Problems in the Application of Tax Law to Civil Law Trusts
Author: Diane Bruneau
TABLE OF CONTENTS
INTRODUCTION
1. PROBLEMS ARISING FROM THE INTERACTION BETWEEN THE CIVIL CODE
AND THE NEW RULES FOR SELF-BENEFIT TRUSTS
1.1. Self-Benefit trust
1.2. I.T.A. Criteria
1.3. The civil law problematics
1.3.1. Concept of beneficial ownership
1.3.2. The mechanism of devolution on the settlor's death
1.4. Conclusion
2. VESTED OR VESTED INDEFEASIBLY (DÉVOLU ou DÉVOLU IRRÉVOCABLEMENT)
2.1. Indefeasible vesting to the trust
2.2. Vesting in the trust beneficiary
2.2.1. Indefeasible vesting in a beneficiary
2.2.2. Non indefeasible vesting
3. CONSTRUCTIVE AND RESULTING TRUSTS
3.1. Constructive trusts
3.2. Resulting trusts
3.3. What makes such trusts so attractive from a tax standpoint
3.4. Solutions for Quebec
3.4.1. The government could reverse its position of recognizing the existence of
a constructive trust or even a resulting trust as a trust for tax purposes;
3.4.2. The family as a tax unit (or eliminating the attribution rules between spouses)
3.4.3. Prevent resulting and constructive trusts from having a retroactive tax
effect by enacting measures similar to those adopted for Quebec's community property regime
3.4.4. Recognize everywhere in Canada that a reasonable consideration, corresponding to the payment of a spouse's entitlement based on enrichment, constitutes a valuable consideration
3.5. Conclusion
4. THE CONCEPT OF INCOME AND CAPITAL
4.1. Spousal and similar trusts
4.1.1. Distinction between income and capital
4.1.2. Solution for the spousal trusts
4.2. Income vs capital - other aspects
4.2.1. Income payable
4.2.2. Losses
4.2.3. Nature of expenses
4.3. Conclusion
5. INVESTMENT TRUST FOR A MINOR CHILD
5.1. Tutorship vs trust
5.2. Types of accounts
5.2.1. Traditional trust for a child drafted on instructions by a lawyer or notary
5.2.2. Opening an account in the child's name
5.2.3. Opening an "intrust" account in the parent's name
5.2.4. Trust constituted on a form supplied by the financial institution
5.3. C anada child tax benefit
5.4. Proposals to promote consistency in the use of child investment trusts
5.4.1. Gift subject to a term
5.4.2. Opening an account created by the government
5.4.3. The Canada Child Tax Benefit
5.4.4. Immediate solutions
6. MORE FOOD FOR THOUGHT
6.1. Section 43.1
6.2. Trust with a reversionary interest
6.3. Bare trust (Simple fiducie )
CONCLUSION
INTRODUCTION
Historically, federal tax legislation has always been based on the common law. An example is
the deemed disposition of trust assets for tax purposes every 21 years, which is a direct
reference to the common law rule against perpetuities for trusts.[1]
Now that in Quebec a trust established by contract by and large corresponds globally to the
common law concept of an express trust in terms of its effects, it must be determined whether
references to the common law trust in the Income Tax Act[2] are neutral enough to encompass
the distinctive features of the civil law trust. Where they are not, the impact of the discrepancies
will be analysed and solutions proposed.
Before embarking on the technical study of these differences, we must indicate the approach
that will be taken in our analysis of the dissimilarities between the common law and the civil law,
although there may be some exceptions.
Amend the tax laws, not the applicable private law
The goal of the exercise is not to amend the tax laws in a way that would make Quebec
residents subject to the common law rules, or vice versa. Where the tax treatment diverges, an
effort, ideally, should be made to respect the civil law rather than amend it so that it operates
like the common law. The principle of respecting the civil law can, on an exceptional basis, be
stretched somewhat. One example is the technique applied in paragraph 248(3)(d) for the
recognition of certain arrangements such as self-directed RRSPs. That raised some doubts in
Quebec's civil law but were acceptable in the other provinces. While the purpose of that
paragraph is laudable, its effect is to distort Quebec's civil law insofar as it encourages recourse
to common law rules in Quebec rather than making adjustments to the tax provisions so they
will work in harmony with the civil law.
Major and unavoidable differences
There are differences between the common law trust and the civil law fiducie that cannot be
resolved through tax law.
Me Jean Charles Hare[3] has identified four main differences between the civil law fiducie and
the common law trust:
* The nature of the trust;
* Cumulation of the functions of settlor, trustee and beneficiary;
* The power to appoint beneficiaries; and
* Variation and termination of the trust.
On the nature of the trust, this author points out the difference between the dual ownership of
property held in the common law trust comparatively to the civil law trust patrimony over which
no one has ownership.
Cumulation of roles is not permitted by the Civil Code of Québec,[4] since article 1275
C.C.Q. requires the appointment of a trustee who is neither the settlor nor a beneficiary.
Although this difference means that an additional trustee must be involved in the trust, a
prerequisite that is unnecessary under the common law, it generally does not lead to a different
tax treatment for Quebec trusts because of subsection 75(2) I.T.A., among others. In addition,
the use of substitution, which tax law treats as a trust, can be considered. With substitution, no
trustee other than the institute need be appointed to administer the property.
With respect to the power to appoint, Me Hare writes: [TRANSLATION] "the settlor may
give the trustee unlimited power to add or remove trust beneficiaries," which is not
permitted under the civil law. This would appear to be a difference that does result in a
distinctive tax treatment between Quebec and the other provinces.
Finally, Me Hare addresses the difference in the procedures for the variation and termination of
a trust depending on the jurisdiction. Although, in principle, such variations and terminations can
be effected on the mere consent of the beneficiaries, those modifications are generally subject to
specified requirements enacted by provincial laws. Then, the complexity of those requirements
have to be considered when a comparison is made between common law and Quebec civil law,
the latter providing for an application to the court in such circumstances.
Other examples of differences in civil law include the prohibition against appointing a corporate
trustee other than a trust company, the absence of a Protector, the absence of an extended
case law on trusts and the impossibility of using a declaration of trust.
This study will not propose changes for most of the above elements since they are a matter of
private law and will evolve along with it. Intervention would be warranted only where a specific
difference resulted in a different tax treatment.
Forum shopping
When completed, the current harmonization will not alter the appeal of finding the provincial
private law system with the most advantageous trust legislation. On considering the differences
between the civil law trust and the common law trust and the differences among provinces
because of their respective trust legislation, some taxpayers will still opt for the law of Quebec,
which offers trustees, for example, more security in terms of their personal liability or, on the
other hand, the common law trust, which permits the settlor to appoint himself as trustee.[5]
However, because harmonization seeks to resolve the differences in tax treatment, at least at the
federal level, the choice of jurisdiction should no longer be motivated by such differences.
Avoid any tax difference?
Before proposing amendments to standardize the federal tax treatment of trusts all across
Canada, it is essential to ascertain whether it is worthwhile to try to completely eliminate all of
the tax advantages or disadvantages arising from different rules from one jurisdiction to another.
In our opinion, harmonization should be applied primarily to cases where the legal situation
created is essentially the same but, because the concepts are different, their tax treatment is
different. This action would then be in line with the prevailing case law favouring the uniform
application of tax legislation notwithstanding the applicable private law.
However, harmonization has its limits because some tax differences are the result of specific
rules that are not found in the other legal system. This is true of constructive trust which results
from a common law judge's interpretation of a past situation. Although methods can be
proposed to limit the tax impact of such differences, constructive trusts and the resulting tax
advantages are not available to Quebec residents although less spectacular results may be
obtained through the court's acknowledgement of a tacit partnership.[6]
Quebec residents can use substitution to obtain trust tax treatment without the presence of an
actual trustee. As it happens, this distinctive feature is the result of the federal government's
attempt to adapt its tax legislation to an institution specific to Quebec by applying the tax rules
for trusts, a related concept. The result is interesting since the concept of substitution, which had
been ignored by Quebec tax specialists, can once more be utilized. Substitution is clearly a
concept specific to Quebec, however, and the concomitant tax advantages and disadvantages
are not applicable anywhere else in Canada.
When the difference in tax treatment between the two legal systems arises from features specific
to one of the systems, it may be impossible to achieve perfect uniformity, although efforts can be
made to mitigate the differences.
Reduce the number of references to concepts that are foreign to the civil law
When faced with legal concepts that are foreign to their jurisdiction, civil law lawyers and
notaries need solutions that make the application of the tax rules clearly understandable so that
they are not forced to analyse the common law to be able to apply the rules. The concept of
"vested indefeasibly" in subsection 70(6) I.T.A. and that of "revert" in subsection 75(2) I.T.A.
could be defined, for example. These definitions could be made applicable to the civil law as
well as the common law, thus obviating reference to the common law as a complementary
source for the provisions. That solution could lead to more differences, however, if the definition
of a common-law concept did not correspond to the definition made by that jurisdiction's
courts.
Avoid adding to the complexity of the law
In analysing the proposed solutions, a sustained effort must be made to avoid adding to the
complexity of the law. This complexity is a source of differences and unfairness for Canadian
taxpayers because of differences in the means available to them to access accurate tax
information. To increase the complexity of the law in order to make it horizontally uniform
across the whole country would lead to greater disparities in its vertical application across the
various classes of taxpayers.
Impact of taxation on trust agreement
Having set the parameters within which we shall work and in our discussions of problems and
solutions, we must be aware of the extent to which tax law influences the law of trusts and the
fact that the two areas of law are intrinsically related. That influence is one more reason why it is
necessary to harmonize tax legislation whereas, if tax policy were still neutral in terms of
deciding whether or not to set up a trust, things would be different.
Far from being neutral, tax rules even impose the framework in which a trust is legally
constituted and in so doing occasionally misrepresent the civil law perspective on the issue.
Some trusts in fact are directly derived from tax legislation or other public laws.
The following lists some of the elements that by and large derive from tax legislation:
* Choice of settlor (reasons: subsection 75(2), attribution rules, preferred beneficiary
election);
* Choice of trustees (reasons: subsection 75(2), Canadian residence) ;
* Choice of property transferred (reason: the resulting tax disposition);
* Choice of beneficiaries (reasons: benefit to shareholder, attribution rules);
* Methods for distributing income and capital (reasons: 21-year rule, presence of a
preferred beneficiary or a spouse in a trust exclusively for his or her benefit,
requirements to render amounts payable).
Such elements, however, play a fundamental role in a decision to set up a trust, but for tax
reasons they must often be articulated differently from what the parties to the trust deed had
intended at the outset.
That influence is not peculiar to civil law. The constitution of a common law trust is also subject
to tax considerations that must be worked out in terms of the applicable legislation.
Analysis and proposals
Taking the above into consideration, our task is now to analyse the specific elements of the law
(other than the concepts of "beneficial" and "legal ownership", which are treated in another
study) that raise problems of interpretation when they are applied in a civil law context.
For each tax problem that is identified, one or more solutions will be proposed that could
standardize the tax treatment of trusts in Canada while respecting the private law of the
provinces.
1. Problems arising from the interaction between the civil code and the new rules for
self-benefit trusts
In 1994, the Civil Code introduced a redefined trust concept that allowed trusts to be used in
Quebec to protect assets from creditors or a bad administration, although the nature of this trust
is not making unanimity.[7]
To obtain such protection, a person has only to transfer some of his property to the trust in
order to take it out of his own patrimony. However, the degree of protection sought will vary
depending on the terms of the trust deed. To achieve protection from creditors, the safest trust
would appear to be one that allows the trustees, at their discretion, to distribute the trust income
and capital among a number of beneficiaries, including the settlor, so that the transferor's interest
in the trust would be of no value as long as the discretion of the trustees had not been exercised
in his favour.[8] Differences between common law and civil law do not particularly affect the
way in which the trust is used. The disadvantage of this kind of trust for tax purposes, however,
is that a deemed disposition is triggered when the property is transferred to the trust.
The trust that is the object of the present chapter offers a less greater protection against the
creditors but its advantage is that it can receive property without tax consequences.
1.1. Self-Benefit trust
To avoid a disposition for tax purposes, the trust must be created for the exclusive benefit of the
transferor, which in this study will be referred to as a "self-benefit trust" (or fiducie pour soi in
French). In this kind of trust, the assets are not directly available to the transferor's creditors but
are sheltered in the trust patrimony. If the creditors cannot attack the transfer, which may have
been made in violation of their rights,[9] through the other means available to them, they cannot
seize the trust assets nor can they cause them to be sold. At most, they can seize the proceeds
eventually resulting from the transferor's interest in the trust.
However, Quebec jurists wishing to avail themselves of the self-benefit trust for their clients face
significant difficulties because the qualifying criteria, recently included in the I.T.A, that allow
tax-free transfers to this kind of trust originate in court decisions from common-law jurisdictions.
Therefore, they must be interpreted with the requisite adaptations if they are to be transposed to
a civil law context.
A jurist's comment to me illustrates the problem:
[TRANSLATION]
in this context, it's not only necessary in Quebec law to imitate a transfer of legal
ownership that does not involve a transfer of the beneficial ownership, but it must also
be ascertained how a life interest in the trust can be disposed of while preserving a
reversionary interest on death.
