion that a beneficiary is the ‘beneficial owner’ of trust property, or more specifically that property can be transferred to a trust without a change in beneficial ownership. Is the beneficiary of a trust also considered the ‘beneficial owner’ of trust property for other tax purposes.[167]? If so, when? The answer to this question is of fundamental importance in a taxing statute that imposes a tax result based on who the beneficial owner of property is. In the absence of specific statutory guidelines, how does one determine this answer? A number of factors should be considered..

First, reference must be made to subdivision k , specifically subsection 104(2) which deems the trust to be an individual for purposes of the Act. It is clear for purposes of subdivision k and who must report income and claim deductions that the trust is considered the owner of the trust property. .If this deeming provision does not apply for all purposes of the Act, a point that in my view is unclear, reference must presumably be made to private law to determine who the “beneficial owner” of trust property is considered to be. If such consideration is made, the debate dating back to the 19th century [168] about whether a beneficiary ‘beneficially owns’ trust property or simply has a right against the trustee to compel performance of the trust is of tremendous relevance [169]. For example, it would be the basis for legal argument about whether a corporation is a CCPC [170] when the trustee is a Canadian resident but the beneficiaries of a discretionary trust are not

Is the beneficiary the beneficial owner of trust property as the rights in rem advocates would claim, or are the beneficiaries’ rights restricted to beneficial enjoyment of the trust property, as those who argue that the rights are in personam would claim? If the latter advocates are correct, does the trustee own the trust property or does the trust?

Before answering this question a number of other questions should be considered. For example, what policy considerations underlie the specific provision? Should both the legal title holder and the beneficiary be considered in determining the answer? Should it matter if the trust is discretionary or fixed? How do tax decisions primarily interpreting succession duty legislation or other tax statutes affect the determination of who is the beneficial owner for purposes of the I.T.A.[171]? Can one rely on the conclusion reached by the S.C.C. that a beneficiary under a trust may have a specific interest in trust assets for some tax purposes, and/or obiter[172] by that court that the beneficiaries are, in some cases, the beneficial owners of trust property? Or should we conclude that when Supreme Court Judges use the expression beneficial owner, what they really mean is that the beneficiaries beneficially enjoy the trust property?

The important point is that the issue of whether a beneficiary is the beneficial owner of trust property arises both when the words ‘beneficial owner/ownership’ or ‘owned’ are used as well as whenever the issue of ownership is included in broader concepts, such as who holds shares, or who do shares ‘belong to,’[173] or who is related [174] or affiliated [175]. It is also integral in determining whether a corporation is a Canadian corporation, or a partnership a Canadian partnership, or a newspaper a Canadian newspaper [176] to name a few examples. All of these determinations rely on who is considered to own or, in some cases, who is considered to control trust property for tax purposes. Is it the trustee, the trust or the beneficiary? The answer, in my view, is often not obvious

Can private law provide some certainty in determining who is the beneficial owner of trust property for purposes of the I.T.A.?

In my view the answer is no. Although the expression ‘beneficial owner’ is often used, any answer found in private law is uncertain and unhelpful for two important reasons. First, the I.T.A. interjects the fiction that the trust is an individual for purposes of the Act. Secondly, in almost every case in which a beneficiary has been found to have a specific interest in or ownership of trust property, revenue collection has been at issue. In reaching their conclusions, Canadian courts have therefore rejected private law, sometimes in very strong terms: “[we will] not be bound by the arcana of ancient property law concepts in determining the application of a taxing statute”[177]. It seems therefore that the matter what ‘beneficial ownership’ means for tax purposes must be settled within the structure of the I.T.A. In particular, whether one should view the beneficiary as the beneficial owner of trust property for tax purposes? If so, when? This is a matter that could be addressed by the addition of a definition of ‘beneficial ownership’ as those words are used in the I.T.A.

Where does this discussion leave us for purposes of interpreting the current provisions of the I.T.A. and the concept of beneficial ownership therein? First, for purposes of determining who pays tax on trust income and who can claim tax deductions, the owner of trust property is the trust. If the trust is a bare trust, subsection 104(1) arrangement, or a resulting or constructive trust, the beneficial owner or owner is the beneficiary. If there is a specific deeming rule, beneficial ownership is determined based on the deeming provision [178]. In all other cases, beneficial ownership is a question of fact that presumably will be determined based on private law concepts. As discussed, determining who beneficially owns trust property as a private law matter is not at all settled. Thus, the debate about whether a beneficiary can be said to have an interest in specific trust property (a ‘beneficial ownership’) as a matter of trust law may be very relevant in determining how provisions in the I.T.A. are to be interpreted and applied, both where the words ‘beneficial owner’ are used and where that concept is determinative of the tax result - in short where ever the tax outcome revolves around the determination of who the property owner is.

ii. No change in ‘Beneficial Ownership’

Prior to the 2001 Amendments, if one were to describe for tax purposes when a transfer of property does not result in a change in beneficial ownership, one would likely describe a transfer of property to a bare trust, in which the settlor is the sole beneficiary , or perhaps a transfer of legal title, if legal title is held under a resulting or constructive trust. [179]

In all other transfers involving trusts, a change in beneficial ownership (as that concept is commonly understood) arguably occurs. The change occurs because the trustee is considered in law to be the owner, subject to the rights of the beneficiary under the terms of the trust deed.

II ‘Beneficially Interested’

The expression ‘beneficially interested’ appears 34 times in 19 sections [180] in the current I.T.A. and twice in the Legislative Proposals and Explanatory Notes on Taxation of Non-Resident Trusts and Foreign Investment Entities[181].

‘Beneficially interested’ is defined in the I.T.A. and given a very broad meaning that includes both those interested at common law (equity) as well as a much broader class of persons under the Act[182].

Specifically, subsection 248(25) of the I.T.A., provides that a person (or partnership) is ‘beneficially interested’ in a trust if that person has any right - whether contingent, absolute, immediate, future, conditional, or otherwise- as a beneficiary under a trust to receive any of the income or capital. In addition, a person not otherwise ‘beneficially interested’ in a trust may be deemed to be ‘beneficially interested’ where, under the terms or conditions of the trust or any arrangement, the person may, because of the exercise of any discretion by anyone, become beneficially interested at a later time. Under this part of the deeming rule, the trust must have acquired property from the particular person, a person not dealing at arm's length with the other person, a controlled foreign affiliate, or a non-resident corporation that would be a controlled foreign affiliate if it were a corporation resident in Canada. The definition also includes a person who has given any guarantee on behalf of the trust or provided any other form of financial assistance.

As a result of this definition, if the trustee has a discretionary power to allocate income or capital amongst a group of people named in the trust, the named persons are considered as ‘beneficially interested’ in the trust for tax purposes. A wide class of persons may also be considered to be beneficially interested in the trust under a power of appointment.

Since the term is defined in the I.T.A., its meaning is common in each of the listed provisions below.

44(3) Subsection 70(3) does not apply to compensation referred to in paragraph (b), (c) or (d) of the definition proceeds of disposition in subsection 13(21) or paragraph (b), (c) or (d) of the definition proceeds of disposition in section 54 that has been transferred or distributed to beneficiaries or other persons beneficially interested in an estate or trust.

54 principal residence (c.1) where the taxpayer is a personal trust, unless

(i) the particular property was designated by the trust in prescribed form and manner to be the taxpayer's principal residence for the year,

(ii) the trust specifies in the designation each individual (in this definition referred to as a Aspecified beneficiary@ of the trust for the year) who, in the calendar year ending in the year,

is beneficially interested in the trust, and (Y)

54 principal residence (c.1)(iii)

(iii) no corporation (other than a registered charity) or partnership is beneficially interested in the trust at any time in the year, and

56(4.1) Where

a particular individual (other than a trust) or a trust in which the particular individual is beneficially interested has, directly or indirectly by means of a trust or by any means whatever, received a loan from or become indebted to

(b)(ii) property that the loan or indebtedness enabled or assisted the particular individual, or the trust in which the particular individual is beneficially interested, to acquire, or

60(l)(ii)(B) under which the taxpayer, or a trust under which the taxpayer is the sole person beneficially interested in amounts payable under the annuity, is the annuitant for a term not exceeding 18 years minus the age in whole years of the taxpayer at the time the annuity was acquired

66(12.671)(a) with the trust if, at any time after the particular agreement was entered into and before the share is issued to the trust, the particular corporation or any corporation related to the particular corporation is beneficially interested in the trust;

70(3) Where before the time for making an election under subsection (2) has expired, a right or thing to which that subsection would otherwise apply has been transferred or distributed to beneficiaries or other persons beneficially interested in the estate or trust,

74.3(1) Where an individual has lent or transferred property (in this section referred to as lent or transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to a trust in which another individual who is at any time a designated person in respect of the individual is beneficially interested at any time, the following rules apply:

80(1) eligible Canadian partnership at any time means a Canadian partnership none of the members of which is, at that time,

(d) a trust, other than a trust in which no non-resident person and no person described in paragraph (a), (b) or (c) is beneficially interested;

94(1) Where,

(a) at any time in a taxation year of a trust that is not resident in Canada or that, but for paragraph (c), would not be so resident, a person beneficially interested in the trust (in this section referred to as a beneficiary was

104(1.1) Notwithstanding subsection 248(25.1) and for the purposes of subsection (1), paragraph (4) (a.4), subparagraph 73(1.02)(b)(ii) and paragraph 107.4(1)(e), a person or partnership is deemed not to be a beneficiary under a trust at a particular time where the person or partnership is beneficially interested in the trust at the particular time solely because of

104(5.5) For the purpose of subsection (5.4), a beneficiary under a trust is an individual who is beneficially interested in the trust, except that an individual shall be deemed not to be a beneficiary under a trust at a particular time

104(5.6)(c) in the case of any other trust, the individual who was, or who was related to, an individual beneficially interested in the trust and who is designated by the trust in its election under subsection (5.3)

(i) where, at each time in the relevant period, the total amount of property transferred or loaned before that time by the designated individual (either directly or through another trust) to the trust

(A) exceeded the total amount of property so transferred or loaned before that time by each other individual who was born before the designated individual and who, at any time, was related to any individual beneficially interested in the trust, and

(B) was not less than the total amount of property so transferred or loaned before that time by each other individual who was born after the designated individual and who, at any time, was related to any individual beneficially interested in the trust,

104(5.6)(c)(ii)(C)(I) at any time were related to any individual beneficially interested in the trust or to any individual who transferred or loaned property to the trust before the end of the relevant period, and

108(1) beneficiary under a trust includes a person beneficially interested therein

127(9) eligible taxpayer means and, for the purpose of this definition, a beneficiary of a trust is a person or partnership that is beneficially interested in the trust;

191(3)(d) (any partnership or trust, other than

(ii) a trust in which each person who is beneficially interested is

(A) related (otherwise than because of a right referred to in paragraph 251(5)(b)) to each other person who is beneficially interested in the trust and who is not a registered charity, or

(B) a registered charity and, for the purpose of this subparagraph, where a particular person who is beneficially interested in the trust is an aunt, uncle, niece or nephew of another person, the particular person and any person who is a child or descendant of the particular person shall be deemed to be related to the other person and to any person who is the child or descendant of the other person, or

(iii) a trust in which only one person (other than a registered charity) is beneficially interested,

206(4) For the purposes of this Part, where at any time a taxpayer acquires property, otherwise than pursuant to a transfer of property to which paragraph (f) or (g) of the definition disposition in subsection 248(1) applies, from a person with whom the taxpayer does not deal at arm's length for no consideration or for consideration less than the fair market value of the property at that time, the taxpayer is deemed to acquire the property at that fair market value, and for those purposes, a particular trust is deemed not to deal at arm's length with another trust if a person who is beneficially interested in the particular trust is at that time also beneficially interested in the other trust.