Indeed, although the criteria that the Parliament has elaborated are sufficiently detailed to try to
adapt them to the civil law, though not without questions, they derive from concepts foreign to
the civil law.
1.2. I.T.A. Criteria
Two new and similar tax provisions allow for tax-free transfers to trusts by gift or by sale. The
proposal is to integrate the first provision to section 73 I.T.A.[10] with the new alter ego
trustand the joint spousal or common-law partner trust, both of them are permitted beginning at
age 65. These trusts will enjoy the same rollover as the one originally given inter-spousal
transfers of capital property.
The second provision is found in subsection 107.4(1) I.T.A. and is one of the situations giving
rise to a "qualifying disposition" for a rollover.
The two provisions have roughly the same requirements and, according to the established
hierarchy, subsection 107.4(1) I.T.A. applies only if the trust does not qualify under subsection
73(1) I.T.A.,[11] for example, for a transfer of property to the trust by a corporation,[12] or
for a transfer of property to the trust that is not capital property.
The criteria for the application of these rollovers are technically as follows:
Like the spousal rollover, subsection 73(1.01) I.T.A. requires that the following conditions be
met:
* The settlor's right to receive all of the income during his lifetime;
* No one else may receive any capital before his death.
By comparison, the concept of a qualifying disposition in subsection 107.4(1) L.I.R implicitly
includes the following requirements arising from the necessity that there be no change in the
beneficial ownership of the property, as this condition is interpreted in the Technical Note
accompanying this section:
* the settlor is the sole beneficiary of the trust;
* the settlor is entitled to receive whatever share he requests of the annual income and the
capital gains realized from the trust; and
* the trust property returns to the settlor if the trust is ended before his death.[13]
Unlike section 73 I.T.A., the concept of a qualifying disposition makes it possible to choose
whether the rollover will be total or partial.[14]
Two other conditions must be met in order to take advantage of the section 73 I.T.A trust:
The disposition does not result in a change in the beneficial ownership of the property
and there is immediately after the disposition 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 particular trust.[15]
With a few minor differences, the same criteria apply to trusts constituted under subsection
107.4 I.T.A.
Subsection 104(1.1) of the Income Tax Act provides that a person is deemed not to have a
beneficial right under a trust where the person is beneficially interested in the trust solely because
of a right that may arise as a consequence of the law governing the intestacy of an individual or a
right that may arise as a consequence of the terms of the will or other testamentary instrument of
an individual. The foregoing clarification seems useful given that the law forbids the presence of
a potential right of becoming a beneficiary. It would seem appropriate that the possibility of a
right to take back by the settlor or by his or her heirs exist and that intestate heirs would be
eligible to become potential beneficiaries[16]. However, the reference made to the will leaves us
perplexed because the testamentary dispositions will be acknowledged as valid only once the
settlor is deceased. This date is quite distant from the date of the initial transfer to the trust. Is
the paragraph an indication that the property must necessarily come back to the estate of the
settlor ? If it is the intention of the legislator, he could have been more explicit. A contrario,
could we not contend that if unlimited power to appoint beneficiaries is given to the settlor by
the trust deed, the appointment which takes effect only at the time of the settlor's death and the
termination of the trust, therefore, the condition that no person has a beneficiary right
immediately after the transfer, even if this right is just potential, has been fulfilled (without having
to examine subsection 104(1.1) I.T.A.) ? It would be difficult to uphold in these circumstances
that each and every person is a potential beneficiary. How about the limited power given to the
transferor to appoint beneficiaries, but which limited power is broad enough to include all of the
people who are naturally potential heirs of the transferor? Thus, because we are of the opinion
that the power to appoint beneficiaries stays an option, it will be part of the present analysis as
well as testamentary and intestate heirs.
Furthermore, there will be a disposition of the property of such a trust on the day on which the
death of the settlor occurs, according to new subsection 104(4)(a.4) I.T.A., rather than every
21 years.
1.3. T he civil law problematics
A practitioner in a civil law environment who is informed of these technical requirements is
confronted with at least two questions: 1. What is beneficial ownership? - 2. In a civil law
context, what is the mechanism whereby property may be devolved after the settlor's death?
1.3.1. Concept of beneficial ownership
The concept of beneficial ownership referred to in the Act is dealt in another Department of
Justice study. While awaiting the legislative amendments that will result from the latter study,
there could be a solution by giving a liberal interpretation to paragraph 248(3)(e) I.T.A., which
attempts to harmonize the common law concept of beneficial ownership to the civil law.
Arguably, as soon as a person has a beneficiary right in the trust, he has the beneficial ownership
of the property in that trust.[17]On the other hand, from the technical interpretations of the
Canada Customs and Revenue Agency (the "Agency") reported by Me Jolin,[18] as soon as a
person receives a beneficiary right (even a future right) in a trust, that is enough to cause a
change in the beneficial ownership and prevent a rollover to a self-benefit trust.[19] Recent
publications, however, reveal the extent to which Quebec jurists no longer know what tack to
take with regard to this concept.[20] The pending clarifications to the Act will certainly be
welcome if they manage to shed light on this debate. For the time being, we shall confine
ourselves to noting that, as regards the self-benefit trust, the other requirements in the Act seem
to function as a description of what, in the civil law, constitutes no change in the beneficial
ownership.
1.3.2. The mechanism of devolution on the settlor's death
A trust deed usually specifies the person to whom the property will be transmitted on the death
of a beneficiary. The various possibilities open to a Quebec jurist under the Income Tax Act
when drafting a self-benefit trust have been listed in the legal literature as follows:
[TRANSLATION]
To comply with the condition that no one but the settlor may be the present or future
beneficiary of a self-benefit trust, regardless of age, the trust deed may provide for the
happening of one of the following on the death of the settlor-beneficiary:
* make no provision for a beneficiary in the event of the settlor-beneficiary's death;
* provide for who will become the trust beneficiaries in the event of the death of the
settlor-beneficiary among the persons mentioned to that effect in the will of the settlor-
beneficiary;
* provide for who will become the trust beneficiaries in the event of the death of the
settlor-beneficiary among the persons who are the heirs by intestacy of the settlor-
beneficiary; or
* provide that all the property of the trust will be deemed to be transferred to the settlor
immediately before his death.
The trust deed should not designate the persons who will be beneficiaries of the trust on
his death, but this designation may be made in another document, the will. The
connection between the two must be explicitly referred to.[21]
Faced with this array of solutions, it would be difficult to argue that this kind of trust cannot be
used in Quebec. However, attempts to apply the above solutions will result in various difficulties
and the results will vary depending on the particular solution chosen. In the other provinces,
however, the use of such trusts does not appear to be as problematic, since the requirements
seem to be directly derived from common law concepts such as beneficial ownership, discussed
above, and the transfer of a life interest in trust while preserving a reversionary interest on death.
Here are the issues that arise in the civil law with regard to these different variants in the order in
which they are listed above:
Remain silent about the identity of the trust beneficiary or beneficiaries on the death of the
settlor. (#1)
As we have previously mentioned in our comments concerning subsection 104(1.1) I.T.A.,
article 1297 of the Civil Code provides that, where there is no beneficiary, the property
devolves to the settlor or his heirs.
This article makes it possible to comply with the requirements of subsection 104(1.1) I.T.A. and
leaves it up to the settlor to make a will concerning the trust property, thus giving him complete
freedom on the choice of the subsequent beneficiaries.
The Civil Code offers a tool enabling Quebec jurists to draw up a self-benefit trust in full
compliance with the law. However, for this article to be used, there are certain civil law issues
that cry out for clarification:
* Does the property return to the deceased's patrimony by the effect of this provision?
* Can the settlor make a legacy by particular title of the trust property?
The two questions address, on the one hand, the quality of the protection obtained for the assets
in this manner and, on the other hand, restrictions on testamentary freedom.
The Civil Code is unclear about whether the property returns to the settlor and passes into his
patrimony on his death by the effect of article 1297 C.C.Q. If the answer is affirmative, the
property becomes available at that time to pay creditors,[22] thus rendering the protection for
the assets less effective. In terms of the tax consequences, the inter vivos trust property would
be the subject to the deemed disposition on the beneficiary's death and consequently would not
receive the spousal rollover.[23] However, if, as we believe, the property goes into the
deceased's patrimony, it could then be used to create testamentary trusts. Is this similar to the
results achieved by citizens in the other provinces?
On the issue of whether a legacy by particular title of the property from a self-benefit trust
would be authorized in this situation, the Civil Code and academic opinion unanimously agree
that the Code's use of the term "heirs" [héritiers], generally excludes a legatee by particular
title.[24] On this interpretation, the settlor must take this outcome into account in planning his
estate and provide that the trust patrimony will be given to those successors who receive
universal legacies or as legatees by universal title.
However, we believe that in a trust context the term "heirs" should be understood in a broad
sense as meaning all successors of the settlor, especially since, if the trust property were
returned to the settlor during his lifetime, it would be part of the mass of the succession property
or estate. When this issue comes before the courts, it is impossible to imagine that a judge, on
the basis of the wording of the Code, would decide that the legacy is not valid and that the trust
property should instead be turned over to the persons receiving the residue of his estate in a
case where the settlor has left a will clearly providing that the inter vivos trust property is to go
to a specific legatee by particular title. Furthermore, article 2456 C.C.Q. is also important. It
creates an exception to the definition of "heirs" by specifying that when the term "heirs" is used
to designate the beneficiary of an insurance policy it means the person's entire succession
generally.
However, this limitation on the settlor's testamentary freedom does not call for a tax-specific
solution, although it does clarify how a self-benefit trust fits into the Quebec context.
Provide that on the death of the settlor-beneficiary those named in the will for that purpose will
be the beneficiaries of the trust. (#2)
Insofar as the spirit of the tax measure concerning the self-benefit trust does not require that the
property return to the settlor's patrimony when the trust ends, the best way to constitute such a
trust appears to be to include a specific provision in the trust deed that the property will be
handed over to the persons chosen by the settlor under the terms of his will.
The great advantage of this option lies in the increased protection it offers to the trust property
which at no time will pass through the settlor's patrimony and become subject to the claims of
the creditors. The tax aspect differs from that of the first option in that it then becomes
impossible to create a testamentary trust using the property of the inter vivos trust. It is even
necessary to ensure that other trusts are not tainted by that property.[25]
However, it should be asked whether the power of appointment is enough to ensure compliance
with paragraph 104(1.1)(a) I.T.A., which among other things permits "a right that may arise
as a consequence of the terms of the will or other testamentary instrument of an
individual who, at the particular time, is a beneficiary under the trust."
In view of this wording and the general context of the self-benefit trust, the use of the power of
appointment raises two questions:
* Does the I.T.A authorize a provision in the trust deed that the settlor will appoint in his
will the persons who will receive the trust property on his death without the property
passing through his patrimony?
* In civil law, can such a power be drafted to make it unlimited, or should it be restricted
to certain classes of persons, in which case the tax impact of such restriction must also
be ascertained.[26]
The government will have to explain its policy on the first issue. The second concerns limitations
on the power to appoint under the civil law. This power is the privilege of designating, after the
trust has been constituted, the persons who will be its beneficiaries. Professor Brierley describes
the power as a right intuitu personae (of a specific person) without patrimonial value.[27]
Article 1282 C.C.Q. would seem favourable to the idea that there is no need to limit the power
of appointment to a class of persons where it involves a power retained by the settlor, as
opposed to that conferred on the trustee or a third party. If the Civil Code were interpreted as
a tax provision, we could be sure of this conclusion from the wording of the article:
The settlor may reserve for himself the power to appoint the beneficiaries or determine
their shares, or confer it on the trustees or a third person.
…the power to appoint may be exercised by the trustee or the third person only if the
class of persons from which he may appoint the beneficiary is clearly determined in the
constituting act.
At a recent APFF conference, Me Richard Gauthier said he favoured this interpretation,
namely, that the article permits an unlimited power of appointment.[28]
Me Jolin, on the other hand, expressed the view that the power to appoint must be limited:
[TRANSLATION]
The problem is that, in a trust constituted in accordance with the Civil Code of Quebec,
an unlimited power of appointment is completely invalid. Moreover, according to article
1282 C.C.Q., only a trustee or a third person can be granted the power to appoint
beneficiaries or determine their shares. It would appear that the Agency has completely
overlooked such realities in applying the federal tax system to trusts established under
the Civil Code of Quebec. [29]
Since Me Jolin completely overlooks the portion of the article stating that the settlor may
reserve this power for himself, we think that his conclusion on the requirement to limit the power
of appointment might have been different if he had dealt with that possibility.
When article 1282 C.C.Q. was introduced, the Minister of Justice of Quebec commented
briefly that the provision was consistent with the current state of the law.[30]
But what was the state of the law? The case law has consistently affirmed that, in order to be
valid, a power of appointment must limit the class of persons in whose favour it can be
used.[31] Often cited among these judgments is the decision of the Quebec Court of Appeal in
Succession de Brodie. The decision was rendered in a testamentary context.