233.3(1) specified Canadian entity for a taxation year or fiscal period means

(A) a taxpayer resident in Canada in the year that is not (viii) a trust in which all persons beneficially interested are persons described in subparagraphs (i) to (vii); and

233.6(1) Where a specified Canadian entity (as defined by subsection 233.3(1)) for a taxation year or fiscal period receives a distribution of property from, or is indebted to, a non-resident trust (other than a trust that was an excluded trust in respect of the year or period of the entity or an estate that arose on and as a consequence of the death of an individual) in the year or period and the entity is beneficially interested in the trust at any time in the year or period, the entity shall file with the Minister for the year or period a return in prescribed form on or before the day that is

248(3)(e) For the purposes of the application of this Act in relation to the Province of Quebec,

(e) a person who has a right (whether immediate or future and whether absolute or contingent) to receive all or any part of the income or capital in respect of property referred to in paragraph (a), (b), (c) or (d) shall be deemed to be beneficially interested in the trust referred to in that paragraph; and shall, notwithstanding that such property is subject to a servitude, be deemed to be beneficially owned by the person at that time.

248(25) For the purposes of this Act,

(A) a person or partnership beneficially interested in a particular trust includes any person or partnership that has any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any person or partnership) as a beneficiary under a trust to receive any of the income or capital of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships;

(b) except for the purpose of this paragraph, a particular person or partnership is deemed to be beneficially interested in a particular trust at a particular time where

(i) the particular person or partnership is not beneficially interested in the particular trust at the particular time,

(ii) because of the terms or conditions of the particular trust or any arrangement in respect of the particular trust at the particular time, the particular person or partnership might, because of the exercise of any discretion by any person or partnership, become beneficially interested in the particular trust at the particular time or at a later time, and

(C) a member of a partnership that is beneficially interested in a trust is deemed to be beneficially interested in the trust.

251(1)(b) (a taxpayer and a personal trust (other than a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1)) are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(personnel)(b)(iii)(A)(II) to (IV); and

----------------------------------------------------------------------------------------------------------------

Provisions found in the Legislative Proposals on Taxation of Non-Resident Trusts and Foreign Investment Entities

94(1) beneficiary (a) beneficiary of or under a trust includes

(a) an entity beneficially interested in the trust; and

94(1) specified charity

(d) specified entity in respect of a trust at any time means

(i) an entity that is at that time

(A) beneficially interested in the trust,

III ‘Beneficial Interest’

The I.T.A. makes references to a “beneficiary’s interest in the trust,” “the interest of a beneficiary,” an “interest as a beneficiary” and a “beneficial interest(s)” on 33 occasions in 13 sections of the Act,[183] and on nine occasions in two sections under the Legislative Proposals and Explanatory Notes on Taxation of Non-Resident Trusts and Foreign Investment Entities[184].

These references all describe the same general concept: the interest that a beneficiary may have in a trust. Often the statutory provision is asking about the value of that interest in relation to the fair market value of all beneficial interests in the trust, or to identify a beneficiary’s involvement with a trust.

As discussed in Issue one, a trust permits a division of the beneficial enjoyment of the trust property (beneficial ownership) among different beneficiaries. Such a division may create different beneficial interests in the property, set out in the trust deed. For example, a beneficiary may have an income or capital interest in the trust. The trust document may also give the trustee a substantial amount of discretion to create or extinguish a beneficial interest, or for the shifting of beneficial interests among different beneficiaries. In consequence, beneficial interests under a trust are capable of many variations. There are joint and common interests, successive interests; interests of the born and unborn, and vested and contingent interests. The expressions (‘interest of a beneficiary,’ ‘beneficiary’s interest in a trust,’ or ‘interest as a beneficiary’) would include any of these types of interests, or in fact any interest created under the trust deed.

One who is ‘beneficially interested’ in a trust has a hope or expectancy of receiving property from the trust and a right to compel the trustee to perform the terms of the trust, but does not necessarily have a right to any of the trust property [185]. Consider, for example, a beneficiary of a discretionary trust. Such a person would be described as having a ‘beneficial interest’ in the trust but not a ‘beneficial entitlement’ to the trust assets (unless the trustee exercises discretion in that individual’s favor). The important distinction is that a beneficiary of a discretionary trust may not have an equitable right to trust property that would be enforced by the courts. Instead, that person would be considered ‘beneficially interested’ in the trust, but may only have the right to bring an action to require the trustee perform the terms of the trust, including the exercise of their discretion if required by the trust.

Each of the relevant provisions listed below that use this expression reflects this general meaning.

17(5)(a)(i) the fair market value of the beneficiary’s interest in the trust at that time is of

17(5)(a)(ii) the fair market value of all the beneficial interests in the trust at that time; and

17(10)(b) each beneficiary of a non-discretionary trust is deemed to own that proportion of the number of shares of a class of the capital stock of a corporation owned by the trust at that time that

(i) the fair market value of the beneficiary's interest in the trust at that time

is of

(ii) the fair market value of all the beneficial interests in the trust at that time.

39(1)(a)(v) an interest of a beneficiary under a qualifying environmental trust;

88(1)(c.2)(ii)(B)

(I) the fair market value at that time of that member's interest in the partnership or that beneficiary's interest in the trust, as the case may be, is of

(II) the fair market value at that time of all the members' interests in the partnership or beneficiaries' interests in the trust, as the case may be, and

94(1)(d) in any other case, for the purposes of subsections 91(1) to (4) and sections 95 and 233.4, (i) the trust shall, with respect to any beneficiary under the trust the fair market value of whose beneficial interest in the trust is not less than 10% of the total fair market value of all beneficial interests in the trust, be deemed to be a non-resident corporation that is controlled by the beneficiary,

94(1)(d)(iii)

(A) the fair market value at that time of the beneficiary's beneficial interest in the trust is of (B) the fair market value at that time of all beneficial interests in the trust

104(15)(b) (where paragraph (a) does not apply and the preferred beneficiary's interest in the trust is not solely contingent on the death of another beneficiary who has a capital interest in the trust and who does not have an income interest in the trust, the trust's accumulating income for the year; and

107(2.2) Where at any time before 2005 a beneficiary under a trust described in paragraph (h), (i) or (j) of the definition A flow-through entity in subsection 39.1(1) received a distribution of property from the trust in satisfaction of all or a portion of the beneficiary's interests in the trust and the beneficiary files with the Minister on or before the beneficiary's filing-due date for the taxation year that includes that time an election in respect of the property in prescribed form, there shall be included in the cost to the beneficiary of a particular property (other than money) received by the beneficiary as part of the distribution of property the least of

107.3(2) Where property of a qualifying environmental trust is transferred at any time to a beneficiary under the trust in satisfaction of all or any part of the beneficiary's interest as a beneficiary under the trust,

107.3(3)(c) each beneficiary under the trust immediately before that time shall be deemed to have received at that time from the trust an amount equal to the percentage of the fair market value of the properties of the trust immediately after that time that can reasonably be considered to be the beneficiary's interest in the trust;

142.2(4) where

A is the fair market value at that time of the beneficiary's beneficial interest in the trust, and

B is the total of all amounts each of which is the fair market value at that time of a beneficial interest in the trust; and

144(1) unused portion of a beneficiary’s exempt capital gains balance (b)(ii) where there has been a disposition of an interest or a part of an interest of the beneficiary in the trust after the beneficiary's 2004 taxation year (other than a disposition that is a part of a transaction described in paragraph (7.1)(c) in which property is received in satisfaction of all or a portion of the beneficiary's interests in the trust), the total of all amounts each of which is an amount by which the adjusted cost base of an interest or a part of an interest disposed of by the beneficiary (other than an interest or a part of an interest that is all or a portion of the beneficiary's interests referred to in paragraph (7.1)(c)) was increased because of paragraph 53(1)(p), and

186(3) subject corporation means a corporation (other than a private corporation) resident in Canada and controlled, whether because of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts).

248(1) personal trust means

(b) an inter vivos trust, no beneficial interest in which was acquired for consideration payable directly or indirectly to

any beneficial interest in the particular trust acquired by such a person shall be deemed to have been acquired for no consideration;

248(1) specified shareholder of a corporation in a taxation year means a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation and, for the purposes of this definition,

(b) each beneficiary of a trust shall be deemed to own that proportion of all such shares owned by the trust at that time that the fair market value at that time of the beneficial interest of the beneficiary in the trust is of the fair market value at that time of all beneficial interests in the trust,

256(1.2)(f)(i)(B) where clause (A) does not apply, those shares shall be deemed to be owned at any time before the distribution date by any such beneficiary in a proportion equal to the proportion of all those shares that the fair market value of the beneficial interest in the trust of the beneficiary is of the fair market value of the beneficial interests in the trust of all those beneficiaries,

(iii) in any case where subparagraph (ii) does not apply, a beneficiary shall be deemed at that time to own the proportion of those shares that the fair market value of the beneficial interest in the trust of the beneficiary is of the fair market value of all beneficial interests in the trust, except where subparagraph (i) applies and that time is before the distribution date, and 256(1.2)(f)(iii) in any case where subparagraph (ii) does not apply, a beneficiary shall be deemed at that time to own the proportion of those shares that the fair market value of the beneficial interest in the trust of the beneficiary is of the fair market value of all beneficial interests in the trust, except where subparagraph (i) applies and that time is before the distribution date, and

Provisions found in the Legislative Proposals and Explanatory Notes on Taxation of

Non-Resident Trusts and Foreign Investment Entities

94(1) specified charity

(c)(ii) an amount was received by the charity on the disposition of all or part of its interest as a beneficiary of or under the trust,

(d) specified entity in respect of a trust at any time means

(i) an entity that is at that time

(A) beneficially interested in the trust,

94(1) treasury interest treasury interest in a trust means an interest as a beneficiary of or under the trust that was issued by the trust for consideration.

94(2)(g) each of the following acquisitions of property by a particular entity is deemed to be a transfer, at the time of the acquisition of the property, to the particular entity from the entity from which the property was acquired, namely the acquisition by the particular entity of

(ii) (ii) beneficial interest in a trust (otherwise than as a consequence of a disposition of the interest by a beneficiary under the trust),

94(8)(a)(i) an amount payable before the particular time to the particular entity (or another entity that was, at the time the amount became payable, a specified party in respect of the particular entity) by the trust because of the interest of the particular entity (or of the specified party) as a beneficiary under the trust,

94(8)(a)(ii) an amount (other than an amount described in subparagraph 5 (i)) received or receivable before the particular time by the particular entity (or by another entity that was, at the time the amount became receivable by the particular entity, a specified party in respect of the particular entity) on the disposition of all or part of an interest as a beneficiary under the trust

94(10) specified property (b) a beneficial interest in a trust;

94.1(1) participating interest(b) where the entity is a trust,

(i) a beneficial interest in the trust, and

(ii) a property that, under the terms or conditions in respect of which or any agreement relating to which, is convertible into or exchangeable for or confers a right to acquire, directly or indirectly, a beneficial interest in the trust or a property the fair market value of which is determined primarily by reference to the fair market value of a beneficial interest in the trust; and

· The expression is also used in two other provisions in the I.T.A. and has a meaning that does not fit neatly into the above grouping. Section 74.4 refers to a specific interest of a beneficiary in trust property: the shares of a corporation. Clause 88(1)(c.2)(iii)(A) provides for a “direct or indirect interest” and does not necessarily refer only to an interest by a person through a trust. For example, it may include an interest by a parent corporation in shares held by a subsidiary. In my view, the precise meaning of these words in this context is not clear.