Professor Brierley[32] has made a comparative study of this judgment and another Ontario
decision, also in a testamentary context. The common law jurisdiction had maintained the
validity of a general power of appointment, which corresponds to an unlimited power of
appointment, whereas the contrary result was reached in Quebec. Professor Brierley explained
the result by the differences in the two jurisdictions' concept of the law of property: the common
law allowing that a "mere power" in a will to designate beneficiaries took priority over the trust
concept, which requires that beneficiaries be designated more specifically, whereas from a civil
law standpoint, testamentary freedom must yield to the requirement that the persons who are to
benefit from the will must "exist or be identifiable at the time of the testator's
death"[33]according to former article 838 C.C.L.C. He explained the result in the civil law in
more detail as follows:
The general power of appointment was struck down in Brodie, on the other hand,
because the device of a power, like the notion of a trust itself, is perceived to be
no more than a modality of gratuitous dispositions of property and, in particular,
dispositions by will[…] That general law is to the effect that a disposition of
ownership by one person, the owner (the person divesting), necessarily requires
that there be certainty in the person to whom the ownership is transferred (the
person to be vested). [34]
The Brodie decision was rendered under the old Code, which provided that the constitution of
a trust could exist only as a mechanism for the administration of gifts or legacies.[35] Thus,
although the Supreme Court of Canada[36] had already had occasion to rule that ownership of
the trust property was vested in the trustee and not the beneficiaries, this did not prevent the
Court of Appeal to maintain that in order for the power of appointment to be recognized as
valid in the context of a legacy, it must at least define [TRANSLATION] "the class of
beneficiaries within which the trustees or legatees will choose.[37]
Article 1282 C.C.Q. would therefore have codified that legal rule. However, it cannot be
concluded from this that a power of appointment reserved by the settlor for himself should
necessarily receive the same treatment, given that the Code draws a distinction between the two
cases and the earlier case law never dealt with this situation. In fact, the traditional concept of
the power of appointment is the power left to a third person which must be supervised, whereas
when the power is to be exercised by the settlor, it should instead be considered as an unlimited
right that the settlor reserves for himself. Furthermore, article 1281 C.C.Q. also provides that
the settlor may reserve the right to receive the fruits and revenues or the capital of the trust. In
addition, the Civil Code indirectly incorporates an unlimited power of this kind in article 1297
C.C.Q. by providing that the "heirs" of the settlor receive the trust property when there is no
beneficiary. In this way, the designation of the beneficiaries is left up to the settlor's will, which is
free to designate anyone. Not to admit that the settlor can reserve the power for himself with no
limitations would amount to denying the legality of the following clause in a self-benefit trust
deed:
[TRANSLATION]
"On the death of the settlor, the property will be given to the persons who are
designated in the settlor's will."
whereas the Code already admits the validity of the following clause:
[TRANSLATION]
"On the death of the settlor, the property will be given to the heirs of the settlor in
accordance with article 1297 C.C.Q."
It is true that there is a great difference between these two clauses if one accepts the thesis that
the second clause triggers the return of the property to the settlor's estate, while the first clause
allows the trust property to pass directly to the persons designated. The two clauses are
equivalent, however, in their lack of precision concerning the identity of those who will receive
the property and the scope of the power left to the settlor allowing him to choose any
beneficiary.
In the context of the new Code, if we correctly understand Professor Brierley's reasoning, he
expresses doubts about whether the settlor may reserve an unlimited power of appointment for
himself, although he admits that the Code provides the settlor with an opening in this direction by
letting him retain the right to reserve a power of appointment for himself.[38]
Furthermore, in commenting on the new articles of the Civil Code in another paper,[39]
Professor Brierley explains that the Code repeats the main themes of the earlier case law and he
clarifies the distinction between a trust and the power to appoint. He makes only one allusion to
such power's being reserved by the settlor:
[TRANSLATION]
the second (the power to appoint) implies the power of the holder of the power (trustee
or others, even the settlor) to choose the beneficiaries within a determined class…
Given the fact that a jurist as expert as Professor Brierley has not stated that there have been
any changes in the law, which for years has proclaimed that the power of appointment should be
limited, together with the impossibility of easily modifying a trust, it is not surprising that some
Quebec jurists still do not venture to use the power of appointment without accompanying it
with a determination of the class of persons in whose favour it may be exercised.
In deciding how to apply the power of appointment to a self-benefit trust, a Quebec jurist is
then faced with two alternatives:
1. Playing the caution card under the civil law and limiting the power of appointment, while
at the same time trying to comply with I.T.A. requirements by ensuring that the limitation
is as unrestrictive as possible through an authorization to the settlor to choose among all
persons having a family relationship to him or a charitable organization. This method
ensures greater protection from a trustee in bankruptcy who could be tempted to try to
appropriate an unlimited power to himself. However, according to the Agency's
technical interpretations, this kind of expanded power of appointment could be seen as
an appointment of potential beneficiaries, which would make the trust ineligible for the
tax rollover.[40] Me Jolin recently stated, however, that he had secured a verbal
agreement from the Agency that such a power of appointment could be used in the
context of a self-benefit trust.[41]
2. Or, playing the caution card in tax law and provide for a general and unlimited power of
appointment, but this creates the risk that it could be deemed null and article 1297
C.C.Q. would be applied. However, even if the Quebec jurist adopts this solution, he is
not at the end of his troubles since, if the return of the property to the settlor's patrimony
is a key element to qualify for the rollover to the trust, as the Agency has stated on
occasion,[42] by using the unlimited power to circumvent this rule, it might not qualify
for that rollover, which could be very expensive.
The following clause, which probably comes from the common law, was examined by the
Agency in a technical interpretation[43]:
" on the death of the settlor (" Mr. X"), the trustees of the trust are to deal with the trust
property in the same manner as if it formed part of his estate, that is, in accordance with
the provisions of his last will, if any, and if none, in accordance with applicable intestacy
laws. As an alternative, the trustees are given the power to transfer all or part of the
trust property to Mr. X's estate.
This clause is as broad as an unlimited power of appointment. However, according to the
Agency, it does not meet the conditions for the rollover expressed in Technical News No.
7,[44] which were the origin of the provisions in section 73 I.T.A. Here are some particularly
revealing excerpts from this ruling:
" The effect of the " as if " clause is to provide for other (contingent) beneficiaries of the trust.
(…) the power to appoint beneficiaries would have to be a general power ( …)
Property over which the deceased has a general power which is exercised in the deceased's will
is, however, generally available for payment of debts of the deceased."
Although this opinion is based on common law principles, one cannot but be uneasy about the
treatment of even an unlimited power of appointment in Quebec.
In fact, the real conclusion of this part is that we do not know how to adapt a general power of
appointment to a civil law context and what consequences this would have for the rights of
property.
Provide in the trust deed that when the settlor dies, his heirs by intestacy will receive the
property. (#3)
In theory, this technique would meet the requirements of paragraph 104(1.1)(b) I.T.A., because
the latter paragraph at first glance does not require that the laws of intestacy be applied only
where no will exists, in contrast to the Explanatory Notes accompanying section 107.4 I.T.A.
If the trust deed contained a clause, as we proposed in the alternatives listed above, to the effect
that the heirs by intestacy are entitled to the trust property, we think this would constitute a step
backwards in relation to the other situations that have been analysed, in the sense that the list of
subsidiary beneficiaries would be even more rigid and would completely put aside the settlor's
discretion. Although the heirs by intestacy are undefined before the settlor's death, the clause
would ensure that, if the settlor had a spouse and children on his death, they would share in the
property in the proportions dictated by the Civil Code. If there were no longer any spouse, the
children would receive everything, and so on. However, if such description of the contingent
beneficiaries had been made in the trust deed, the trust would undoubtedly have been
disqualified for the tax rollover because of the presence of other future beneficiaries.
Furthermore, this description deprives the settlor of his testamentary freedom over the trust
property. This result may create an even greater distance between civil law and common law if it
turned out in this latter jurisdiction that the retaining of this testamentary freedom is necessary for
the lack of change in beneficial ownership.
We do not retain this alternative. It is less flexible than the first and presents far more of a risk in
the sense that it does not seem to respect the fiscal policy underlying self-benefit trusts. We
believe that it is an erroneous interpretation of the bill, which has the object of permitting that
one can fall back on the law of intestacy, but only where the settlor does not leave a will. Then,
in our opinion, this option is already covered by the option #1, which uses article 1297 C.C.Q.
Transfer the trust capital immediately before the time that is immediately before the death of the
settlor. (#4)
A relatively widespread practice in the context of a protective trust,[45] even before the recent
amendments, is to have the trust property return to the settlor's patrimony before his death so
that the property can pass among the assets of his estate. By doing this, one is not deprived of
the possibility of taking advantage of the rollover of the assets to the spouse on death and the
possibility of creating testamentary trusts as of that time. The effect of this practice is to advance
the time when the property reverts to the settlor by the operation of article 1297 C.C.Q.
To achieve this result, a deeming clause is included in the trust deed providing either that the
return of the trust property takes place as a matter of law immediately before the settlor's death
or that the trust ends immediately before this time. Thus, on the death of the settlor, the deed
would have one notionally return to the moment immediately before the settlor's death for this
clause to take effect, whereas at the time this moment occurred the effect did not exist, since the
death had yet not occurred. This is nothing more or less than contractually giving retroactive
effect to a delivery or termination provision. Although this may be valid as between the parties
to the contract, its effect in the eyes of the tax authorities is debatable. However, in such a
context, the argument that the tax authorities are a third person against whom this clause may
not be set up is harder to apply than in the context of a counter-letter, where at the beginning of
the trust the tax authorities have received a copy of the deed and can take cognizance of the
effects provided for on death.
In our opinion, the idea that one can cause or avoid certain tax effects through the use of such a
clause is a fundamental issue. In our opinion, the law cannot allow this, because immediately
before the death, the delivery of the trust property or the termination of the trust has not
occurred. To foresee that it has done so is a fiction. In fact, only on death does the obligation to
hand over the property or the end of the trust arise and not before. This was the view of the
Federal Court of Appeal in the context of a shareholders' agreement in its recent decision in
Nussey Estate.[46] The judges unanimously refused to recognize the effectiveness of a
contractual provision deeming that a share redemption by the company had taken place before
the disposition on the shareholder's death when, in his lifetime, the shareholder had not benefited
from any such redemption.
In a bench judgment, the Court held that
…the deemed redemption provision in the agreement did not effect a retroactive
disposition of the shares the day before A.W. Nussey's death. By its terms, the
agreement could only operate once the taxpayer had died, by which time subsection
70(5) of the Act would have applied.
For the same reasons and because, by analogy with this situation, a presumption in the trust
deed would make it possible to avoid the deemed disposition of the property on the
beneficiary's death, this presumption could not be set up against the tax authorities, since they
are not party to this fiction even if they are aware of its existence.
Thus, although option #4 would have the same advantages as option #1 and even more, making
it possible to take advantage of the spousal rollover in addition to the possibility of creating
testamentary trusts on death, this option would probably not be recognized by the tax
authorities, and article 1297 C.C.Q. would apply in any event, as in the first option, but with the
risk that the parties concerned would rely on the wording of the trust deed in planning their
estates.
Use of this last option is accordingly not recommended.
The following summarizes the consequences of using each option and whether it can be
recommended in setting up a self-benefit trust:
Vesting chosen for delivery of the trust property on death :
#1
No mention of or reference to the application of art.1297 C.C.Q.
#2
Provide in the will for a power to appoint beneficiaries.
#3
Provide in the will that the heirs by intestacy will receive the property.
#4
Transfer the trust capital immediately before the time immediately before death.
Identification of beneficiaries
They are the legatees or heirs by intestacy if no will.
They are the persons who are chosen among the classes of persons provided for in the deed, if
any.
Persons and proportions determined by law.
The capital returns to the settlor during his lifetime.
Freedom of choice reserved by settlor
Yes, subject to the fact that it cannot be transmitted to legatees by particular title, only to
general legatees or legatees by general title.
Complete testamentary freedom is lacking because of the need for specific classes, unless the
opposing view is accepted that such classes are not necessary.
No
Yes
Options
#1
1297 C.C.Q.
#2
Power to appoint
#3
Ab intestat
#4
Immediately before the death
Deemed disposition in the inter vivos trust on death 104(4)(a.4)
Yes
Yes
Yes
No in theory, in practice should not be able to avoid this.
Spousal rollover
No
No
No
Yes, in theory
Creation of testamentary trusts using the property of the inter vivos trust on death of
beneficiary
Yes, but subject to the interpretation of 1297 C.C.Q.
No
No
Yes
Application of 75(2)
Yes
Yes
Yes
Yes
Property available to creditors at death
Yes, but this answer is subject to the interpretation of 1297 C.C.Q.
No
No
Yes
Certainty of the qualification of the trust to the rollover of the self-benefit trust.
Yes
Doubt - (1) No, if the property has to go through the settlor's patrimony
(2) power to appoint and compliance with subs. 104(1.1) I.T.A.?
No, in our opinion, does not qualify because it involves appointment of beneficiaries that
removes the settlor's freedom of choice.
Yes, because no other beneficiaries provided for.
Options
#1
1297 C.C.Q.
#2
Power to appoint
#3
Ab intestat
#4
Immediately before death
Is its use recommended?
Yes, although the above, namely that the assets are not protected at death.
Hesitation - it would be the best solution for protection of assets, especially with a flexible
limited power of appointment, but not in terms of tax advantages at death. Uncertainty as to the
Agency's treatment.
No, this use does not seem to comply with the spirit of the measure.