74.4(4) For the purposes of subsection (2), one of the main purposes of a transfer or loan by an individual to a corporation shall not be considered to be to benefit, either directly or indirectly, a designated person in respect of the individual, where

(a) the only interest that the designated person has in the corporation is a beneficial interest in shares of the corporation held by a trust;

88(1)(c.2)(iii) the reference in the definition specified shareholder in subsection 248(1) to the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation shall be read as the issued shares of any class (other than a specified class) of the capital stock of the corporation or of any other corporation that is related to the corporation and that has a significant direct or indirect interest in any issued shares of the capital stock of the corporation

IV ‘Beneficially Entitled’

The expression ‘beneficially entitled’ is used in two sections of the I.T.A. to describe a person beneficially entitled to receive dividends, interest, or proceeds of disposition of property. An extensive discussion of the meaning of the expression ‘beneficially entitled’ and related case law can be found under that heading in Issue one. In summary, to understand the meaning of the expression beneficial entitlement one must look to the context in which it is being used. The history of its meaning as found in case law lies in the determination of rights under an estate or trust. In that context the expression ‘beneficially entitled’ is generally used to describe a person who has both an equitable interest in property and the right to enforce the interest. The word ‘entitled’ would require the existence of a right enforceable by a court, and the word ‘beneficially’ distinguishes an equitable right or interest from a legal right or interest. The test of ‘beneficial entitlement’ has been summarized by the courts as the ability to ‘sue for and recover’ the property in question. A number of tax cases, primarily dealing with succession duty, have interpreted and expanded the meaning of the expression for revenue collection purposes. The most extreme example of this expansion can be found in Covert[186], where Martland expanded the meaning of the expression for purposes of subsection 2(5) of the Nova Scotia Succession Duty Act. He stated:[187]

In my view, the corporation is no less “beneficially entitled” when the property is held by its wholly owned subsidiary as when it is held in trust for it. Its legal entitlement is even more immediate as it does not have to call upon a third party to perform its obligation as trustee. It only has to exercise its rights as a sole shareholder of its subsidiary.

In Covert the court may have been strongly influenced by the fact that the obvious purpose of the testator’s adopted scheme was that the subsidiary company turn over to the parent company the residue of the estate so that it could, in turn, divide the residue among its shareholders, the grandchildren of the deceased.

Covert was a 4:3 decision that may be restricted to its facts, or to tax statutes or to statutes imposing succession duty. It does not appear to have been followed in subsequent tax decisions [188] on the matter of when one is beneficially entitled to trust property. It is nonetheless important for two reasons. First, it provides the most recent and authoritative statement on the meaning of “beneficially entitled” in the context of a taxing statute. Its meaning in that context is clearly much broader than that formerly understood in trust law. Second, it is important for its conclusion that “one who is beneficially entitled to property is in reality the beneficial owner of it.”

Later decisions, both tax and non-tax, refer to the more traditional tests used in MacKeen [189] and Montreal Trust [190]. For example, in Canada v LeBlanc[191], a case for judicial review of an umpire's decision under Unemployment Insurance Regulations, the court first quoted MacKiegan C.J.N.S. in MacKeen and the ‘sue for and recover’ test and then quoted the modification by Rand J. in Montreal Trust: “if the word ‘recover’ extends to the application of money to one's benefit, and ‘sue for’ to an ultimate and alternative resort as the effective cause of payment, I am disposed to accept it.”

It is Rand J’s test that most aptly describes the meaning of the expression in the relevant provisions listed below.

153(4) Where at the end of a taxpayer's taxation year the person beneficially entitled to an amount received by the taxpayer after 1984 and before the year as or in respect of dividends, interest or proceeds of disposition of property is unknown to the taxpayer, the taxpayer shall remit to the Receiver General on or before the day that is 60 days after the end of the year on account of the tax payable under this Act by that person an amount equal to

153(5) An amount remitted by a taxpayer under subsection (4) in respect of dividends, interest or proceeds of disposition of property shall be deemed

(a) to have been received by the person beneficially entitled thereto; and to have been deducted or withheld from the amount otherwise payable by the taxpayer to the person beneficially entitled thereto.

V Summary Conclusions

The meaning of the expressions ‘beneficial ownership,’ ‘beneficial owner,’ ‘beneficially owned,’ ‘beneficial interest,’ ‘beneficially interested,’ and ‘beneficial entitlement’ within the contexts in which they are used in the I.T.A. are, for the most part, easily determined in case law or deeming provisions. The significant exception to this is where expressions that refer to the concepts of ‘beneficial ownership,’ ‘beneficial owner,’ or ‘beneficially owned’ are used. Multiple meanings could attach depending on the provision at issue. Where the expressions are not used, these concepts become very important in determining the tax result. A significant part of the difficulty in ascertaining a meaning for the words ‘beneficial owner,’ ‘beneficial ownership,’ or ‘beneficially owned’ is the fiction that the trust is an individual for tax purposes. In consequence, the meaning of ‘beneficial ownership’ for purposes of the I.T.A. can often not be found in private law, nor can the solution to tax problems where beneficial ownership is the underlying issue. The reason is simple and obvious. For private law purposes the trust is a relationship that imposes fiduciary obligations on the trustee, it is not an individual.

Issue 3 :Appendix A

Trusts and The Income tax Act

What is the nature of a trust beneficiary’s interest in a trust?

Professor Maitland considered that “of all the exploits of equity, the largest and the most important is the invention and development of the trust.”[192] This simple concept allows the separation of the rights to manage property from the right to enjoy it. This fiduciary relationship between the trustee who manages the property and the beneficiary who enjoys it, is unique to English law. It was first enforced in equity, later through the Courts of Chancery, and is now enforced through the modern common law courts. At the root of equity is duty; the fiduciaries duty. Thus, what was first enforced in equity was the trustee’s obligation to honour the terms of the trust. Over time, the issue of whether the beneficiary also had rights to or an interest in specific trust arose, and, in particular, whether the beneficiary had rights against third parties. The answer in some cases was found to be yes.[193] Thus the question: What is the nature of a trust beneficiary’s interest in a trust? or, put differently, Does a beneficiary have an interest in specific trust assets?

Nature of the Trust Beneficiary’s Interest

There has been considerable debate about the answer to this question in a non-tax context. The focus has been on whether a beneficiary’s right is restricted to a personal action against the trustee to enforce the terms of the trust or whether it includes a proprietary right or interest in the trust assets. The debate has been further fueled by the position adopted by various authors that beneficiaries’ rights should be classified as in personam or in rem. These authors, who included the leading authorities in the field, have expressed very different and often impassioned views on the matter.[194] Maitland for example, thought that to view a trust beneficiary as an owner of trust property was “simply to court fallacies of reasoning.”[195] Scott on the other hand viewed the beneficiary as an equitable owner of the trust property. “The trustee is merely a buffer between the beneficiary and the world, carrying some of the rights of ownership in himself, but always on behalf of the beneficiary.” In his opinion to speak of the rights of the cestui que trust as equitable ownership is “ a perfectly proper use of terms and one which accurately expresses his rights”[196] and that to “speak of equitable ownership is just as accurate a use of terms as to speak of legal ownership.”[197]

In a modern context, it is probably most correct to say that a beneficiary’s rights in trust property are viewed as both personal against the trustee and proprietary with respect to trust assets depending on the context. The beneficiary’s rights are personal against the trustee if the issue is whether the trustee has properly administered the trust. Sometimes, however, it is the relationship of the beneficiary to the trust property that is at issue and the proprietary aspect of the beneficiary’s rights may predominate. A number of examples of when this may occur are offered by various authors, and include the right of beneficiaries to call for trust property if they are sui juris under the rule in Saunders v. Vautier,[198] the right of tracing trust property to third parties, and the right of a beneficiary against the trustee if he or she has misapplied trust property but continues to retain it in specie. At issue in each of these examples is the relationship of the beneficiary to the trust property and not an action against the trustee for the proper performance of the trust.

The most common context in which the proprietary nature of a beneficiary’s interest in trust property is stressed is revenue collection. At issue is how the beneficiary’s interest in or enjoyment of the trust assets is to be viewed for tax purposes. This issue has arisen under a number of different taxing statutes, both in Canada [199] and in other jurisdictions. To resolve the matter, the Courts have looked to what is sometimes referred to as the “substance” of the trust beneficiary’s interest in the trust.[200]

The leading case in this area is Archer-Shee v. Baker,[201] a decision of the House of Lords. In that case, Alfred Pell, a citizen of the United States, left the residue of his estate by his will upon trust (in the events which happened) to apply “the whole of the . . .income and profits. . . to the use of my daughter Frances. . .during her life,” with remainder over. The trust was situate in New York and the trustee was a New York trust company. The trust property consisted entirely of non-British securities. Frances was married to Sir Martin Archer-Shee, who was assessed under the British Income Tax Act, 1918 for the income paid to Frances’ use from the trust since the marriage. None, of this income had ever been remitted to her in England, but had been paid by the trustee (less any sums required for American income tax and the trustee’s fees and expenses) to her order at a New York bank.

Under the British Income Tax Act, a person resident in the United Kingdom was liable for tax on all “possessions out of the United Kingdom [including] stocks, shares, or rents in any place out of the United Kingdom” on which the taxpayer was entitled to receive and did receive the interest and dividends, but with respect to “possessions out of the United Kingdom other than stock, shares, or rents” the tax liability extended only to “the full amounts of the actual sums annually received in the United Kingdom.” In short, Sir Martin Archer-Shee was liable only if the funds paid into the New York Bank account were income arising from securities.

Rowlett J. outlined the arguments of both parties succinctly,

Mr. Maugham says that she (the Lady Archer-Shee) has no interest specifically in the stocks, shares and rents at all, and that they are not her possessions. The question is whether that is an argument which carries him home in this case. Of the correctness of the proposition generally speaking there can be no doubt at all. What this lady enjoys is not stocks, shares and rents or other property subject to the will, but what she does enjoy and has got is the right to call upon the trustees, and to force the trustees if necessary, to administer this property during her life so as to give her the income arising therefrom, according to the trust. Her interest is that of equity and it is not an interest in the specific stocks and shares at all. There is no doubt about the correctness of that. But the question is whether that is so for the purpose of Income Tax. (Emphasis added).

The view put forward on behalf of the Crown is that in this case she receives the income from these stocks and shares because the possessions need not be her possessions in a legal or specific sense for the purpose of Schedule D, Case V; she has income from the stocks and shares de facto.

It seems to me that I must adopt that latter view. Without in the least impugning the correctness of Mr. Maugham's description of this state of affairs from a legal point of view, for the purposes of classifications and distinctions in this Act I must adopt the view that she has income from the stocks and shares.

Two of the House of Lords Judges dissented. Viscount Sumner raises a number of important issues in his reasons about the relationship between what is clearly the result at law and the result being proposed for tax purposes. His views reflect the position espoused by Maitland that the trustee is the owner of trust property.

My Lords, the position of the equitable tenant for life and of the investments which form the trust fund is so clear both in law and equity that, apart from any special prescriptions express or implied of the law relating to Income Tax, there can, I think, be no doubt about them.