No, even if tax law uses such fiction of disposition immediately before death, under civil law, it is
doubtful whether retroactive effect could be given to a distribution of capital that at the time of
death had not yet occurred. - We think that option #1 is a better alternative.
1.4. Conclusion
The Department of Finance should clarify which approaches it intends to allow, taking into
account the two civil law options: returning the property to the settlor under article 1297 C.C.Q.
or using the power of appointment.
2. Vested or vested indefeasibly (Dévolu ou dévolu irrévocablement)
In trust matters, the fact that a property has vested or vested indefeasibly is essential to meet the
conditions for certain kinds of tax relief or tax treatment.[47] Although the concept of devolution
is known to the civil law in matters of succession,[48] the term "vested" in the Income Tax Act
is translated in the French version not just by the term "dévolu" but also by the term
"acquis".[49] It is interpreted through reference to the common law concept of vesting and has
a broader meaning than does devolution in civil law.
The concept of indefeasible vesting also refers back to the common law. While its literal
meaning seems fairly obvious, its legal meaning is somewhat different, as can be seen from the
various definitions for the opposing concept of "defeasible interest", which can mean an interest
subject to a condition, an interest in a legacy that has not been paid (subject to being divested)
or an interest subject to a power of revocation.[50] Practitioners in a civil law environment must
not only understand the nuances involved in the common law concept of indefeasibly in
combination with that of vested, but must also adapt these nuances to their own legal system in
order to comply with the conditions prescribed by the Income Tax Act.
Since the topic of indefeasible vesting is treated in a separate research contract, in this study we
will content ourselves with indicating the various difficulties of a practical nature occasioned by
the use of this concept in civil law trusts.
We may distinguish between two kinds of situations where the concept of devolution (vesting)
or acquisition is used in connection with trusts: (1) the devolution of property to the trust
patrimony and (2) the devolution of property to a beneficiary while the trust continues to
administer it. They both are characterized by their opacity in civil law.
2.1. Indefeasible vesting to the trust
To the first category belongs the rollover on death, for example to a trust created for the
exclusive benefit of the spouse under subsection 70(6) I.T.A.[51] Among other things, this
subsection requires that the property has vested indefeasibly in the trust. It is clear on the face
of it that such vesting is specific to the settlement of a succession, since subsection 73(1) I.T.A.
deals with a similar rollover for an inter vivos transfer without requiring indefeasible vesting.
The only definition of the concept of "indefeasible vesting" to be found in the Income Tax Act is
in subsection 248(9.2), which only serves to explain that the property is deemed not to have
vested indefeasibly after the death of an individual or a spouse who is a beneficiary of a trust,
but does not provide the parameters for vesting.
The main tool for the analysis of the criteria for indefeasible vesting continue to be the Agency's
position as reflected in Interpretation Bulletin IT-449R.[52] The adaptation of these criteria to
the civil law has been the subject of commentary by the academic community.[53]
Under the Civil Code, the effect of a legacy is established at the time of death and its
acceptance only confirms it[54] but, according to the Interpretation Bulletin, indefeasible vesting
requires that the property subject to the legacy be clearly identified and concerns the time when
the spouse, spouse trust or child of the deceased "obtains a right to absolute ownership of
that property in such a manner that such right cannot be defeated by any future event,
even though that person may not be entitled to the immediate enjoyment of all the
benefits arising from that right."[55]
Thus, the retroactive effect of the civil law or other provincial law[56] is not recognized.
According to Me Jolin, one must wait for the heirs to accept[57] and even for the partition of
the property before the heir's rights in a property can be certified and it can be claimed that the
property has vested indefeasibly in the heir. Even the declaratory effect of partition[58] would
not suffice for recognition of the vesting for tax law purposes at a date prior to that of the
agreement. However, publication of the declaration of transmission, which renders the
liquidator's divestiture official and releases the property for the benefit of the legatees and heirs
at the end of his administration[59] is not required for vesting.[60]
Interpretation Bulletin IT-449R contains additional qualifications concerning the indefeasible
vesting of shares subject to a buy-sell agreement among shareholders.[61]
As can be seen, notwithstanding the interpretation of indefeasible vesting in a testamentary trust
context demonstrates a number of differences concerning the civil law, enough information is
available so that a civil law lawyer or notary can be aware of the limits, even if they have been
dictated by a common law environment. In an harmonization context of the Act with the private
law, it would be appropriate to redefine these limits to make them more inclusive of the civil law.
Study of the feasibility of this adaptation could be linked to a review of retroactivity since,
among other things, it needs to be determined whether in this context the declaratory effect of
the vesting should be recognized or whether the Act should explicitly reject it.
2.2.Vesting in the trust beneficiary
The concept of " vested," which is translated by "dévolu" or "acquis" and used with regard to
the beneficiary of a trust is far more nebulous in civil law. It refers to a situation where an interest
in a trust is acquired by a beneficiary without the property's having been distributed to the latter.
The vesting must sometimes be indefeasible.
2.2.1. Indefeasible vesting in a beneficiary
Paragraph (g) of the definition of "trust" in subsection 108(1) I.T.A. includes an exception for a
trust of which all beneficiaries have acquired all their indefeasibly vested rights. This trust
escapes the 21-year deemed disposition rule, but is still subject to the other tax rules for trusts,
with the exception of the preferred beneficiary election and section 106 I.T.A.
The technical notes offer a brief explanation of the former version of paragraph 108(1)(g) as
follows:[62]
The definition is amended for 1993 and subsequent taxation years so that the exclusion
with respect to unit trusts also applies to trusts under which all interests in which have
vested indefeasibly and in which no interest may become effective in the future. The
ability of a trust beneficiary to sell his or her interest in the trust or gift the interest during
his or her lifetime or on death through the terms of a will is not intended to bring a trust
outside the terms of this exclusion. […] This amendment is relevant primarily for those
commercial trusts which do not qualify as unit trusts.
As can be seen, apart from the fact that the beneficiary implicitly receives an interest that he may
dispose of, these notes are not very helpful in understanding the meaning of indefeasible vesting.
In the section on loans to non-residents, subsection 17(15) I.T.A. specifies that a trust in which
all of the interests have indefeasibly vested is synonymous of a non-discretionary trust.
However, the scope of this definition is limited to this section.
We must return to Interpretation Bulletin IT-449R in which indefeasible vesting to a beneficiary
is explained as follows:
where [….] the individual's ownership rights cannot be defeated by any future event
and no other person has any right whatsoever to an immediate or future benefit from
that property or that trust, the property will be considered to vest indefeasibly in that
individual.[63]
Paragraph 8(c) of the Bulletin explains that if, under the terms of a will, farm land is directed to
be held in a trust for the benefit of the taxpayer's child, to be distributed to the child when the
child reaches a specified age and, if the child should die before that age, to be distributed to the
child's estate, the property is considered to vest indefeasibly in the child. If the will provides,
however, that the land would be distributed to other persons, for example, the taxpayer's
grandchildren, if the child should die before attaining the specified age, the land would not vest
indefeasibly in the child until the child attained the specified age.
This interpretation seems to be in line with the new subparagraph 108(1)g)(v) I.T.A. permitting
to escape the 21-year rule only if the indefeasibly vested interest of a beneficiary should
terminate properly, namely "as a consequence of a distribution to the person (or the
person's estate) of property of the trust".
However, this reference to the person's estate creates a problem in civil law with respect to
personal trusts, at least where the specified age of distribution is later than the date on which the
child reaches the age of majority and acquires the capacity to make a will. In fact, under the civil
law one cannot generally leave to a beneficiary, by means of a reference to his succession, the
freedom to designate replacement beneficiaries[64]. As explained in section 1.3.2 on the power
of appointment, it is necessary to specify the classes of persons among whom the power may be
exercised.[65] Although the classes may be broad enough to encompass family members, they
cannot be equivalent to testamentary freedom since they must usually exclude "friends" and
other persons who cannot be described except as members of a class so broad and imprecise
that it could include anyone.
Since the power of appointment must be differentiated from proprietorship, it may also be
thought that, if an amount has become payable to a beneficiary, he would act as a creditor of the
trust for this amount. This debt would then belong to the beneficiary's patrimony and would
therefore automatically return on his death to his testamentary succession or succession by
intestacy, as the case may be, without passing through the provisions of the trust deed. But it
seems to us that the notion of indefeasible vesting does not go so far.
Could a simple reference to the persons who would have received the succession by intestacy
of the beneficiary without regard to the latter's would be valid from a tax point of view? To
answer this question, we must first find out whether indefeasible vesting in a beneficiary involves
a tax requirement that the beneficiary has the same testamentary freedom as if he had been the
owner of the property.
In view of all this lack of precision, the first step would be, then, to define the parameters of the
indefeasible vesting that takes place in favour of a trust beneficiary. They seem to be well known
in the common law, but for a civil law lawyer or notary they mean nothing. Specifically, answers
are needed to the following questions:
1. Must the beneficiary have unlimited testamentary freedom over his share of
the trust?
Ex: Three children are each entitled to a third of a trust patrimony. The patrimony will be divided
into three separate portions, the capital and income from these portions will be appropriated to
the exclusive needs of the child for whom each portion is intended and, if the child dies, his
portion will be distributed to his heirs. (N.B. This power of appointment could be illegal under
the civil law.)
2. Is indefeasible vesting equivalent to granting the beneficiary a financial claim
on the trust property that he may transmit to his heirs?
Ex.: A trustee makes a third of the property of the trust patrimony payable, and the trust
becomes the debtor, in favour of a child beneficiary and the property that is to be used to
pay the debt will be placed in a separate account. No other beneficiary is stipulated for
this share. The trustee can distribute all or part of this property at his discretion. On the
death of the child, the trustee will distribute the property to his (the child's) succession.
There is only a slight difference between these two situations. We are not even certain that they
are really different, since in fact the creditor relationship seems unworkable to us in the context
of a personal trust. We can certainly imagine that the trust could become indebted in favour of a
beneficiary if an amount has become payable to him, for example when the beneficiary has
reached the age of distribution, or when the trustee has exercised his discretion to distribute
some income or capital. The writing of a note could then testify of a creditor/debtor relationship
for this amount. That debt or note would certainly be part of the property in the beneficiary's
succession on his death and would be handed over according to his will or the rules of intestacy.
Except for those situations we do not think that the trust is the debtor of the beneficiary's entire
share while retaining the ownership and administration of it. In the Civil Code, the right of the
beneficiary in the trust is contingent upon the respect of the conditions enacted by the settlor. On
the death of the beneficiary, if his right to receive the capital is not yet opened[66], we believe
that his succession will have no right to claim against the trust. The right of the deceased will
pass to other beneficiaries according to the trust deed. Furthermore, the case law is in the
opinion that the "succession" could not qualified as a replacement beneficiary, because it would
constitute an illegal unlimited power of appointment.
So, in civil law, a relation of debtor/creditor for the entire participation of a beneficiary would go
beyond the personal trust context. The trustee would no longer be administering the trust
patrimony but rather the beneficiaries' patrimony.
Once the answers to these questions have been clarified and the other criteria for indefeasible
vesting have been made clearer, if possible, the second step would be to ensure that the criteria
are consistent with the civil law, particularly with respect to the power of appointment, which
cannot usually be unlimited. If the criteria were found to be inconsistent, they would have to be
reviewed and adapted to this system of law, for example by allowing on the death of a
beneficiary the use of a large but limited power of appointment, or the use of a disposition
referring to the succession by intestacy without the necessity to have a full testamentary
freedom.
It should be noted that our comments do not necessarily apply to commercial trusts as it seems
that in those trusts, the right of a beneficiary would not terminate upon his death since his
participation does not result from a gift or a will.[67] It would then be easier to meet the
requirements of an indefeasibly vested right with commercial trusts.
2.2.2. Non indefeasible vesting
In other contexts, the law disregards the indefeasibility requirement and retains only the vesting
requirement. Thus, subsection 104(18) I.T.A. allows the taxation of income in the hands of a
child even when the income is not paid or made payable to him as long as the right to the
income has been vested (or "acquis") to the child.
In the light of the technical interpretations on this subject referring to the common law definition
of "vested", at first glance we cannot point out the difference between vesting and indefeasible
vesting. Both seem to require a certain right in the trust that can be transferred by the beneficiary
himself.[68]
These interpretations have also shown that the Agency relies on two common law decisions for
its interpretation of the concept of "vested", namely, Hashman v. M.N.R.,[69] and Cole Trust
v. M.N.R.[70] These decisions, however, do not offer much enlightenment about the meaning
of "vested" since they do not provide a definition but rather apply the concept to specific
situations.
We might add another example to the debate: a legacy of an RRSP to a trust under 60(l)(ii)(B)
I.T.A. where the trust is for a child under 18. In this situation, the Act requires that the child be
the "sole person beneficially interested in amounts payable under the annuity " acquired
from the RRSP. Although the English version speaks of "sole person beneficially interested"
and not of "vested", this might possibly be a concept equivalent to vesting or, at least, we can
assume a contrario, that the fact that an interest is "acquis" could be enough to ensure that the
requirement of this provision is met. There is some confusion in Quebec about how it is to be
interpreted. For example, it is said that this provision requires a trust whose the sole beneficiary
is the child.[71] All that the Act requires, however, is payment to the child of the annuity
amount, not the entire trust property. Having just one child as the beneficiary can definitely
facilitate taxation of the trust income, but does not solve the question of whether the child's
interest can terminate, for example, on his death and be given to his brothers and sisters.