The trustee has the full legal property in the whole of the trust fund and the beneficiary has not. Apart from special provisions ‑ in particular settlements which do not affect the general {767} principle ‑ the trustee is not the agent for the beneficiary who can neither appoint nor dismiss him. She cannot require him to change or forbid him to change the particular investments of the fund. There is no liability on the beneficiary for the trustee's acts on the principle of respondeat superior and, unless the trust deed otherwise provides, the trustee must act without remuneration to himself and cannot in any case sue the beneficiary on any implied promise to pay. It is the trustee alone who can give a discharge for interest, rent or dividends to the parties who have to pay them, in respect of the invested trust estate, nor need they know the beneficiary in the matter. All that the latter can do is to claim the assistance of a Court of Equity to enforce the trust and to compel the trustee to discharge it. This right is quite as good and often is better than any legal right, but it is not in any case one which for all purposes makes the trust fund "belong" to the beneficiary or makes the income of it accrue to him eo instanti and directly as it leaves the hand of the party who pays it. I do not understand that so far there was any contest. The Appellant's argument is that whatever may be the legal position of the capital and the equitable position of the trustee and the cestui que trust as regards the right to the income, for Income Tax purposes the law is otherwise and that under the Income Tax Act and by virtue of some implication the "accrual" is to the beneficiary. (Emphasis added)

He goes on to state that if the income is to be taxed to the husband in the circumstances, the reason must be in the statute itself, a point with which I strongly agree.

It follows that it is in the terms of the Income Tax Act or in some decided construction which binds your Lordships, that the Inland Revenue can alone find authority for the present contention that the person "entitled to" the income is the beneficiary, and a rule of "Income Tax law" {768} which so completely and uncompromisingly disregards the regular law of trusts and the ordinary law of property is one that must be enacted beyond doubt or question.

Lord Blanesburgh, in his dissent made a similar point about the tax result. In his view the position of Lady Archer-Shee based on private law principles was clear. This, however, did not necessarily dictate the tax outcome.

My Lords, the ultimate question in this appeal turns upon the description which in Income Tax phraseology ought properly to be applied to the moneys paid during the two years in question by the Trust Company of New York to the order of Lady Archer‑Shee, the Respondent's wife, at Messrs. J. P. Morgan and Company's bank there. None of these moneys have been received in the United Kingdom. It is that fact which, if his contention as to their true description be correct, enables the Respondent to say that he is not liable to pay Income Tax in respect of them, either in whole, in part, or at all.

Lord Blanesburgh’s comments speak to the crux of the matter. Regardless of what the private law outcome may be, the real question is what is the meaning of the expression in the context of the legislation in which it is being used, in this case the British Income tax Act.?

The decision is Archer- Shee is also important for a second reason. In finding liability to tax in this case, the House of Lords also held, in effect, that Lady Archer-Shee was the beneficial owner of the interest and dividends from all securities held by the trust. It was for this reason that her husband was assessable on the trust income. Lord Carson said:[202]

[i]n my opinion upon the construction of the will of Alfred Pell once the residue had become specifically ascertained, the respondent’s wife was sole beneficial owner of the interest and dividends of all the securities, stocks and shares forming part of the trust fund therein settled and was entitled to receive and did receive such interest and dividends. This, I think, follows from the decision of this House in Williams v. Singer, and in my opinion the Master of the Rolls correctly stated the law when he said

. . .that in considering sums which are placed in the hands of trustees for the purpose of paying income to beneficiaries, for the purposes of the Income Tax Acts, you may eliminate the trustees. The income is the income of the beneficiaries; the income does not belong to trustees.

Of some significance is that Lady Archer-Shee was the sole income beneficiary of a fixed trust which no doubt assisted in the finding by the House of Lords. The decision has been roundly criticized,[203]particularly on the basis that it totally ignores Maitland’s well respected thesis that the beneficiary has no proprietary right to specific assets in the trust.[204]

Archer-Shee was nonetheless applied by the Supreme Court of Canada in 1956 in Minister of National Revenue v. Trans-Canada Investment Corp. Ltd.[205] At issue was whether taxable dividends paid to a trustee and later distributed to a corporate beneficiary retained their identity as taxable dividends in the beneficiary’s hands for purposes of subsection 27(1) of the Income Tax Act.[206] If so, the dividends were deductible by the recipient corporation in calculating its taxable income.

Cameron J. of the Exchequer Court first determined that Trans Canada Investment Corp. Ltd. was the beneficial owner of the underlying shares held by the trust. His reason for this is somewhat unclear. His Lordship said “From these facts and particularly because he could demand that the trustee deliver to him his proper proportion of the shares in the “underlying companies”, it seems to me that the holder of the series “B” certificate was , in fact, the beneficial owner of the basic shares represented thereby.”[207] He then went on to state that the dividends received retained their character in Trans Canada’s hands notwithstanding the intervening trust. His reasoning was as follows:

“.... ’no one else had any beneficial interest’ in such shares. The number of shares to which he was entitled in each company was fixed at the time he purchased the certificates, remained the same throughout, and he was entitled to physical possession thereof upon demand.

Under the circumstances, I do not think that the amounts which the appellant received were other than dividends from the ‘underlying companies.’ The majority decision of the House of Lords in Archer-Shee v. Baker strongly supports this view.”[208]

Cartwright J.,in his reasons for judgement agreed that “the mere imposition of a trustee between the dividend-paying companies and the beneficial owner of the shares did not change the character of such sum.”[209]

Unfortunately, the Supreme Court was not asked to determine whether Trans Canada was in fact the beneficial owner of the shares. Cartwright J. in his reasons for judgement states simply that “the finding of the learned trial judge that the appellant was the beneficial owner of the shares in the underlying companies was not questioned before us.”

Rand and Estey J., dissented on the tax effect of the intervening trust and whether Archer-Shee applied. Rand J. argued that the respondent trust corporation was entitled only to a fractional part of the underlying securities. That was not present in Archer-Shee. He also stressed the enormous complexity of the trust; the holders of certificates, the charges on the funds, the powers of the administrator and the voting powers over the stocks. There was clearly “an intermediate original of income” distinct both from the underlying companies and the certificate holders. Estey J. agreed with Rand but did concede that “the intervention of a trustee or of more than one beneficiary would not, in circumstances such as existed in Archer-Shee, destroy the identity of the dividends or cause them to lose their character as such”.[210] The facts concerning this trust corporation in his view, simply went much further.

M.N.R. v. Trans-Canada Investment Corporation Ltd. carries Archer-Shee to the furthest limit it has achieved in Canadian law, by finding that a beneficiary of a complex trust had a specific interest in trust assets for the purpose of tracing the source of trust income.[211] It is unsatisfactory in that the Supreme Court did not make a finding that Trans Canada was the beneficial owner of the trust property, instead relying on the finding of the trial judge. The trial judge’s comments leave one with the impression that his finding of beneficial ownership was based on the ability of the beneficiary to demand his proportion share of the shares in the underlying corporations, thus suggesting a bare trust. However, the judge also makes clear that the trustee could vote the shares and had the power to sell and convert them, thus refuting the notion of a bare trust. Rand J. in his dissent also makes clear that the trustee had certain active duties in relation to the sale or purchase of stocks and the investment of proceeds. Trans Canada thus leaves as an open question, when and if a beneficiary will be considered to beneficially own or hold a specific interest in trust assets for tax purposes. It is significant that in Trans Canada case beneficial ownership of the shares was found notwithstanding that there were multiple beneficiaries and trustees with active trustee duties. The important point seems to have been that the interest of the particular beneficiary was fixed and the source of trust income identifiable.

In Shortt v. MNR, [212] a few years later the Exchequer Court, also found that the beneficiaries had an interest in specific trust assets. In Shortt, the court also assumed the two appellants were each the beneficial owner of one-half share in an unincorporated business, under their mother’s will (although reasons for the finding were not provided). The business was under the administration of the testatrix’s husband, the father of the appellants, who was also trustee and executor of his wife’s estate. According to the provisions of the will the appellant’s shares of the profits of the business for the years 1953 and 1954 were held and reinvested in the business. The Minister treated these sums as investment income received from an estate operating a business. The Shortts claimed that the trustee received earned income only from carrying on the business and that the profits remained earned income when paid to them as beneficiaries.

After citing Syme, Archer-Shee, and Trans-Canada Investment Corporation Ltd., Thurlow, J. stated as follows;

....., the factual situation, as I view it, is one wherein the income in question was income from the carrying on by the trustee of a business which was vested in him as trustee for the appellants and others, but wherein the net income from such business, as determined by the trustee, belonged entirely to the appellants. [213]

The beneficiaries were therefore able to claim the tax benefits available as if they received earned income and not investment income from the trust.

Almost 20 years later in McCreath, [214] the Supreme Court of Canada again suggests that a beneficiary of a trust may hold an interest in specific trust property for tax purposes, in this case a discretionary trust [215]. In McCreath the significant issue was whether Mrs. McCreath, who retained a general power of appointment [216] exercisable by will, reserved to herself “an interest in the property passing under the trust” so as to make it “property passing on the death of the deceased” as defined in subclause 1(p)(viii) of the Ontario Succession Duty Act.[217] Dickson J. described the “property passing” under the settlement as the equitable interest in a voting trust certificate representing 99,986 common shares in the capital stock of Mount Royal Paving and Supplies Limited which were transferred by Mrs. McCreath to the trustee. According to the Supreme Court an interest in the corpus of the trust was retained by Mrs. McCreath until the time of her death; that is an interest in the Mount Royal Paving and Supplies shares, notwithstanding that the trust was completely discretionary.

In summary, although each of these decisions were made under other statutes or repealed I.T.A. provisions, the message is clear. For some tax purposes a beneficiary may have an interest in specific trust property. Trans Canada Investments is also authority for the proposition that even multiple beneficiaries of a complex trust may ‘beneficially own’ trust property. The matter of the source of income received by a beneficiary from a trust, which was the issue in Trans Canada and Shortt, has been resolved by the introduction of subsection 108(5) of the ITA which deems amounts received by a beneficiary from a trust to be income from property. The matter of when a beneficiary is considered to have a specific interest in or to beneficially own trust assets is unresolved except with respect to specific deeming rules in the ITA [218] and apparently in the context of the new definition of disposition and the accompanying rollover rules in the March 2001 amendments.

[1] See for example, Judicature Act, R.S.N.S. 1989, c. 240, and in Alberta, Judicature Act, S.A. (2000) c. -J.2.

[2] However, as Bruce Ziff points out in Principles of Property Law, 3rd Edition, Carswell: (2000) at 195:

The effect of recognizing the rights of enforcement of the cestui que trust is normally described as creating an equitable interest in property that has been impressed with a trust. The result of this characterization is that equitable rights are regarded as proprietary. Even so, in important respects an equitable interest is more fragile than a legal entitlement. A right in equity is dependent on the availability of equitable remedies, the granting or withholding of which is still a matter of judicial discretion. Additionally, equity will not impose an obligation against a bona fide purchaser for value of a legal interest that had no notice of an antecedent equitable claim. Such a person acquires the legal title free from the obligations of equity.

[3] Supra note 2 at 64.

[4] The beneficiary also has some rights against third parties to trace and recover trust property.

[5] Presumably this would also include equivalent relationships in the Province of Quebec. Subsection 248(3).

[6] Subsection 104(2).

[7] Whether this conclusion is limited to transfers as described under the 2001 is not clear.

[8] See the discussion of this issue under Trusts in Issue Two.

[9] Over time, however, a beneficiary was able to enforce his/her rights with respect to the trust property against third parties in certain circumstances. It was the evolution of these third party rights that led to the argument that the beneficiary has a right in rem with respect to trust property.

[10] See Appendix Three A for an overview of these decisions.

[11] To perhaps further confuse the matter, Sir Robert Megarry and M.P.Thompson, in Megarry's Manual of the Law of Real Property, Seventh Edition, (London: Sweet and Maxwell Limited: 1993), refer to the beneficial owner of a legal estate and state at page 64 "the ability of the beneficial owner of the legal estate (i.e. one who has the equitable interest as well as the legal estate for his own benefit) to separate the legal from the equitable interest is one of the fundamentals of English law."

[12] The practice became so widespread that in 1484 the British Parliament passed a statute allowing beneficiaries in possession of land to convey good [legal] title to a purchaser even against the foefee, thus formally recognizing that the practice of conveying legal title to a mere nominee or “man of straw” to hold on the grantor’s behalf had become very common.

[13] See for example, Judicature Act, R.S.N.S. 1989, c.240, and in Alberta, Judicature Act, S.A. (2000) c.J-2.

[14] See P. Girard, “History & Development of Equity”, in The Law of Trusts: A Contextual Approach, Editors, Gillen and Woodman, Edmond Montgomery, 2000, Toronto, Chapter 2 at 35.

[15] Equity will enforce the beneficiary's title against any transferee from the trustee except a bona fide purchase for value without notice. It may therefore also be said that they enjoy a form of quasi‑property interest in that they would have standing to trace trust property to a third party, though the property would be recovered for the trusts. See comments in Oosterhoof and Gillese, Text, Commentary and Cases on Trusts, Fifth Edition, (Carswell, Toronto) at 29 and their reference to H.A.J. Ford and W.A. Lee, assisted by Peter McDermott, Principles of The Law of Trusts, 3rd ed. (Sydney: L.B.C. Information Services, 1966) at 1790, who state this proposition by analogy to the right of the beneficiary of an unadministered estate to recover estate assets.

[16] Supra note 4.

[17] However, as Bruce Ziff points out in Principles of Property Law, 3 rd Edition, Carswell: (2000) at 195: The effect of recognizing the rights of enforcement of the cestui que trust is normally described as creating an equitable interest in property that has been impressed with a trust. The result of this characterization is that equitable rights are regarded as proprietary. Even so, in important respects an equitable interest is more fragile than a legal entitlement. A right in equity is dependent on the availability of equitable remedies, the granting or withholding of which is still a matter of judicial discretion. Additionally, equity will not impose an obligation against a bona fide purchaser for value of a legal interest who had no notice of an antecedent equitable claim. Such a person acquires the legal title free from the obligations of equity.

[18] Supra note 4 at 64.

[19] The beneficiary also has some rights against third parties to trace and recover trust property.

[20] E.H. Burn, Cheshire and Burn’s Modern Law of Real Property, 15th ed. (London: Butterworths 1994), 55.

[21] Ibid.

[22] An important exception is an interest in joint tenancy. The title would first have to be severed into a tenancy in common.

[23] Supra note 6.

[24] For a general discussion of this issue see B. Pierre, Classification of Property and Conceptions of Ownership in Civil and Common Law, (1997) 28 R.G.D. 235-274.

[25] Stroud’s Judicial Dictionary of Words and Phrases, 5th edition defines the “owner” or “proprietor” of a property as “the person in whom (with his or her assent) it is for the time being beneficially vested, and who has the occupation or control, or usufruct, of it”.

[26] Black’s Law Dictionary, 7th edition, s.v. “ownership”.

[27] Ibid.

[28] Property Law, Text and Materials, 2nd ed. (Toronto-Edmond Montgomery, 1990) at 21.

[29] A.M. Honoré, “Ownership” in A.G. Guest, ed., Oxford, Oxford Essays in Jurisprudence (London, O.U.P., 1961) 107 at 113.

[30] Supra note 10 at 2.

[31] The Leff Dictionary of Law: A Fragment: Part 3", 94 Yale L.J. 2113, July 1985.

[32] Ibid.

[33] Slightly different terminology is often used in the law of real property. The 'legal title holder' is said to have a legal estate in land and the 'equitable title holder' an equitable or beneficial interest in the land. These terms may also be used in a context other than a trust since equitable remedies apply in a number of contexts. The vendee under a contract for the sale of real property, for example, is said to be the 'beneficial owner' though the vendor still holds legal title". The reason that the words 'beneficial owner' are used in this context is that the purchaser may have a right of specific performance (an equitable right) with respect to the property in question, which will be enforced by the common law courts if the terms of the contract are not met. For a discussion of this matter see Property in Issue Two.

[34] Black’s s.v. “beneficial owner”. For a discussion of the meaning of “belongs to”, see also Re City of Kitchener and Reg. Mun. Of Waterloo (1978), 94 D.L.R. (3d) 760 (Ont. Div. Ct.).

[35] Black’s s.v. “beneficial owner”.

[36] The Federal Court in The Jensen Star examined the words in the context of the Federal Court Act, R.S.C. 1970 (2nd Supp.) C.10, s 43(3). In Csak the court considered the definition of 'complainant' in section 238 of the Canada Business Corporations Act, R.S.C. 1985, c.C‑44, (now repealed).

[37] (1977), 36 A.P.R. 572, [1977] C.T.C. 230, 78 D.L.R. (3d) 66 (Nova Scotia Supreme Court T.D.) (Also Cowan et al v. Minister of Finance of Nova Scotia). This passage was cited with approval by Martland J. in Covert v. Minister of Finance of Nova Scotia [1980] 2 S.C.R. 774 at 784.

[38] (1978) 89 D.L.R. (3d) 426 at 433-434.

[39] In the MacKeen case, the testator had common shares in Rockingham Investments Ltd. ("Rockingham"), a company incorporated in Alberta. His wife was the sole shareholder of a separate company. Similarly, his three daughters were each sole shareholders in three other companies. Each of these four companies owned by the wife and daughters had wholly‑owned subsidiaries. All eight of the companies were incorporated in Alberta. The testator, his wife and daughters were all Nova Scotia residents. On the testator's death, he left his shares in Rockingham to his executors to hold in trust and pay the net income during his wife's life to the subsidiary company of the parent company of which she was the sole common shareholder. On the wife's death the shares in Rockingham were to be divided into four equal parts, three of which were to go to the subsidiary companies of the parent companies of which each of the three daughters were sole common shareholders, and the fourth part going to another daughter who was not a resident of Nova Scotia. The Minister of Finance of Nova Scotia claimed over $500,000 from the widow and three daughters as resident successors under the Succession Duties Act.

[40] Black’s s.v. “beneficial owner”.

[41] Montana Catholic Missions v. Missoula County (1905), 200 US 118, the Supreme Court of the United States, pp. 127-28.

[42] An important and unresolved issue in Canada, and other jurisdiction, is the precise nature of a trust beneficiary's interest in specific trust property. See D. Waters, "The Nature of the Trust Beneficiary's Interest," 1967 Can. Bar Rev. V. XLV 219 at 220. For a review of the history of uses and trusts, Gillen & Woodman, The Law of Trusts in Canada: A Contextual Approach (Carswell, Toronto 2000) Chapter 1. See also, D. Waters, The Law of Trusts in Canada, 2nd Edition (Carswell: Toronto, 1984). See especially the discussion of Trusts in Issue Two. However, some authorities dispute even this conclusion.

[43] Archer-Shee v. Baker, [1927] A.C. 844 (H.L.). This decision has received mixed support in Canada in the context of tax statutes. See for example, Minister of National Revenue v. Trans-Canada Investment Corp. Ltd. [1956] S.C.R. 49, [1955] 5 D.L.R. 576 (S.C.C.). Archer-Shee was also cited in Pan American Trust Co. v. M.N.R. [1949] Ex. C.R. 265; 1949 C.T.C. 229 (Exch. Ct.).

[44] See for example, M.N.R. v. McCreath [1977] 1 S.C.R. 2 [1976] C.T.C. 178, (S.C.C.).

[45] The expression is also sometimes loosely used to describe the owner or legal title holder where the beneficial enjoyment of the property also belongs to that legal title holder.

[46] Covert et al., Executors of Jodrey Estate v. Minister of Finance of Nova Scotia, 1980 Carswell NS 78, [1980] 2 C.T.C. 437, 42 N.S.R. (2d) 181 (S.C.C.).

[47] Ibid, 1980 Carswell NS at 98.

[48] Ibid at 99.

[49] Ibid at 109.

[50] Montreal Trust v. M.N.R. (1958) S.C.R. 146 (S.C.C.).

[51] Supra note 39.

[52] See for example the comments of Dickson J. in McCreath, supra note 37 [1976] C.T.C. 178 at 187; "I do not believe that the niceties and arcana of ancient property law should be fastened upon with mechanical rigidity to determine the effect of a modern taxation statute whose

purpose is plain”.

[53] (1958) S.C.R. 146 (S.C.C.).

[54] 1958 Carswell Nat 271, p. 8.

[55] (1977) 36 A.P.R. 572; [1978] C.T.C. 557. (Also Cowan et al v. Minister of Finance of Nova Scotia) (C.A.).

[56] Supra note 39.

[57] Ibid. Mr. Justice Hart provides the following example to further his explanation. “This distinction between the two expressions is, in my opinion, clearly shown by the judgments in the cases of Rodwell Securities (S.C.C.) [1968] All E.R. 257 and Montreal Trust [Torrance Estate] [1958] S.C.R. 146. In Rodwell Securities the Court was dealing with the situation in which the appellant was required to establish “beneficial ownership” of the shares of two separate companies in one third company. It was found that the true real ownership of the shares was in a subsidiary company rather than its parent. In the other case the Supreme Court of Canada was considering the meaning of the expression “beneficially entitled to” where the Court found that it was sufficient if the property in question could be applied to one’s benefit by resort to an effective cause of payment”.

[58] Supra note 32 at 247; cited in agreement in MacKeen at supra note 48 [1978] C.T.C. 557.

[59] The MacKeen test was also used by the Federal Court of Appeal in Paxton v. R. (1996) Carswell Nat 2400, (sub nom. Minister of National Revenue v. Paxton) 206 N.R. 241, (sub nom. R v. Paxton) 97 D.T.C. 5012 (F.C.A.) by McDonald J. in a dissenting opinion.

[60] (1978) 89 D.L.R. (3d) 426 at 433-434 (C.A.).

[61] Supra note 39.

[62] Ibid. In Covert the Supreme Court did not recognize a clear distinction between “beneficial owner” and “beneficially entitled”, stating that beneficial entitlement resulted in beneficial ownership in this case.

[63] 1972 (N.S.), c.47.

[64] Supra note 39 at 795.

[65] Supra note 39 at 794. It is certainly questionable whether the same logic would be applied today under the Income Tax Act R.S.C. 1985, c.1 (5th Supp.) As amended (hereinafter the I.T.A.) inlight of Stubart [1984] 1 S.C.R. 536 and subsequent decisions that rejected literal interpretation in favour of a purposive approach to tax legislation. While not rejecting the traditional approach to the interpretation of tax legislation, Estey J. quoted with approval the following excerpt from E.A. Dreidger, Construction of Statutes, 2" ed. (Toronto: Butterworths, 1983), at 87: "Today there is only one principle or approach, namely, the words of an Act are to be read in their entirecontext and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of parliament." See also R. v. Golden, [1986] 1 S.C.R. 209; Bronfman Trust v. R., [1987] 1 C.T.C. 117 (S.C.C.); Johns‑Manville Can. Inc. v. R., [1985] 2 S.C. R. 46; Antosko v. R., [1994] 2 C.T.C. 25 (S.C.C.); Québec (Communauté urbaine) v. Corp. Notre‑Dame de Bon‑Secours, [1994] 3 S.C.R. 3; Friesen (J.) v. Canada [1995] 2 C.T.C. 369 (S.C.C.); Duha Printers Ltd. v. Canada, [1998] 1 S.C.R. 795; Neuman v. M.N.R. [1998] 1 S.C.R. 770; Continental Bank Leasing Corp. v. R., (1998), 98 D.T.C. 6505 (S.C.C.); Shell Canada v. R., [1999] 4 C.T.C. 313 (S.C.C.); Canadian Pacific Ltd. v. R., ]1999] 2 C.T.C. 193 (F.C.A.), affmg, [1998] 4 C.T.C. 2023 (T.C.C.); 65302 British Columbia Limited v. R., [1999] 3 S.C.R. 804.