In a civil law context, we would really like to know what the concept of "vested" is all about. It
may be that its meaning is not much clearer in common law and that this discomfort stems from
Quebec's lack of experience with trusts. It would be advisable, however, for the government to
clarify this important concept, use a uniform language when it is appropriate and clarify the
differences, if any, that it sees in a right vested in a beneficiary, a right vested indefeasibly and a
trust of which one is the sole beneficiary in respect of a certain amount.
Once again, such explanations should, needless to say, take into consideration the limitations
posed by the civil law on the application of these definitions.
3. Constructive and resulting trusts[72]
The Civil Code of Quebec does not recognize any trusts but expressly created trusts. The
Associate Deputy Minister of the ministère de la Justice has also made it clear that the common
law concepts of resulting trust and constructive trust have not been introduced in Quebec's
law.[73]
Tax litigation jurisprudence concerning cases from Quebec has no choice to refuse to apply
such trusts.[74]
Nevertheless, reliance on the concepts of resulting trusts and constructive trusts seems to be on
the rise in the common law jurisdictions, and such trusts are increasingly used to obtain tax
results to the taxpayers' advantage.
As part of this study of the differences between the common law and civil law jurisdictions in
terms of trusts, it is worth taking the trouble to look more closely at these concepts.
3.1. Constructive trusts
A constructive trust (trust by interpretation) arises from the interpretation of a past situation by a
common law judge.
The concept of constructive trust is used in two circumstances:
1. As a restitutionary mechanism developed by American and Canadian courts. It
corresponds to the civil law doctrine of unjust enrichment. This kind of remedy is often
sought in a matrimonial situation.
2. As a presumption for the protection of the victim in a fraud or misconduct context. This
use of the constructive trust originated in Great Britain.
Canadian case law has applied these concepts in two sorts of circumstances. In either case,
there may be some interesting tax consequences stemming from the court's decision to recognize
a trust rather than make an order transferring the property to the victim on some other basis
because the trust so created predates the judgment recognizing the trust. When the existence of
a constructive trust is directly argued in a tax case and not in the context of a claim against the
person who has been enriched, judges often feel that they are justified in recognizing its effects
notwithstanding the fact that the actual creation of the trust falls outside their jurisdiction. Some
in fact believe that where the taxpayer's situation meets the conditions where the existence of
such a constructive trust could be successfully argued in court, the tax consequences should be
defined accordingly.
Let us look at a few examples from the tax case law:
In Karavos v. The Queen,[75] the judge refused to apply the constructive trust concept in a tax
case involving restitution. The taxpayer argued that a constructive trust was created by the sale
of a building so that part of the gain could be taxed in the hands of her spouse. After analysing
the authorities and Supreme Court of Canada decisions, the judge commented as follows:
A constructive trust is a mechanism by virtue of which a Court with equitable jurisdiction
can grant redress to an unjustly deprived person. In determining whether unjust
enrichment exists and restitution through the invocation of a constructive trust is
appropriate a Court may take into account the deprived person's actual financial
contributions, (which may properly include the contribution of earnings towards
household bills and maintenance), all work performed in relation to the property, both
physical and otherwise, and other factors as the performance of housekeeping duties,
the raising of children etc. The result is that effectively a Court is required to embark on
an examination of the totality of a marital relationship extending over a period of 30
years to determine whether an unjust enrichment occurred and whether it would be
appropriately remedied by a declaratory order vesting the claimant with title to property
or by granting a monetary award. In my view such an inquiry is inappropriate in an
income tax context. The use of a restitutory device to remedy situations of unjust
enrichment should not be equated with the determination of a collateral issue necessary
in order for this Court to carry out its statutory function, that is, to dismiss or allow an
appeal or vacate or vary an assessment.
[…]
Even if the Appellant had established the prerequisites which would enable this Court to
find that unjust enrichment existed this appeal could not succeed. In order to determine
whether it is appropriate in a given case to invoke the remedy, the Supreme Court
proposed a "causal connection" test. This test was considered by Dickson, C.J.C. in
Sorochan v. Sorochan where he said:
... It is suggested simply that there should be a "clear link between the
contribution and the disputed assets". The question of a connection between the
deprivation and the property is further explained as "an issue of fact". That is,
courts must ask whether the contribution is "sufficiently substantial and direct" to
entitle the plaintiff to an interest in the property in question.
For this appeal the question may be stated as follows: Were Mrs. Karavos'
contributions, in a broad sense, sufficiently substantial and direct so as to entitle her to a
portion of the profits realized upon the sale of the property? There must be a clear
causal connection between the spousal contribution founding the unjust enrichment and
the property which is alleged to be the subject of the constructive trust. In my view there
is no reasonable connection between the contribution or alleged deprivation and the
property.
Although the facts in this case did not allow the judge to find a trust, it is interesting to note that
the definition concerns striking a balance in a couple's domestic relations.
The other component of the constructive trust, the "protective" aspect has a lesser foothold in
Canadian case law, according to authors Brown and Rajan:[76]
The history of the constructive trust has created uncertainty about its current doctrinal
basis. Although it has been argued that the current position in Canada is that the
constructive trust is to be regarded as a remedy and not a substantive institution, it is not
clear that a Court would refuse to impose a non-remedial constructive trust on the basis
of the British institutional notion of the trust as a cause of action in appropriate
circumstances. […] the specific nature of the constructive trust may have important tax
consequences since at least one Tax Court decision appears to have distinguished
between the remedial and non-remedial constructive trust when providing tax relief.
The decision mentioned is Fletcher v. M.N.R.[77] In that case, the Tax Court of Canada
expressed the opinion that the term "trust" in the Act includes all kinds of trusts, even a
constructive trust arising from the misconduct of a person acting under a power of attorney.[78]
In the result, this case allowed Mr. Fletcher, a non-resident, to plead with success that he had
realized a capital loss under section 115 I.T.A. as a result of the disposition of his interest in a
Canadian trust,[79] a trust that was a constructive trust created by his agent's misconduct.
Thus, although it did not have the jurisdiction to declare the existence of a constructive trust and
require the payment of compensation, the Tax Court of Canada did not deprive itself of the
power to recognize the tax consequences of such a trust. This court based its intervention on the
need to identify the owner of the beneficial ownership in a property in order to assess the taxes
correctly.[80]
The Agency recognized that a constructive trust is a trust in a tax context at a Round
Table[81] held after the Fletcher decision. In response to a number of questions, in particular
whether it was a bare trust that should be disregarded from a taxation point of view, the Agency
replied:
It is our view that a constructive trust will be a trust that is subject to the application of
all relevant provisions of the Act. In these trusts, the constructive trustee usually has the
control of the trust property within the meaning of subsection 104(1) of the Act. Such a
trust would be deemed to have been created at the time the property or control thereof
is acquired by the ultimate constructive trustee, or later on, as the circumstances may
require. Normally, the time of the Court judgment would not be relevant to this
determination. In our opinion, a constructive trust would be a personal trust within the
meaning of the definition contained in subsection 248(1) of the Act.
Another example of the application of the constructive trust concept for tax purposes can be
found in Anderson Estate v. The Queen.[82] Real property of the deceased had escaped the
deemed disposition rules on his death on the basis that, at that time, he no longer held the
beneficial ownership of it, even though the title was in his name. After his death it was
recognized that the property belonged to his sister-in-law who had lived with him for 57 years
and had never been paid for her work. This finding made it unnecessary to consider whether a
trust existed since the court relied on her beneficial ownership of the property. From a civil law
viewpoint, it is difficult to understand the nuance between recognizing a constructive trust of the
remedial kind and deeming the beneficial ownership to have already been transferred because of
the work performed by a family member, but the result seems to be the same, a result that is not
available in Quebec.
Liability for tax under section 160 I.T.A. was also avoided in the Savoie[83] case on the basis
of a constructive trust, which was argued along with resulting trust. The judge held that it was
legitimate to argue the existence of the trust for the first time in the context of a tax case when it
had to be determined who had the ownership of the property; therefore, the recognition of such
trusts is not exclusively reserved to courts hearing a case between two spouses.[84]
3.2. Resulting trusts
A resulting trust (fiducie par déduction) is described summarily by Professor Waters:[85]
… a resulting trust arises whenever legal or equitable title to property is in one party's
name, but that party, because he is a fiduciary or gave no value for the property, is
under an obligation to return it to the original title owner, or to the person who did give
the value for it.
A resulting trust requires at least two elements: a common intention, expressed or not, that the
property be held in trust, and facts supporting this intention or from which this intention may be
deduced.[86]
Like the constructive trust and often in conjunction with it, resulting trust has been argued on a
number of occasions in tax cases from common law jurisdictions.
One example is Holizki[87] in which the Federal Court of Appeal confirmed the trial decision
finding that the husband, who owned 99% of the shares of the family business, had always held
a part in a resulting trust for the benefit of his wife. Once again, the facts that led to this result
were the usual situation where a couple pools their property, the husband is in business and
subsequently incorporates his business in his own name. His wife's involvement, among other
things, had consisted in guaranteeing loans for the business, working in it and making up any
cash shortfalls from her nursing income. It should be noted that during the years the business
was in operation the income was all taxed in the husband's hands.
The judge summarized their situation as follows: "There was no express trust agreement and
no discussion between Mervin and Maureen that he was holding any property in trust for
her. Both Mervin and Maureen testified that it was just "understood" that the business
belonged to both of them." [88].
The consensus between the spouses regarding their common property, despite the fact that the
title to the shares was in the husband's name alone, allowed the couple to claim that, although
the husband had subsequently transferred 49% of the shares to his wife, the transfer should
escape to the attribution rules since the ownership had never been transferred. By applying the
concept of resulting trust, the wife had always been the owner of these shares. And the court
found in their favour.
A similar decision was rendered in Disbrowe v. The Queen.[89]
A Quebec jurist might be somewhat sceptical about this line of cases after all the efforts put
forth by the Department of Finance to prevent spouses under a community of property regime in
Quebec from using their co-ownership under that regime to split income![90]
This jurist still remembers the words of Judge Dubé in a Federal Court - Trial Division decision
in 1989 refusing to recognize a capital gain split between spouses married under Quebec's
community of property regime, despite the spouses' co-ownership of the property:[91]
…it would be quite unfair for taxpayers in one province to be favoured by provincial
legislation dealing with the application of the Act, which should affect all Canadian
taxpayers equally.
3.3. What makes such trusts so attractive from a tax standpoint
The majority of the decisions involving both resulting or constructing trusts and taxation is
connected with transactions between spouses or other related persons. The consequences vary
and can include avoidance of the attribution rules, of the deemed disposition on death or of the
application of section 160 I.T.A. When such trusts are found to exist, the result is that the
property in question has not in fact been transferred since it is deemed to have always been held
in trust for the benefit of the person who suffered the impoverishment as a result of the
relationship that has been established, whether conjugal or other.
As said earlier, other situations between unrelated persons involving misconduct or unjust
enrichment can also give rise to such trusts.[92] These situations appear less problematic,
however, since they do not open the door to abuse given the opposing interests of the persons
in question. From a tax perspective, however, if it must be considered that a trust existed in a
tax context, as in the Fletcher decision,[93] it would be normal then to reassess the years that
were not statute-barred and, among other things, take into account the 21-year deemed
disposition rule. Oddly enough, as the authors Brown and Rajan[94] have noted, those
decisions where tax relief was claimed in this context have not reconsidered the taxpayers'
whole tax file on the basis of the trust's existence.
Opinion on the issue of the retroactive tax impact of resulting or constructive trusts is not
unanimous.[95] There is disagreement as to whether the existence of such trusts and thus the
beneficial ownership of the person claiming the gain begins at the time of the event giving rise to
his entitlement, on the acquisition of the property to which the trust applies, in the course of the
events giving rise to an unjust enrichment, at the time a claim was instituted on this basis or when
the judgment recognizing the trust is rendered.[96]
It is nonetheless interesting to note that, at the tax level, once the existence of a constructive or
resulting trust was recognized, none of the recent decisions was decided on the basis that the
trust did not exist until judgment had been rendered by the Court.
3.4. Solutions for Quebec
In view of all this fiscal uncertainty, what should be retained and what should be asked to ensure
fairness for Quebec?
Where the differences begin to be significant in the tax treatment accorded in civil law and
common law jurisdictions is with unjust enrichment claims in the context of a constructive or
resulting trust[97] and in matrimonial matters in particular. The civil law also offers a remedy
based on enrichment in the same circumstances[98] or on the compensatory allowance between
married persons[99] but, as far as we know, whatever compensation has been obtained has
never had a retroactive tax impact.
One author has summarized the treatment of unjust enrichment as follows:
[TRANSLATION]
Arising from the same equitable principle and applying the same conditions for its
exercise, the case law from Quebec and the common law provinces has evolved
interrelatedly, with the common law provinces incorporating principles taken from
Quebec law and vice versa.