[66] Supra note 39 at 794. It is questionable whether the same logic would apply now in interpreting this expression, particularly under the I.T.A. in light of the Supreme Court of Canada’s decisions in Stubart Investments [1984] 1 S.C.R. 536 and subsequent decisions that rejected a long history of literal interpretation in favour of a purposive interpretation of I.T.A. provisions. While not completely rejecting the traditional approach to the interpretation of tax legislation, Estey J. quoted with approval the following excerpt from E.A. Dreidger, Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), at 87: “Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of parliament”. This new approach to statutory interpretation under the I.T.A. can also be found in R. v. Golden, [1986] 1 S.C.R. 209; Bronfman Trust v. R., [1987] 1 C.T.C. 117 (S.C.C.); Johns‑Manville Can. Inc. v. R., [1985] 2 S.C. R. 46; Antosko v. R., [1994] 2 C.T.C. 25 (S.C.C.); Québec (Communauté urbaine) v. Corp. Notre‑Dame de Bon‑Secours, [1994] 3 S.C.R. 3; Friesen (J.) v. Canada [1995] 2 C.T.C. 369 (S.C.C.); Duha Printers Ltd. v. Canada, [1998] 1 S.C.R. 795; Neuman v. M.N.R. [1998] 1 S.C.R. 770; Continental Bank Leasing Corp. v. R., (1998), 98 D.T.C. 6505 (S.C.C.); Shell Canada v. R., [1999] 4 C.T.C. 313 (S.C.C.); Canadian Pacific Ltd. v. R., ]1999] 2 C.T.C. 193 (F.C.A.), affmg, [1998] 4 C.T.C. 2023 (T.C.C.); 65302 British Columbia Limited v. R., [1999] 3 S.C.R. 804 (S.C.C.)

[67] Ibid note 39 at 817.

[68] In Consolidated‑Bathurst Ltd. v R. [1985] 1 C.T.C. 142, (F.C.T.D.) Strayer J. distinguished Covert as being exceptional on its facts. Reference is also made to the decision in Atco Ltd. et al v. Calgary Power et al, 140 D.L.R. (3d) S.C.C.. The decision is also referred to in Yarmouth Industrial Leasing Ltd. v. R. [1985] 2 C.T.C. 67 (Fed. Ct. T.D) on the issue of control of a subsidiary.

[69] (1991) 124 N.R. 321 at 328 (F.C.C.A.).

[70] LeBlanc infra note 66 at 329.

[71] (1986), 58 Nfld. & P.E.I.R. 62 at 63.

[72] Ibid at 63-64.

[73] See for example Canada v LeBlanc, (1992) 124 N.R. 321 (F.C.C.A.) At 328 (discussed supra note 63).

[74] See Willis v. MNR, 1968 Carswell Nat 70, [1968] Tax A.B.C. 177 where it was argued that the expression 'beneficially interested' was synonymous with the expression 'beneficially entitled' as found in paragraph (m) of Section 2 of the Dominion Succession Duty Act, R.S.C. 1952, c. 89 (now repealed). The court did not accept this argument.

[75] Black’s s.v. “beneficial owner”.

[76] See especially discussion infra at note 74.

[77] (1989) 36 ETR 192 (Ont. C.A.).

[78] See, for example, the Trustee Act, R.S.N.S. 1967, c. 317, section 40; Trustee Act, S.A. (2001)

c. T-8, section 42.

[79] For example, subsection 248(25) of the ITA was amended by the 1996 Budget, effective 1997. The substantive change was the introduction of the word 'includes.' Since the word 'includes' is now used, the normal meaning of the expression 'beneficially interested' applies as well. A person or partnership 'beneficially interested' in a trust also includes, in addition to any person or partnership explicitly referred to, any other person or partnership otherwise regarded as 'beneficially interested' in the trust.

[80] R.S.O. 1960, c.386 (now repealed).

[81] For a discussion of this issue see Fortin, G. “Economic versus Legal Reality: Planning for Trusts”, 96 C.R. p. 5:36.

[82] Supra note 70 at 15.

[83] R.S.O. 1960, c. 386 (now repealed).

[84] Supra note 70 at 14.

[85] [1980] C.T.C. 358, 3 E.T.R. 39 (F.C.A.)

[86] Ibid, at 360.

[87] The Sachs decision has not been followed and is widely considered to be incorrectly decided. See for example, Cullity, Brown and Rajan, Taxation and Estate Planning, Carswell, (TEP) 20023‑60 to 3‑61.

[88] See Halsbury’s Laws of England, 4th ed., volume 48, paragraph 641.

[89] See discussion re Trusts in Issue Two.

[90] Covert et al., Executors of Jodrey Estate v Minister of Finance of Nova Scotia, 1980 Carswell NS 78, [1980] 2 C.T.C. 437, 42 N.S.R. (2d) 181 (S.C.C.) at 216.

[91] It may also be said that they enjoy a form of quasi-property interest in that they would have standing to trace trust property to a third party, though the property would be recovered for the trust. See Re Steed and Raeburn Estates, [1949] S.C.R. 453. See comments in Oosterhoof and Gillese, Text, Commentary and Cases on Trusts, Fifth Edition, (Carswell, Toronto) at 29 and their reference to H.A.J. Ford and W.A. Lee, assisted by Peter McDermott, Principles of The Law of Trusts, 3rd ed. (Sydney: L.B.C. Information Services, 1966) at 1790, who state this proposition by analogy to the right of the beneficiary of an unadministered estate to recover estate assets.

[92] For a good discussion of these issues see J.K. Maxton, “The Nature of a Beneficiary’s Interest Pending the Administration of An Estate”, The Conveyancer, 92 and Catherine Brown, “The Transfer of Property on Death: Ownership Control & Vesting”, C.T.J. (1994) Vol. 42 No. 6, 1449.

[93] See ITA subsection 104(24).

[94] In Re Steed at p 461.

[95] As will be discussed further in Issue 3, this is a highly debated point which has at its root the right of a beneficiary to enforce an equitable interest in any trust property transferred by the trustee to a third party, except a bona fide purchaser for value without notice of the trust. It is said that this right is much like a proprietary right that leads to the description of the beneficiary as the beneficial or equitable owner of trust property. If a beneficiary owns trust property, a number of consequences follow; among them, it has been argued that there is an ability to tax beneficiaries with respect to the assets of a trust or income generated by a trust of which he/she is a beneficiary. See Archer-Shee v. Baker, [1927] A.C. 844 (H.L.).

[96] See for example Oosterhoof & Gillese, Text, Commentary and Cases on Trusts, 5th ed. (Carswell: Toronto), 24-30, D.M. Waters, Law of Trusts in Canada, 1984 (Carswell: Toronto) 1984 at 24.

[97] See Kevin Gray, Elements of Land Law, (Butterworth & Co., London: England) 1987. Some American authors, Scott for example, view the beneficiary as an equitable owner of trust property. In his view to speak of the rights of the cestui que trust as equitable ownership is “a perfectly proper use of terms one which accurately expresses his rights”. See A.W. Scott, “The Nature of the Rights of the Cestui que Trust”, 1917, 17 Col. L. Rev. 269.

[98] Ibid at 51.

[99] “Purchase for Value without Notice”, 1 Harvard L.R. 1 at 9 (1887-88).

[100] Maitland, Equity: A Course of Lectures, revised by John Brigante (Cambridge: Cambridge University Press, 1936) at 47.

[101] Ibid at 52.

[102] See Town of Cascade v. Cascade Co, 75 Mont 304 at 311 (1925). This wider view was that typically espoused by Lord Mansfield CJ, who stated quite clearly in Burgess v. Wheate (1759) 1 Eden 177 at 217, 28 ER 652 at 688, that trusts are considered as real estates, as the real ownership of the land”. Cited in Gray, supra note 8.

[103] The immunity conferred on the bona fide purchaser is, of course, an undeniable qualification on the “ownership” of the beneficiary. It was Langdell who pointed out that “if equitable rights were rights in rem, they would follow the res into the hands of a purchaser for value and without notice” (A Brief Survey of Equity Jurisdiction, 1 Harvard LR 55 at 60 (1887-88)). See, however, A.W. Scott, 17 Columbia LR 269 at 278f as cited in Gray, supra note 8.

[104] Jurisprudence (12th ed by P.J. Fitzgerald, London 1966), p 256f. See also the statement of Isaacs J in Hoystead v Federal Commissioner of Taxation (1920) 27 CLR 400 at 422 that equity “regards the cestui que trust of property as the true owner of the property itself” as cited in Gray, supra note 8.

[105] Supra note 8 at 54.

[106] Minister of National Revenue v. Trans-Canada investment Corporation Ltd., [1955] D.L.R. 576 (S.C.C.), [1956] S.C.R. 49, [1955] C.T.C. 275.

[107] Ibid., see Rand’s comments in his dissent in Trans-Canada Investments at 577-581. Trans-Canada has been cited in subsequent decisions. See, for example, Canada Trust Co. v. Minister of National Revenue, 1966 Carswell Nat 321, [1966] C.T.C. 785, [1967] 1 Ex. C.R. 518, 66 D.T.C. 5508, Exchequer Court of Canada and in Shortt v. M.N.R. [1960] Ex. C.R. 414.

[108] In Shortt v. Minister of National Revenue, a decision by the Exchequer Court a few years later, a similar result was reached, although for different reasons. In Shortt, the two appellants each became the “beneficial owner” of one‑half share in an unincorporated business under their mothers will. The business was under the administration of the testatrix's husband, the father of the appellants, who was also trustee and executor of his wife's estate. According to the provisions of the will the appellant's shares of the profits of the business for the years 1953 and 1954 were held and reinvested in the business. The Minister treated these sums as investment income received from an estate operating a business. The Shortts claimed that the trustee received earned income only from carrying on the business and that the profits remained earned income when paid to them as beneficiaries. After citing Trans‑Canada Investment Corporation Ltd.,Thurlow J. held that the income in question was income from carrying on a business by the trustee, which was vested in him as trustee for the appellants and others, but that it ultimately belonged entirely to the appellants. 1960 Carswell Nat 290, [1960] C.T.C. 78, [1960] Ex. C.R. 414, 60 D.T.C. 1056 [Exchequer Court of Canada].

[109] Subsection 108(5) added by 1980-81-82-83, c.140, applicable with respect to amounts included or deductible in the income of a taxpayer for taxation years ending after November 12, 1981.

[110] A reference to a “trust” is for the purposes of the Act, a reference to the trustee (subsection 104(1)). In this the Act recognizes the trust law conclusion that there is no separate legal personality in the trust. However the Act treats it as a separate patrimony of assets distinct from the trustee’s personal property (I.T.A. subsection 104(2)).

[111] This expression formerly appeared once in the I.T.A. in the definition of disposition in subparagraph 54(c)(v) of the definition of disposition.

[112] See Willis v. MNR, 1968 Carswell Nat 70, [1968] Tax A.B.C. 177 where it was argued that the expression “beneficially interested” was synonymous with the expression “beneficially entitled” as found in paragraph (m) of Section 2 of the Dominion Succession Duty Act, R.S.C. 1952, c. 89 (now repealed). The court did not accept this argument.

[113] E.H. Burn, Cheshire and Burn’s Modern Law of Real Property, 16th edition, 2000, Butterworth’s, London, p 54-67.

[114] See also the doctrine of equitable conversion under a trust for sale where the trust beneficiary is viewed as having an equitable right to the sale proceeds.

[115] See The Leff Dictionary of Law: A Fragment: Part 3, 94 Yale L.J. 2113, July 1985.

[116] Ibid.at page 579.In so describing the relationship which exists between a vendor and a purchaser of lands after they have entered into a valid contract of sale, Schroeder J. referred to the words of Jessel, M.R. in Lysaght v. Edwards (1876), 2 Ch.D. 499 at pp. 505-6, “...the moment you have a valid contract for sale the vendor becomes in equity a trustee for the purchaser of the estate sold, and the beneficial ownership passes to the purchaser, the vendor having a right to the purchase-only, a charge or lien on the estate for the security of that purchase-money, and a right to retain possession of the estate until the purchase-money is paid, in the absence of express contract as to the time of delivering possession. In other words the position of the vendor is something between what has been called a naked or bare trustee...and a mortgagee who is not inequity (any more than the vendor) the owner of the estate”.

[117] As cited in Mary Jane Mossman and William F. Flanagan, Property law, Cases and Commentary, 1998 Edmond Montgomery Publications Ltd, Toronto at 485.

[118] S.C. 2001, c.14.

[119] (1990), 69 D.L.R. (4th) 567 (Ont. H.C.J).

[120] Ibid at 571.

[121] See for example Choremis c. Recine, [1997] A.Q. no. 3957,JEL/1997-0627, Evans v. Facey, [2000] O.J. No. 2276 (Ont. S.C.), Joncas v. Spruce Falls Power and Paper Co. [1999] O.J. No. 2359 (Ont. Court of Justice (General Division)).

[122] CBCA S.C. 2001, c.14.

[123] See briefing Book, An Act To Amend the Canada Business Corporations Act and the Canada Cooperatives Act, Industry Canada, Comments to section 126.

[124] See discussion at pages 3-7.

[125] See for example the definition of Canadian controlled private corporation in subsection 125(1).

[126] Supra note 1 at 777.

[127] Canada Business Corporations Act, R.C.S. 1985 c.C-44, as amended (now repealed).

[128] CBCA 2001, subsection 126(2).

[129] R.S.O. 1990,c.B.16. Definition of ‘insider’ paragraph (d) of subsection 138(1).

[130] R.S.O. Section 1 and subsection 1(5).

[131] Ibid.definiton of “insider” in paragraphs (c) and (d) of subsection 138(2).

[132] Articles 10(2), 11(2) and 12(2) of the UN Model treaty also refer to the beneficial owner of the payment.

[133] 21 ET 141,143 (1981) as cited in Klaus Vogel at 456.

[134] See OECD Model Treaty Article 3(2) Double Taxation Conventions, 1991 Kluwer Law and Tax Publishers, which provides that if a term is undefined in the treaty, its meaning shall, unless the context otherwise requires, determined under domestic law of the contracting state to which the tax applies.

[135] OECD Model Convention, Commentary to Article 10, para.12.

[136] “Treaty Benefit Entitlements”, 97 CR, 33:1 at 33:8.

[137] See Critchfield et al, 18 Tax Notes Intl, Feb. 8, 1999, p. 587 at paragraph 24. See also M. Cooper, “When the dividend, interest and royalty articles of existing U.S. treaties were negotiated and ratified, the treasury made it clear to the Senate in the ratification process that the meaning of the term “beneficial owner” would be determined under U.S. principles”. 96 TNI 200-11 at 12.

[138] United States Model Income Tax Convention, September 20,1996, Treasury Department Technical Explanation, Article 10,140. This definition is included in paragraph 10 of the protocol of the U.S.-German Tax Treaty, August 29,1989. 90 TNI 26-48.

[139] A second definition is also possible for treaties other than those based on the 1996 Model. According to Critchfield Honson, Mendelowitz in Passthrough Entities, Income Tax Treaties and Treaty Overrides, 18 Tax notes Int’l, Feb. 8, 1999, p. 587, “treaties other than the 1996 U.S. Model may have used the term “beneficial ownership” in a more traditional, property law sense, looking to who has dominion and control over a payment rather than who will be subject to tax on it” (Para 25). This test is based on a U.S. tax Court decision Aiken Industries v. Commissioner 56 T.C. 925,933 (1971) acq. 1772-2 C.B. as cited in Critchfield.

[140] Klaus Vogel, Double Taxation Conventions, 1991 Kluwer Law and Tax Publishers, at 456; Vogel also states “the entitlement at issue in these instances is determined by reference to domestic private-law...the question of when such an entitlement is not merely a formal one, is a matter to be decided under treaty law” (p.457).

[141] Ibid at 457.

[142] In Klaus Vogel (Chair), The OECD Model Convention - 1988 and beyond, The Concept of beneficial ownership in Tax Treaties”, Proceedings of a seminar held in London, International Fiscal Association, (1988) Kluwer Law, London, at 23.

[143] Ms. Walser provides as an example of this point the following swap arrangement. A treaty country resident may hold legal title to shares of stock and have the right to receive any dividends. That person may be completely free to vote the stock and to dispose of it at will. He may, however enter into a swap arrangement with a resident of a non treaty country under which he agrees to pay the non treaty country resident an amount equal to any dividends on the stock in exchange for a stated rate of interest, on a notional principal amount. The swap may or may not pertain to any increase or decrease in the value of the underlying stock. The question she poses is then “who should be considered the beneficial owner in these circumstances? Ibid.

[144] One U.S. author has commented that there is virtually no substantive difference between the anti-treaty shopping phrase and the terms “beneficial owner”, “beneficially owned” or “beneficially entitled”. See M. Cooper, “Interpretation of Beneficial Owner under U.S. Tax Treaties”, 96 TNI 200-11 at 15.

[145] Since each country may choose to interpret the expression beneficial ownership within the context of its domestic law under Article 3(2), anomalous results may occur. See for example Tillinghurst, Ruling on Beneficial Ownership and Tax Residence Threatens U.S. Investments in India, 96 TNI 131-5 where India ruled that the parent corporation and not the wholly owned subsidiary was the beneficial owner of dividends received.

[146] Ibid 17.

[147] Subsection 251(2).

[148] Subsection 251(1).

[149] Subsection 251.1.

[150] Presumably this would also include equivalent relationships in the Province of Quebec. Subsection 248(3).

152 This conclusion is reached as a consequence of both case law , and the CCRA’s assessing practice with respect to when bare trusts will be ignored for tax purposes. According to Technical News # 7, a bare trust is a trust under which the settlor is the sole beneficiary and can cause the property to revert back at any time. See Adams v. R., (sub nom. R. v. Robinson) 98 D.T.C. 6232, 159 D.L.R. (4th) 205, [1998] 2 C.T.C. 333, (sub nom. Minister of National Revenue v. Robinson) 227 N.R. 63 (Fed. C.A.) ; Brookview Investment Ltd. v. Minister of National Revenue (1963), [1964] Ex. C.R. 123, [1963] C.T.C. 316, 63 D.T.C. 1205 (Can. Ex. Ct.); Fraser v. Minister of National Revenue, (sub nom. Fraser v. R.) 91 D.T.C. 5123, 41 F.T.R. 255, [1991] 1 C.T.C. 314 (Fed. T.D.) ; Pan American Trust Co. v. Minister of National Revenue, [1949] Ex. C.R. 265, [1949] C.T.C. 229, [1949] 4 D.L.R. 798, 49 D.T.C. 672 (Can. Ex. Ct. See also Technical News #7, 1999 at 34978.

[152] This category may be largely subsumed in subsection 104(1) of the I.T.A. However, when subsection 104(1) arrangements were introduced in 2001 it was not claimed that the new provision intended was to override former case law about who a bare trustee is, nor has Technical News #7, to my knowledge, been revoked. Persons falling under any of these categories would, therefore, continue to be considered as the beneficial owner. Beneficiaries under a bare trust as defined in Technical News #7 would, however, include a much narrower group than those who would be considered beneficial owners of trust property by virtue of amended subsection 104(1).

[153] However, if there is more than one beneficiary and their interests differ (for example, if one of the beneficiaries has only a life interest), a possibility that the wording in subsection 104(1) does not seem to preclude, it is unclear to me who would be regarded as the beneficial owner of the trust property for tax purposes. Presumably the beneficiary with the life interest would be considered the beneficial owner of the income interest. Conversely the capital interest holders would be considered the beneficial owners of the trust capital.

[154] See for example, Holziki v. R., 95 D.T.C. 5991 (F.C.T.D.), and Kostiuk v R., 93 D.T.C. 551 (F.C.T.D.).

[155] Generally, subdivision k treats the trust as the ‘owner’ of trust property for the purpose of calculating income, capital gains, or capital losses with respect to trust property. Doubts have been cast on who the owner is for other purposes in the Act in obiter by the court. For example, in the Supreme Court of Canada decision in Trans-Canada Investment Corp, [1953] Ex. Cr. 292, the court based its decision on the fact that dividends retained their character in the hands of the trust beneficiaries who were the ‘beneficial owners’ of the trust property. In Pan Canadian Trust Co. V. M.N.R. [1949] Ex. C.R. 265, the court also found the beneficiaries of a trust to be the beneficial owners of the shares. Recently in Chan v. R., 1999 Carswell Nat 1924, 99 D.T.C. 1215, [2000] 1 C.T.C. 2022, (T.C.C.) Bonner T.C.J. made the following comment at Carswell Nat 12: ”a rollover is provided in the case of a subsection 107(2) transaction because there is, in substance, no disposition whereby a gain could be realized. The beneficiary in such a case holds, after the transaction has been completed, full title to the property of which previously was a beneficial owner.” See also subsection 19(6) of the I.T.A.which was introduced in the 2001 Technical Bill. It states that if a trust is to meet the requirements of ownership of a Canadian newspaper, each beneficiary of the trust must meet the definition. This addition implies that beneficial ownership for tax purposes may be viewed as belonging to the beneficiaries and not to the trust or trustee. Finally, the 2001 Amendments are based on the premise that the beneficiary is the beneficial owner of trust property. See also Appendix A.

[156] See for example, paragraph 256(1.2)(f)(i)-(iv) which deems a beneficiary to own shares held by a trust for purposes of the associated corporation rules; and clause 19(5)(e)(iii)(B) which deems ownership of shares held through a corporation or partnership for purposes of the definition of “Canadian newspaper” in subsection 19(5). In the case of a trust governed by the laws of Quebec, statutory deeming rules provide that property to which a beneficiary has a right as a beneficiary in a trust shall, notwithstanding a servitude be deemed to be beneficially owned by the person at that time (para 248 (3)(f)). Although para 248(3)(f) is stated to deem beneficial ownership by a beneficiary for purposes of the Act, it is difficult to imagine that the provision would be interpreted in a manner that afforded different rights or obligations to a beneficiary under a Quebec trust then to beneficiaries under a common law trust.

[157] For a more detailed description of this category, see the discussion at the end of this section at note 21.

[158] Subsection 104(2).

[159] Whether this conclusion is limited to transfers as described under the 2001 is not clear.

[160] This interpretation relies on subsection 104(2) that deems a trust to be an individual for purposes of the Act. If the trust reacquires the property as a creditor, it follows that the trust would be considered the beneficial owner for purposes of this provision.

[161] See also footnote 9.

[162] The legally precise, less controversial expression would be no change in “beneficial interest” or “enjoyment.”

[163] This general rule is subject to a number of deeming provisions that deem the beneficiary to be the beneficial owner or to beneficially own trust property. See, for example, paragraph 256(1.2)(f)(i)-(iv) which deem a beneficiary to own shares held by a trust for purposes of the associated corporation rules. One might also consider paragraph 248(3)(f) which deems a property to which a beneficiary has a right to as a beneficiary under a trust to be beneficially owned by the person at that time. This is stated to be for purposes of the Act. However, it is difficult to believe that the provision would be interpreted in a manner that afforded different rights or obligations on a beneficiary under a Quebec trust. This provision is therefore discussed in a separate category at the end of this section.