[…] It must be emphasized, however, that in terms of compensation the common law
solutions could not be fully incorporated into our Quebec law, which does not recognize
the constructive trusts or trusts by interpretation that are relied on by the common law
courts in awarding in some cases ownership of the other spouse's property.[100]
The only cases admitting of a retroactive tax effect in Quebec are those involving claims for
restitution based on a tacit partnership. In Beaudoin-Daigneault v. Richard, the Supreme
Court of Canada recognized that there could have been a tacit partnership between common
law spouses who were partners in a farm with the result that the husband's signature on the initial
contract of purchase was merely that of a mandatary of the partnership.[101] For its part, the
ministère du revenu du Québec, in disallowing certain losses, pleaded the existence of a tacit
partnership between spouses.[102] The remedy is not confined to the civil law; taxpayers in
common law provinces have also pleaded the partnership concept.[103] However, a number of
factors limit the use of this remedy and make it less popular in Quebec and elsewhere than
probably common law constructive or resulting trusts.[104]
It should be pointed out that, although the use of the common law constructive and resulting
trusts and even beneficial ownership[105] has been developed in tax case law over the last
decade to good effect in matrimonial cases, their use is still not applicable to Quebec.
What solutions could be considered to deal with the unfairness?
* refuse to recognize such trusts as trusts for tax purposes;
* recognize the family, or at least the couple, as a tax unit;
* prevent resulting or constructive trusts from having a retroactive tax effect by enacting
measures similar to those adopted for Quebec's community property regime; and
* recognize throughout Canada that a reasonable consideration, corresponding to the
payment of a spouse's entitlement on the basis of enrichment, is valuable consideration.
3.4.1. The government could reverse its position of recognizing the existence of a
constructive trust or even a resulting trust as a trust for tax purposes;
Like the bare trust[106], which is deemed not to be a trust, it could be provided that this kind of
trust as well is not recognized for the purposes of tax legislation.[107]
And if this draconian solution is not suitable in circumstances where such trusts result from the
misconduct or fraud of an unrelated person, an exception could be made for those cases and
the trust could even be recognized as dating from the commission of the wrongful act, provided
that the act were not statute barred. Since this kind of situation is relatively uncommon in
Quebec, this exception might have no impact since, although in some cases as in the facts of
Fletcher[108] the tax result might be advantageous, the victim could also find himself having to
be responsible for taxes on income from a property that he did not own at the time.
However, we do not think that this solution would fully cover matrimonial cases, since common
law courts sometimes base their decisions on the concept of beneficial ownership without
necessarily always having to refer to the constructive or resulting trust.[109] Thus, it is not so
much the trust's tax status that matters as the fact that there is no transfer by the spouse who
pays the debt resulting from an unjust enrichment situation.
3.4.2. The family as a tax unit (or eliminating the attribution rules between spouses)
The main inequities resulting from the fact that resulting and constructive trusts are not applicable
in Quebec are that Quebec residents are not allowed to split capital gains or investment income
from the portion of the property that is intended to redress the financial imbalance between the
spouses, and the fact that sufficient consideration cannot be argued in the context of section 160
I.T.A. in relation to the settlement of rights arising from their life in common.
This is only the tip of the iceberg for family tax policy. The Department of Finance still refuses to
recognize the family as a single tax entity, yet there are more and more limitations that reduce the
deductions and tax credits that are based on the income of the entire family.
Tax policy thus favours recognition of the family unit when tax expenditures can be reduced. For
example, two persons who work for an equivalent income and manage their wealth
independently but live together as a couple will have to share the principal residence exemption
if each owns a residence. Furthermore, a mother with a modest income because of her family
responsibilities will have her child tax benefits reduced if her common law spouse (conjoint de
fait) has a high income. Since it is implicitly assumed that this mother has access to her spouse's
property to raise her children, it would be logical to encourage the legal transfer of that property
to her name without the application of the attribution rules. Especially since it can be anticipated
that, even with this tax advantage, such transfers will in fact enjoy limited popularity…
Recognition of the family, or at least the couple, as a tax unit would be a sort of bow to family
unity by eliminating the attribution rules between spouses and reducing tax complexity, especially
since the attribution rules are difficult to monitor and poorly understood.[110]
This solution would do away with tax cases based on the effects of a constructive or resulting
trust, beneficial ownership or a tacit partnership as they relate to the attribution rules. Thus it
would help make the tax system more neutral as far as the choice of the most appropriate
remedy goes. It might also promote shared ownership of property by couples during their union
rather than on the breakdown of their relationship when such discussions become very
painful.[111] To obtain the tax split, the title should have to be transferred to the spouse.
This solution would also have the advantage of placing all spouses on an equal footing: those
who equalize their spouse's property throughout their relationship and those who refuse or
neglect to do so and find themselves at the end of their relationship having to make court-
ordered adjustments.
It would not solve the thorny issue of section 160 I.T.A. In this regard, an exception could be
added to the Act similar to the one granted on marriage breakdown for cases where a
reasonable division of property is made during the union. Otherwise, it might be thought that the
Act favoured marriage breakdown when the couple is in financial difficulty!
On the other hand, if the couple were recognized as a tax unit for all purposes of the Act, all of
the property belonging to the couple might be viewed as a way to guarantee payment of taxes…
3.4.3. Prevent resulting and constructive trusts from having a
retroactive tax effect by enacting measures similar to those adopted for
Quebec's community property regime.
Like denying the existence of a trust for tax purposes, this solution is certainly very simple to
implement in that it does not require extensive legislative amendment and would not generate
additional tax expenditures. On reflection, however, it might just be a case of rearranging the
deck chairs on the Titanic.
In fact, we believe that adopting such a presumption would lead to increased reliance on
another argument, having more or less the same effect, but this time all across Canada, to get
around the attribution rules and section 160,[112] i.e., the sufficient consideration rule. In an
appropriate context, the argument would consist in claiming that the interspousal transfer was
made for equivalent value, i.e., in settlement of all or part of the debt pursuant to the spousal
relationship.
In our opinion, litigation involving constructive and resulting trusts cannot find a fair solution
applicable to the country as a whole unless such situations are viewed in their entirety. Merely
adding a presumption to the Act that these particular kinds of trust do not exist or are of no
effect for tax purposes in order to prevent the income splitting by which their use might give rise
could open the door to arguments about the market value of the consideration. Needless to say,
it would be better to define the new remedy clearly in a way that encompasses and clarifies
throughout Canada the question of the effect of such trusts as well as the questions concerning
the payment of household expenses and spousal compensation.
3.4.4. Recognize everywhere in Canada that a reasonable consideration,
corresponding to the payment of a spouse's entitlement based on
enrichment, constitutes a valuable consideration.
According to the foregoing, instead of reappraising the tax system as it relates to resulting or
constructive trusts, tax policy could solve the issue of fairness between Quebec and the other
provinces by clearly establishing the principle that the payment of marriage debts is a transfer for
consideration everywhere in Canada provided that the transfer is genuine and reasonable in the
circumstances. This solution is similar to eliminating the attribution rules between spouses, with
the difference that the amendment would be restricted to transfers resulting from situations
involving financial rebalancing.
It should be noted in this respect that, even without such official recognition, the reasonable
consideration argument is quietly making inroads. We earlier proposed that this argument could
be used in determining the compensatory allowance during marriage. Our position was that the
debt owned by the creditor-spouse in respect of this allowance could, if it were settled on the
occasion of a transfer of a property, constitute sufficient consideration so that the exception in
subsection 74.5(1) I.T.A. could be used -- to the extent that the subsection 73(1) I.T.A.
rollover was not used.[113] This solution was also argued to avoid the application of section
160 I.T.A. in Savoie. The judge in that case found sufficient consideration, in view of the wife's
rights, as follows:
Her relinquishment, upon the transfer of the property, of her inchoate right to apply in a
provincial superior court for a declaration that she held a 50 % beneficial interest in the
property would have a value equal to the 50 % interest in the property and would
constitute the consideration that paragraph 160(1)(e) requires to be taken into account
in determining her liability under that paragraph.[114]
In their analysis, the authors Brown and Rajan,[115] take the position that the application of the
constructive trust and resulting trust could have been avoided by using this approach.
We are still convinced that, if this argument was well planned and well documented,[116] it
could have success when it is pleaded in a court room. Thus, where one spouse pays the other
an amount of money in settlement of her debt as a result of her work in the house for a specific
number of years, which the spouses have determined to be a specific amount, it would be
surprising if the Court refused to recognize the existence of a consideration, especially in the
current state of affairs where compensatory allowances and unjust enrichment are used, among
other things, to compensate housework.[117]
In Barroso v. The Queen,[118] where this argument was raised, Judge Dusseault indicated in
obiter that the renunciation of the family patrimony could have constituted a consideration if the
value of the family patrimony had been put in evidence.
However, use of this argument, particularly in Quebec, is weakened by the Agency's position
taken early in the 1990s that it did not recognize the transfer of property made in consideration
of a renounciation to the family patrimony or in payment of a compensatory allowance[119] can
be considered as including a sufficient consideration that the attribution rules would not
apply.[120]
Furthermore, in terms of the case law, there is currently a divergence of opinion in the Tax
Court of Canada regarding this issue in the context of section 160. Certain payments to the
spouse or on her behalf are sometimes not even considered transfers but are rather treated as a
payment of an obligation of the taxpayer to participate in household expenses. Thus, in the
Dupuis judgement,[121] the transfer of several small amounts used, among other things, by the
husband as his contribution to household expenses was not recognized as a transfer for the
purposes of the application of section 160, and the exact amount of the expenses did not have
to be proved. Instead, the transfers constituted a payment of the debt incurred by him during
his marriage.[122]
In Raphael,[123] on the other hand, the judge was not satisfied that the consideration given for
the transfer of a number of amounts to the wife was at fair market value.
This brings us far away from the subject area of trust, but we believe that it was necessary to
give a broad vision of the problematic on the specific question inorder that the future solution
that will be adopted will not be merely superficial and pointless.
3.5. Conclusion
What makes the common law remedies of constructive and resulting trusts particularly unfair for
the civil law is their application in family matters deeming that an interspousal transfer never took
place so that the attribution rules or liability for tax under section 160 I.T.A. could be avoided.
Although the common law cases of this kind are not consistent, there are enough examples to
justify Quebec jurists' demand for legislative intervention.
4. The concepts of income and capital
An income interest in a personal trust[124] is defined in the Income Tax Act as a right (whether
immediate or future and whether absolute or contingent) of the taxpayer as a beneficiary under a
personal trust to, or to receive, all or any part of the income of the trust.[125] Furthermore, the
meaning of "income" in the context of that interest refers to income computed without
reference to the provisions of this Act.[126] In consequence, the Act recognizes that the tax
impact of the rights of the beneficiaries of a personal trust must take into account the trust
relationships established under the private law, i.e., the Civil Code in Quebec and the common
law in the other provinces. It also flows from this that the distinction between the beneficiary of
the income and the beneficiary of the capital of such a trust does not fall in the jurisdiction of the
I.T.A.
However, the kind of interest held by the beneficiary of a personal trust is a fundamental element
that is used in the application of a number of tax provisions. For example, the treatment
provided for a disposition of an income interest differs from that reserved for a disposition of a
capital interest.[127] At this point it becomes worthwhile to see whether reliance on the private
law to define the nature of such interests is a source of differences between a Quebec personal
trust and a common law personal trust.[128]
4.1. SPOUSAL AND SIMILAR TRUSTS
If there is any situation where the differences between an income interest and a capital interest
may have significant consequences, it is where a trust is created for the exclusive benefit of a
spouse pursuant to subsections 70(6) or 73(1.01) I.T.A. The Income Tax Act requires that all
the income be allocated and paid to the spouse by the trust, whereas the capital, depending on
the settlor's wishes, may either be paid to the spouse or retained for the benefit of other
beneficiaries although the latter could only receive it after the death of the spouse beneficiary.
The same problematic is applicable to the other trusts mentioned at subsection 73(1.01) I.T.A.
since, in order to qualify for the rollover, they are subject to the same kind of requirement
regarding the income from the trust; accordingly, the comments below will apply to them as
well.
Income is defined in the Act as having the meaning it has in private law,[129] but does not
include a dividend from a capital dividend account.[130]
Whether a trust for the exclusive benefit of a spouse qualifies for a tax rollover is described as a
question of law and not as a question of fact.[131] In other words, what counts are the
provisions of the trust deed and the rights it creates for each beneficiary, not whether the
administration of the trust complies with the trust deed.
For example, when a testamentary trust provides that all the income must be paid to the
surviving spouse with encroachment upon the capital in the latter's favour only if necessary, a
rollover is allowed in the terminal year. After that, the trustee should question himself every year
to whether he has an obligation to pay such and such an element to the spouse. If he mistakenly
characterized an income element and concluded that it came from capital or vice versa, there
would be no effect on the tax rollover previously obtained. At most, the trustee might incur his
liability relating to the beneficiary.
To make his task easier, there is no reason why the trust deed cannot provide that the trustee
will have the power to decide that doubtful elements will be considered as income. This, in fact,
complies the obligation to pay all the income, at least, to the spouse. A clause providing for the
opposite, permitting the trustee to deem that an income element constitute capital should be
avoided, however, because of the risk that the rollover will be denied, although according to
caselaw when such a clause cannot be arbitrarily invoked and cannot have the effect of reducing
the amount of income to be paid to the spouse, it will not disallow the rollover.[132] It must be
noted that if it can be anticipated that such a clause will have so little effect, there is no reason to
add it to the trust deed.
The real difficulty in the Act's reliance on the private law to determine the nature of income and
capital in this context,[133] arises from situations where the settlor does not want to limit himself
to stating a general principle to the effect that the spouse is entitled to all of the income, or does
not want to give the trustee the discretion to distinguish between income and capital because of
the size of the particular element to be characterized. When this happens, the settlor insists on
including in the deed detailed descriptions of the elements that must go to the spouse. Since grey
areas are encountered when determining the nature of certain elements, the inclusion of such
particulars may endanger the status of a spousal trust, not because they are visibly at odds with
tax policy, but because of the difficulty of properly identifying what constitutes all of the income
of the trust. It is clear that uncertainty about the distinction between income and capital is not
confined to the civil law. Since, however, the process of characterization is approached
differently in the civil law system, it is easy to imagine that the same particulars in a trust deed
could prevent a rollover in a civil law jurisdiction but not in a common law jurisdiction and vice
versa.
We will illustrate the problematic with an example in which the possibility of using a
shareholders' agreement or other solution to achieve the desired result is not considered. Those
solutions are set aside so that we can focus solely on the difference in meaning between a
requirement to distribute all the income to a spouse under the common law compared to the
same requirement in the civil law.
The example is drawn from a consultation with a client of the writer:
The principal shareholder of a private company (Opco), whose shares are held by a
holding company (Holdco), wants to make a will and take advantage of the spousal
rollover. He wants to safeguard his second wife's standard of living by giving her the
income received by the spousal trust, while at the same time he wants the Opco shares,
or the proceeds of disposition, to be kept so they may be given to his children on the
death of his wife. The problem is to draft a clause that will meet the requirements for a
spousal trust while respecting the client's desire to conserve the shares for his children.
Two choices are available to the person drafting the will: safeguard the rollover by providing that
nothing is to deprive the spouse of her right to the income, thus reducing the chances that the
shares will be handed over to the children; or safeguard the transmission of the shares to the
children and increase the risk that the rollover will not be permitted.
If the second option is chosen, a clause in the spousal trust could state that, notwithstanding any
other provisions in the deed, the Opco shares, as well as any property acquired by
reinvestment, are to be preserved for the children. Even if on the face of it those elements are
capital, the use of such a clause could raise a doubt as to whether some of the income would
reach the spouse because of the various forms in which the proceeds of disposition of the Opco
shares could be distributed to the trust. In short, could the eventual distribution of the Opco
shares to the trust be considered as in the nature of income and so endanger the rollover?
Before we can argue that the problem is real and that the situation can vary from province to
province, we must examine the definition of income in private law.
4.1.1. Distinction between income and capital
The civil law classifies as income[134] product of agriculture and raising of animals, rents,
interest and dividends, except those representing the distribution of capital of a legal person.
Also defined as income are sums received by reason of the resiliation or renewal of a lease or of
prepayment, or sums allotted or collected in similar circumstances.[135]
According to the Civil Code, capital, apart from the undiscussable elements, includes the
reinvestment of the fruits and revenues, the price for any disposal of capital or its reinvestment,
and expropriation or insurance indemnities in replacement of capital, as well as rights of
intellectual or industrial property and rights the exercise of which tends to increase the capital,
such as the right to subscribe to securities.[136]
The nature of dividends is especially important in our example. According to the above-
mentioned articles, dividends supposedly constitute income, except those representing the
distribution of capital of a legal person. But since the reinvestment of revenues is capital in
nature, would the nature of the revenue from a dividend be limited to the profits, interest and
dividends earned in the year?[137]
The Civil Code articles could be viewed as a reflection of earlier case law since they do not
specify the kind of situations in which the distribution of a dividend becomes capital. Before the
new Code came into force, the Quebec Superior Court, in Munro v. Common,[138] had had
occasion to decide that the proceeds from the sale of a building earned by a corporation which
had subsequently distributed them to a trust were in the nature of income. The dividend had
been paid in cash and did not constitute proceeds of liquidation nor did it alter the corporation's
capital account, since the sale of the building had been accounted for as retained earnings. In
reaching this conclusion, the judge relied on arguments imported from the common law. In
another decision based on the common law, Trust Général du Canada c. Maillet,[139] it
was held that a stock dividend followed by a share redemption in the same year was a capital
dividend.
However, while a number of Civil Code articles were intended to codify the earlier law, the
definitions of fruits and revenues are qualified as new articles.[140] This confirms that earlier
cases will not necessarily be of much use. If the new articles had been applied in those cases
the results might have been different. The distribution of the proceeds from the sale of a building
would have been capital. The stock dividend would have been income if it was for the purpose
of distributing the earnings for the year.
With regards to the common law jurisdictions, Professor Waters reported in 1984 that the
Supreme Court of Canada had established that the factor that determined the nature of a
dividend was the form chosen to pay it (the form rule) and not the intentions of the corporation.
The form rule was commented by Professor Waters as follows:
It is not a matter of real character and substance. Whether a distribution is income or
capital is determined by the company's mode of doing things, for whatever reason it
chose that mode. As Rand J. said in Re Waters "Here form is substance." [141]
According to this test then, dividends in cash or in kind are income, even if the dividend was
extraordinary and resulted from the distribution of a capital gain, whereas what constitutes
capital are capital reductions, share redemptions, as well as stock dividends except in the case
where an option to receive an equivalent amount of money has been offered.[142]
The difficulty of deciding whether the Civil Code codified the form test or has basically
distanced itself from that test arises, as we noted above, from the fact that it offers no examples
of what it considers to be a dividend from the distribution of capital.
By grouping the opinions of some of the civil law authors who have written on this subject
together with Water's description of the form rule, this is how the various kinds of dividends
might be classified depending on the jurisdiction:
Elements
Civil Law
Common Law
Cash dividends
Income, unless there is a disposition of capital ( ? ? ?) (does this then go into the capital
reduction category?)
Income (the form of the dividend determines its nature even if it comes from the sale of a
capital)
Dividends in kind
Income a priori
Income
Capital reduction dividend or winding-up dividend
Capital[143]
Capital[144]
Stock dividend
Income a priori ?[145]
Capital a priori[146]
Deemed dividend s. 84
Capital[147]
Capital
It must be remembered that so far legal doctrine is far from unanimity, as shown in the following
two opinions, and there are still no cases clarifying the meaning of the new Civil Code articles
for knowing whether they are really different from the common law.
Me Dominique Lafleur analysed these articles and reached the following conclusion:[148]
[TRANSLATION]
In our opinion, the C.C.Q. has only resolved the classification of cash dividends and
winding-up dividends, and not all the other kinds of dividends. The latter should be the
subject of an examination on the part of the trustee.
In examining the said dividends, will the trustee have to consider the form test as was
done under the C.C.L.C.? We believe that this question should be answered in the
affirmative.
Taking a different position, Me Fortin is rather of the opinion that the common law form test
should no longer be used to decide if a dividend represents a distribution of capital.[149] He
offers examples in which the distribution of dividends to the trust from elements that would
constitute capital for the corporation, for example, a contributed surplus from a rollover with
low paid-up capital, or a step-by-step liquidation, would be capital. He also questions whether
retained earnings that are not distributed in the year they are earned would become capital.
Although the Civil Code seems to have adopted a test that is more substantive than the form
test, we do not think that Quebec courts will go as far as Me Fortin suggests in differentiating
the civil law from the common law. If not, only the dividends from the earnings of the year will
be characterized as income, whereas the Civil Code actually appears to treat dividends first
and foremost as income, with capital being the exception.
To return to the Opco example, in view of the various forms that the distribution of an affiliate's
shares or the proceeds of its disposition to the shareholders of the parent company may take,
the
settlor of a common law trust cannot claim that the trust is in a position to distribute all of the
income to the spouse if he prohibits the distribution of the Opco proceeds of disposition.
However, the development of the Quebec jurisprudence[150] might allow such a clause. On the
other hand, a clause in a trust deed that applied to stock dividends could affect the capital under
the common law and the income under Quebec law.
4.1.2. Solution for the spousal trusts
We suggest revisiting the requirement for spousal trusts that the income must all be payable to
the spouse. As we have seen, it causes discrepancies in the tax treatment of spousal trusts
because of the varying definitions of income in civil law and common law provinces. In our
example, for instance, the common law may find it more difficult to admit that a restriction on the
business distribution is not equivalent to limiting the spouse's income. If it were possible at least
to provide that certain elements are to be considered as capital by the trustee, then civil and
common law jurisdictions alike could make up for the uncertainties in each legal system and, in
our example, better meet the testator's desire to protect the value of his business for his children
without endangering the rollover.
We make this suggestion since we realize that, in any case, the requirement to pay all the income
to the spouse no longer ensures that the income will be taxed in the hands of the spouse in view
of the tax options[151] now available to the trustee, nor does it ensure a minimum income for
the spouse, since the income depends on the kind of property owned by the trust. In a trust that
holds shares of private companies or a portfolio of securities, it goes without saying that the
income does not represent all the earnings. One only has to realize that the capital gain is
unquestionably capital to understand that an important part of the increase in value does not get
to the spouse.
Among other things, this explains why encroachment upon the capital is usually necessary to
ensure a minimum return to the spouse.
We do not see what would be the harm, in terms of tax policy, in incorporating the principle in a
spousal trust that the capital, as of the time the trust was constituted, plus property acquired by
reinvestment, could be preserved for the children. At the present time, if this principle is included
it should be accompanied by the stipulation, in order to allow the rollover, that it must not have
the effect of depriving the spouse of his or her income. This is not very reassuring for the
testator.
In view of the flexibility of the taxing sections that allows the income to be taxed either at the
trust level or at the level of the spouse, we believe that the requirement to pay all of the income
to the spouse has become obsolete and should be replaced by a requirement providing that "any
payment" from the trust to the spouse must be made to the spouse during his or her lifetime and
that no one else may receive anything whatsoever before his or her death. This change would
solve two problems that arise in drafting and administering the trust: (1) the difficulty of
establishing whether certain elements are income, which would decrease the trustees' level of
liability, and (2) the differences that will apparently continue to exist between the civil law and
the common law in interpreting the concepts of capital and income.
If the objective is just to deal with these differences, consideration might be given to defining all
the elements that are to be regarded as income for the purposes of getting the benefit from the
rollover. This would also let the drafters include the necessary details in the trust deed although it
might further widen the gap between the private law and tax law.
4.2. Income vs capital - other aspects
4.2.1. Income payable
A precise definition of income and capital is needed to compute the trust's annual income taxes.
Once it has been determined to which beneficiary each element of the taxable income is
payable,[152] because the beneficiary is entitled to enforce payment of the amount, the effect of
the determination is to make it possible to tax the beneficiary on these amounts while allowing
the trust an equivalent reduction in the taxes it owes.[153]
However, in view of subsection 104(13.1) I.T.A., the tax reduction given to the trust cannot
exceed the beneficiary's share of the taxable income without reference to the Act. The purpose
of the subsection is to allow income to be retained in the trust so that its non-capital losses,
which are frozen in, can be used. Subsection 104(13.2) allows the same exercise for the trust's
taxable capital gains so they may be used against such losses.
The problem relating to the definition of income and capital here lies in the difference between
income for tax purposes and income as defined in private law. Once the difference has been
identified, which is not always easy, the distortions it causes in terms of the overall taxation of
the trust and its beneficiaries become apparent.
Example: the taxable income of a trust is $150,000, but its civil income is $140,000.
If all of the income is payable to a beneficiary, he could claim $140,000 and pay taxes on that
amount. The deduction allowed at the level of the trust will also be $140,000, but the trust will
have to pay the taxes on the $10,000 difference between the civil income and the income for tax
purposes, and it could be taxed on this amount at a higher rate.
If the trust wanted to pay taxes on this income, it could only do an election on the $140,000,
which is the amount that must be paid to the beneficiary. At the civil level, the taxes not related
to the income will have to be paid from the capital.
Example: this time, it is the civil income of the trust that stands at $150,000, while the income for
tax purposes is only $140,000.
Since the beneficiary is entitled to $150,000, $140,000 can be deducted from the income of the
trust and taxed in the hands of the trust as an amount payable, but the $10,000 will be taxable
as a benefit under the trust pursuant to subsection 105(1) I.T.A. Therefore, there will be no
double taxation in respect of the $10,000, which came from the trust, even though the trust can
deduct only $140,000 from its income under subsection 104(6) I.T.A.
The difference in these concepts does not create any serious problems here. It is certain that
there can be argument among the beneficiaries to have their right to a particular element of
income recognized, but this is a private law problem. Since, generally speaking, the trust deed
may provide that a specific element will go to a specific beneficiary, even if there are differences
between the two kinds of jurisdictions, this will not in itself cause significant inconvenience. If a
cash dividend from the distribution of a capital element is income under the common law and
capital under the civil law, this will definitely give to the Canada Customs and Revenue Agency
some difficulties as well as the trustees; since the level of taxation will have to respect this
characterization, but it will not necessarily lead to unfairness because the level at which the taxes
are assessed will be a direct consequence of the respective rights established between the
beneficiaries.
4.2.2. Losses
When the Act deals with income, losses are also involved. Me Guy Fortin,[154] has pointed out
a double taxation situation that could occur in civil law from the use of losses. It stems from the
difference between income and capital.