[164] This assumes that the trust would be considered to be the owner of the trust property as it is deemed to be an individual for purposes of the Act.

[165] Although this section refers to a beneficiary or other persons who own the shares, it is clear for purposes of the I.T.A. that owner means or includes beneficial owner. This provision is therefore being viewed as similar in meaning to the others in this grouping.

[166] See letter of comfort from the Finance Department with respect to this provision, dated March 7, 2001.

[167] The answer to this question has never been clear for tax purposes, with. the possible exception of a bare, resulting, or constructive trust, or more recently, under a subsection 104(1) arrangement.

[168] See discussion of this issue in Issue 2 and D. Waters, “The Nature of The Trust Beneficiary’s Interest,” 1967 Can. Bar Rev. XLV 219.

[169] See discussion under Trusts in Issue 2. A resolution of this debate and/or a determination of who the ‘beneficial owner’ of trust property is for tax purposes would help to resolve many difficult conceptual questions about the application of a number of tax provisions.

[170] See definition of Canadian Controlled Private Corporation in subsection 125(7).

[171] See Appendix A to this document for a discussion of these cases.

[172] See Pan Canadian Trust Co. V. M.N.R. [1949] Ex.C.R. 265. See also comments of Cartwright J. in M.N.R. v. Trans Canada Investment Corp. Ltd. [1956] S.C.R. 49. (S.C.C.).

[173] Subsection 186(2).

[174] Subsection 252(1).

[175] Subsection 252.1(1).

[176] One example of the difficulty in determining whether the trustee or the beneficiaries are the beneficial owners of a right in a Canadian newspaper can be seen in the former definition of “Canadian newspaper” in section 19. It was argued by the taxpayer that the trustee beneficially owns trust property in the case of a discretionary trust, and therefore the residency of the beneficiaries should not matter in determining whether the ownership requirements under that section were met. This is the legal argument that follows from those who advocate Maitland’s in personam thesis about the nature of the beneficiaries’ rights

[176]. If the beneficiary has only a right of enjoyment in the trust property, it follows that beneficial ownership must lie with the trustee, subject to a duty to the beneficiary. The issue of whether a trust with non-resident beneficiaries will meet the Canadian ownership requirements for purposes of section 19 has now been resolved by the introduction of subsection 19(6). That subsection provides that if the interest in the newspaper is held by a trust, it will not meet the ownership test unless all the beneficiaries under the trust are Canadian residents.

[177] See the comments of Dickson J. in Minister of Ontario v. McCreath [1977] 1 S.C.R. 2;[1976] C.T.C. 178 at 187 (S.C.C.).

[178] Quare whether both the deeming rule and the private law principle would both apply, particularly in the context of the associated corporation rules.

[179] The CCRA’s assessing position with respect to so called “protective trusts” as described in Technical news #7 also added some support to the view that certain transfers to a trust in which the settlor was the sole beneficiary might avoid being assessed on a disposition of the property at the time of transfer.

[180] Sections 44(3), 54 principal residence (c.1)(iii), 56(4.1), (b)(ii), 60(l)(ii)(B), 66(12.671)(a), 70(3), 74.3(1), 80(l), 94(1), 104(1.1), 104(5.5), 104(5.6(c)(i)(A) & (B), 104(5.6)(c)(ii)(C)(I), 108(1), 127(9), 191(3)(d)(ii)(A), (B)(iii), 206(4), 212(11), 233.3(1), 233.6(1), 248(3)(e), 248(25) definition (a)(b)(i) & (ii) and (c), 251(1)(b).

[181] Subsections 94(1), (a), (d).

[182] Subsection 248(25) of the I.T.A. was amended by the 1996 Budget, effective 1997. The substantive change was the introduction of the word “includes.” Since the word “includes” is now used, the normal meaning of the expression ‘beneficially interested’ applies as well, although the provisions in subsection 248(25) are much broader and likely subsume the ordinary meaning. A person or partnership ‘beneficially interested’ in a trust also includes, in addition to any person or partnership explicitly referred to, any other person or partnership otherwise regarded as ‘beneficially interested’ in the trust.

[183] Sections 17(5)(a)(i) & (ii), (17)(10)(b)(i) & (ii), 39(1)(a)(v), 74.4(4), 88(1)(c.2)(iii) B(I) and (II), 94(1)(d), 94(1)(d)(iii), 104(1.1), 104(15)(b), 107(2.2), 107.3(2), 107.3)(3)(c), 118.1(5.3), 142.2(4)(A) & (B), 144(1), 186(3), 248(1) - personal trust (b) specific shareholder (b), 256(1.2)(f)(i)(B) & (iii).

[184] Sections 94(1), 94(2)(g), 94(8)(a)(i), 94(8)(a)(ii), 94.1(i) & (ii).

[185] See Willis v. MNR, 1968 Carswell Nat 70, [1968] Tax A.B.C. 177 where it was argued that the expression ‘beneficially interested’ was synonymous with the expression ‘beneficially entitled’ as found in paragraph (m) of Section 2 of the Dominion Succession Duty Act, R.S.C. 1952, c. 89 (now repealed). The court did not accept this argument.

[186] Covert et al., Executors of Jodrey Estate v. Minister of Finance of Nova Scotia, [1980] 2 C.T.C. 437, 42 N.S.R. (2d) 181, (S.C.C.).

[187] Ibid. [1980] 2 C.T.C. 437 at 448.

[188] In Consolidated-Bathurst Ltd. V. R. [1985] 1 C.T.C. 142 Strayer J. distinguished Covert as being exceptional on its facts. Reference is also made to the decision in Atco Ltd. et al v. Calgary Power et al, 140 D.L.R. (3d) S.C.C. The decision is also referred to in Yarmouth Industrial leasing Ltd. V. R. {1985} 2 C.T.C. 67 (Fed. Ct. T. D.) on the issue of control of a subsidiary.

[189] MacKeen v. Nova Scotia (Minister of Finance), (1977),36 A.P.R. 572; [1978] C.T.C. 577. (N.S.C.A.).

[190] Montreal Trust (Torrance Estate), (1958) S.C.R. 146 (S.C.C.).

[191] (1991) 124 N.R. 321 at 328 (F.C.C.A.).

[192] Maitland, Equity: A Course of Lectures, revised by John Brigante (Cambridge: Cambridge University Press, 1936) 23.

[193] The right of the beneficiary against third parties was a right to have trusts property that was misappropriated by the trustee or his or her heirs returned to the trust. This right against a third party extended to all except a bona fide purchaser of the property for value and without notice of the trusts beneficiary’s interest.

[194] Ibid at 221. See also A.W. Scott, “The Nature of the Rights of the Cestui que Trust” (1917), 17 Col. L. Rev. 269.

[195] D. Waters, “The Nature of the Trust Beneficiary’s Interest”, 1967 Can. Bar Rev. V. XLV 219 at 220. For a review of the history of uses and trusts, Gillen & Woodman, The Law of Trusts in Canada: A Contextual Approach (Carswell, Toronto 2000) Chapter 1. See also, D. Waters, The Law of Trusts in Canada, 2nd Edition (Carswell: Toronto, 1984).

[196] Ibid note 3, Scott at 276.

[197] Ibid at 275.

[198] (1841), 4 Beav. 115, 49 E.R. 282; affirmed (1841), 1 Cr & Ph, 240, 41 E.R. 482.

[199] In Canada, the issue has arisen under both Succession Duty legislation, as well as the Income Tax Act.

[200] For a discussion of this issue see Gillen and Woodman, The Law of Trusts in Canada: A Contextual Approach, (Edmond Montgomery:Toronto) 2000 and Oosterhoof and Gillese, Text, Commentary and Cases on Trusts, 5th Ed. (Toronto: Carswell).

[201] [1927] A.C. 844 (H.L.).

[202] Supra, 866.

[203] Professor Hanbury, in “A Periodical Menace to Equitable Principles”, in Essays in Equity (1934) pages 16-22 , describes the decision as “a contradiction of clear equitable principle” and as a “menace which arose only from looseness of language and forgetfulness of Maitland’s axiom, unless the case was explained as solely concerned with income tax law.” See also G.W. Keeton, Laws of Trusts (8th ed., 1963) p. 288 for comments about this decision.

[204] The following year the decision was overturned based on fact that the law in New York was not the same as in U.K.. As a result the Lady Archer-Shee could not be considered the beneficial owner of the trust income under conflict of law principles. Whether the law in new York was was in fact different from the law in the U.K. is a matter of some speculation.

[205] [1956] S.C.R. 49, [1955] 5 D.L.R. 576.Archer-Shee was also cited in Pan American Trust Co. V. M.N.R. [1949] Ex. C.R. 265.

[206] 1948, S of C, c.52.

[207] Trans-Canada Investment Corp., [1953] Ex. Cr. 292 at 296-297.

[208] Ibid.

[209] This aspect of the tax characterization of income received by a beneficiary from a trust was generally resolved by the introduction of subsection 108(1) effective for 1981 and subsequent tax years. It deems the income to be income form property .However, some aspects of the character of dividends received from a trust by a corporation through a trust remained unresolved under the I.T.A. until 2001. Although subsection 104(20) permitted the trust to designate that a particular beneficiary had received a capital dividend, it did not affect the ability of the beneficiary to flow through the exemption. Thus a corporate beneficiary that received a capital dividend was not able to flow through this amount tax free. The amendment to subsection 104(20)now permits this result.

[210] Ibid at 585.

[211] It has been cited in subsequent decisions. See for example, Canada Trust Co. V. Minister of National Revenue, 1966 CarswellNat 321, [1966] C.T.C. 785, [1967] 1 Ex. C.R. 518, 66 D.T.C. 5508, Exchequer Court of Canada and in Quinn v. M.N.R. [1960] Ex. C.R. 414.

[212] 1960 CarswellNat 290, [1960] C.T.C. 78, [Exch. Ct].

[213] Ibid CarswellNat at 8.

[214] Minister of Revenue for Ontario v. McCreath [1976] C.T.C. 178 (S.C.C.).

[215] As a general rule, a beneficiary of a discretionary trust is not regarded as having a proprietary interest ;see the discussion in Gartside v. I.R.C.,[1968} A.C. 553 (H.L.), and in Weir’s Settlement Trusts, [1971] Ch.145 (C.A.). Essentially the question must be determined on the construction of the particular statute as seen in McCreath.

[216] There was at one time concern that this reasoning would extend to the deemed disposition provisions under the Income Tax Act. Fortunately, the CCRA has opined that a power of appointment is not subject to the deemed disposition provisions in subsection 70(5). See Technical Interpretation 2000 - 0013235 - “Power of Appointment election opt out of 107(2), Oct. 3, 2000. It has been suggested that any attempt to tax the donee of a power of appointment “depart[s] from fundamental proprietary concepts.” See Maurice C. Cullity, “Powers of Appointment,” in Report of Proceedings of the Twenty-Eighth Tax Conference, 1976 Conference Report (Toronto: Canadian Tax Foundation, 1977), 744-62 at 749.

[217] Succession Duty Act, R.S.O. 1960, c.386 (now repealed).

[218] See for example subpara 256(1.2)(b)(i) and 73(1.02)(b)(ii).

TABLE OF CONTENTS

I Overview

II Response to Questions Posed

1. What does each of the following concepts mean at common law: beneficial ownership, beneficial owner, beneficially owned, beneficial interest, beneficially interested, beneficial entitlement?

3. Do these expressions have the same meaning in each of the contexts/provisions of the I.T.A.?

Canadian Bijuralism and the Income Tax Act: Overview