In his opinion, since a business loss would, under the civil law, be in the nature of a capital
loss,[155] its application against other trust income could mean that the income for the purposes
of tax would be not as high as the civil income. The beneficiary would pay tax on the excess
received by virtue of subsection 105(1) I.T.A. Thus, the loss would only serve to reduce
income that would not have been taxed at the level of the beneficiary if there had been no
distribution.
Example: assuming income for tax purposes of $50,000 reduced by a business loss carryover of
$30,000, the recipient of the income would receive $50,000 and would pay tax, on the one
hand, under subsection 104(13) I.T.A. on $20,000 and, on the other hand, under subsection
105(1) I.T.A. on $30,000.[156] Given the conduit role played by the trust, there would be
double taxation for the income amount representing the loss used.
In common law , the business loss would instead, under the normal operating circumstances of a
business, be a loss chargeable against income.[157] The amount going to the beneficiary would
be reduced to $20,000, and the loss would reduce efficiently the overall tax burden.
The solution considered earlier in this chapter: identifying exactly what elements constitute
income and what constitute capital for tax purposes, would not help matters since the question
here is to reconcile the level of taxation with the rights of each beneficiary under the private law.
Thus, in our example, the tax law cannot change the civil law beneficiary's right to income and
reduce it to $20,000, as in the common law, supposing that Me Fortin's thesis is to be
accepted. The tax law can, however, alter the negative consequences of the difference in
softening the rules for using losses to make them more flexible by extending the period during
which the losses can be used, in hopes that civil law trusts can apply them against the capital
gains (to avoid putting the capital beneficiary at too great a disadvantage).
4.2.3. Nature of expenses
Analysis of the attribution of expenses to income or capital is complementary to the concept of
income. Article 1345 of the Civil Code provides that the trust deed takes precedence in this
regard if it contains clauses specifying how the apportionment is to be made. In the absence of
sufficient indication, the apportionment is made equitably, taking into account the object of the
administration, the circumstances and generally accepted accounting principles. After having
expressed these principles, the Civil Code provides examples of what the results of applying
these practices should be.[158]
At this point, it should be asked whether the apportionment provided for in the trust deed would
be valid from a tax standpoint. Although the Civil Code also refers to the deed in order to
establish the apportionment of profits as well as expenditures,[159] we believe that a distinction
should be made here between the two cases. In contrast to apportioning expenses between
capital and income, we do not think that under the civil law the trust deed can change what is
represented by income since that term is defined elsewhere in the Code. Thus, even if the settlor
is allowed to specify or modify in the deed who will receive a particular profit, the intrinsic
nature of this profit as income or capital is determined by the Code. That reasoning seems not to
apply to the apportionment of expenditures, according to the wording of articles 1346 and 1347
C.C.Q.[160] In this regard, the Civil Code does not provide a definition but does reflect
generally accepted accounting principles.[161] However, recourse to those principles seems to
come far behind the trust deed in terms of respecting the apportionment.
The situation seems fairly similar in the common law. On this subject, Waters wrote:
Nevertheless, it is always open to the testator or settlor to say how burdens are to be
borne, and his intentions will govern. It is only where he says nothing on the matter that
the general rule takes effect.[162]
It is only where there are no indications in the deed that the nature of the expense will determine
whether it should be charged against income or capital.
A number of the distortions between civil income and taxable income results from the
differences in the kinds of expenses allowed by each. The distortions may lead to unwanted
results, such as taxing at the level of the trust without a possibility of transferring the additional
taxable income resulting from a lower depreciation expense to the income beneficiary.[163]
To avoid unfairness among the recipients of income or capital with regard to the depreciation
expense, Me Lafleur offers the following recommendation:
[TRANSLATION]
Thus, in order to simplify the administration of the trust, it would be helpful to provide
that the civil depreciation to be deducted from the civil income must be equal to the tax
depreciation claimed under the Act.[164]
Apportioning expenses in this way will have to be respected by the tax authorities since, in
referring to the private law concept of income, the Income Tax Act indirectly introduces the
possibility of relying on the trust deed for clarification regarding the apportionment. Obviously,
this cannot be done where the tax trust is not created by a legal document, as in a succession by
intestacy or when the deed is silent on the question of expenses. However, taking these
possibilities into account, although the same expense can receive different treatment under the
private law, comparing the case law from the common law provinces with that of a civil law
province, we do not think that changes in tax law are warranted since the trusts deeds
themselves can resolve the issue.
Thus, if the principle is to be followed that the terms of the trust deed take precedence in
characterizing an expense, we even think that the above clause proposed by Me Lafleur could
find a place in a trust deed for the exclusive benefit of the spouse, without having the effect of
limiting the latter's right to the income, either in the civil law or in the common law. From this to
recommend it is something else.
To ensure this result and to avoid having to deal with an opinion to the contrary, the government
should make it clear that it will respect the predominance of the trust deed in the apportionment
of expenses.
4.3 Conclusion
Since the tax system is only accessory to the transactions and the rights of the parties, it is
perfectly legitimate to use the private law to evaluate what proportion goes to the income
beneficiary and what to the capital beneficiary. However, if the private law is ambiguous, this
necessarily has repercussions on the application of the tax legislation. To provide for a parallel
system who defines income and capital for tax purposes could have the effect to usurp
provincial jurisdiction in this area since, for the sake of simplicity, the drafters of trust deeds will
certainly take the prudent course of shaping their deeds in accordance with the tax definition,
thereby resulting in a loss of interest in the private law definition. This phenomenon can be
verified particularly with the concept of foundation recently developed in the civil law,[165] the
utility of which is limited since the criteria for a tax foundation are specific and cannot be
circumvented.
It is certain that the differences between civil income and tax income are of a nature to create
difficulties of application and double taxation. However, these problems are as widespread in
the common law as they are in the civil law. A more annoying difference in these jurisdictions is
the different treatment that the same element of taxable income may receive, but since that
difference generally translates into different rights for the beneficiaries, a solution is very difficult
to find.
The situation with a spousal trust is somewhat different in that the discrepancies in the definitions
of income and capital can endanger the rollover of property to such a trust. In this regard, we
prefer the solution of amending the requirement that all the income be distributed to the spouse
and replacing it with a more flexible requirement that all distributions by the trustee be made to
the spouse during his or her lifetime, without the need to distinguish between income and capital.
An other alternative would be to revisit the definition of income in the Act and have it specify
how the various dividends are to be characterized. This approach is not without interest. We
have discussed in the introduction of this chapter of the different tax treatments on the
disposition of property to a beneficiary in exchange of the disposition of his or her interest in the
income or in the capital. The former constitutes taxable income while the latter benefits from a
rollover.[166] We could imagine a family trust deed providing that a beneficiary would receive
one element of the family's assets (e.g., all stock dividends), which, in one jurisdiction would be
considered income and in another, capital. The tax treatment resulting from this difference would
vary significantly. Under the second option, a definition of the nature of dividends would be
added to the Act, which could resolve these differences, since basically this is the kind of
element that poses the most problems.
It should be noted that both alternatives could be applied.
5. Investment trust for A minor child
The concept of the Quebec trust is under attack when it is used as a vehicle to hold investments
on behalf of minor children.
This kind of trust is or has been used in the following circumstances:
* to place the tax burden of the realization of the capital gains on the child;
* to isolate the child tax benefits (as well as the allowances paid at birth and the former
family allowances) and thus avoid the income attribution rules and the capital gains
arising from the benefits; and
* to avoid being subject to the tutorship rules and being limited to investments presumed
sound.
5.1. Tutorship vs trust
The first thing to note is that the tutor of a minor child cannot, in Quebec, make any investments
except those "presumed sound"[167] at the risk of incurring liability for any losses.[168] Where
financial institutions serve the interests of a minor, we have noted that they often regard it as their
duty to ensure that this protective rule is followed, probably to avoid incurring liability
themselves.
The law does not require a trustee to abide by the presumed sound investment rule,[169]
although a trustee who did comply with it would be deemed to act prudently.[170] The trust
deed usually provides that the trustee is not required to limit himself to such investments. Unlike
a tutor, a trustee may make more volatile investments, which are more likely to generate a
capital gain that escapes the attribution rules.
5.2. Types of accounts
In view of these factors, the options that are available in choosing the name in which an
investment account for a minor child should be opened are the following:
1. In the name of a traditional trust prepared by a lawyer or notary on the settlor's specific
instructions;
2. Directly in the child's name;
3. In one of the parents' names "in trust"; and
4. In the name of a trust constituted on a form supplied by a financial institution.
5.2.1. Traditional trust for a child drafted on instructions by a lawyer or
notary
This is the safest approach to take in order to avoid tax and legal problems. The trust deed will
contain clauses concerning the use of the income and capital, the appointment of the current and
contingent beneficiaries, the appointment of one or more trustees, as well as the method for their
replacement and a number of additional administrative details. Depending on the complexity of
the situation, the professional fees to establish such a trust are around several thousand dollars.
Obviously, the portfolio to be administered must be large enough to justify such expense.
Therefore, in Canada, many investments are made on behalf of children that will not benefit from
this type of deed and consequently from the advice of a tax expert. These are primarily the ones
that are likely to cause problems.
5.2.2. Opening an account in the child's name
This type of account ensures that the funds are clearly recognized as the child's property and
that a genuine transfer to the child has taken place. However, financial institutions usually refuse
to create such an account in order to establish a portfolio of growth investments in a minor's
name, partly because of their policy of complying with the presumed sound investment rule.
Accordingly, this kind of account is not used to generate capital gains since it cannot be used to
get around the tutorship rules. However, such an account could be used to deposit the child tax
benefits directly. We will examine this point in section 5.3 below.
5.2.3. Opening an "intrust" account in the parent's name
It is in connection with this kind of account that there is the most confusion, a fact that can be
judged by the recent recommendations of a journalist who is an expert on finance,
administration and economy:
[TRANSLATION]
Many parents will prefer to use a trust account to save money for their child. We are
not talking here about a trust as such but an account that receives funds on behalf of the
child. It must be remembered that the income earned in such accounts is, for tax
purposes, attributed to the taxpayer and must be reported every year.
There may be some exceptions for capital gains that allow the income to be split between the
taxpayer and the beneficiary. But the exceptions are strictly regulated and usually involve a
deemed disposition at fair market value when an asset is transferred to the child's
trust.[171](Emphasis added.)
This kind of account, called for example "(name of the Parent) in-trust account", is often used by
parents to show that the account does not belong to them, even though it remains in their name
because of the minor's incapacity to administer it. There are two obstacles that are increasingly
leading financial institutions to refuse to have it count as a trust. First, civil law cases have
recognized that the divestment required to circumvent the attribution rules is not automatically
brought about by adding a notation to the effect that the funds are deposited in the name of
another person, in this case, the child. The ownership of the amounts may remain in the hands of
the account holder and not in those of the presumed beneficiaries if there are no other elements
to confirm the divestment.[172] Second, even if there is a notation referring to a trust patrimony,
such as "Parent in trust for child", where the notation is not supported by a written trust
instrument, the account could prove problematic both in terms of taxes and in terms of knowing
the exact role of the stakeholder in the account and his capacity to make all the decisions
relating to it.
Professor Cantin Cumyn[173] has made a number of observations concerning the "in-trust"
designation, which may be summarized as follows:
* The usage comes to us from the common law provinces and it did not give rise under
the old Civil Code to particular legal consequences;
* Under the new Code, a trust requires a transfer and cannot be constituted by unilateral
declaration; therefore, the notation "in trust" is not sufficient to constitute a trust;
* The notation can refer not only to the fact that one is acting as trustee but also as any
other kind of administrator of another's property (e.g., tutor, testamentary executor,
agent), or that one has divided his own patrimony to appropriate it to a specific
purpose;
* However, the notation can constitute evidence of this administration or this purpose;
* To avoid confusion, the use of the terms in trust should be reserved for genuine trusts
and the expression "ès qualités" [in one's capacity as] should be used in the other cases.
The Agency has explained its position with regard to such accounts, but it is not necessarily
applicable to the civil law as we can judge by this excerpt of a Technical Interpretation:
In that most "in-trust" accounts do not satisfy the requirements needed to be an actual
trust, we shall presume the arrangements established for your grandchildren are not
trusts in the legal sense but were established so that your grandchildren are the beneficial
owners of the mutual funds that were placed in your name.[174]
In civil law, the possibility of making a person the beneficial owner of a property while the
settlor retains the legal title to it does not exist. Only the legal institution of the trust can achieve
an equivalent result.
An "in-trust" account has also been interpreted in common law as creating an agency
relationship[175] rather than a trustee relationship. Since the owner of the account is then acting
on behalf of the child, the capital gain may be taxed in the child's hands as desired. Professor
Waters, in differentiating between trust and agency alludes to the possible existence of a self-
imposed agency.[176] Transposing that interpretation to Quebec, the only cases where a
person may declare oneself to be the administrator of a minor's property are the tutorship of the
parents and the management of the business of another.[177] In both cases, however, the
person who acts as an administrator has only the powers of simple administration and must
therefore comply with the presumed sound investment rules.[178]
Thus, some financial institutions understandably refuse to open an intrust account for growth
investments that would generate capital gains, offering instead to the parents the option to duly
constitute a trust with a form supplied by them.
5.2.4. Trust constituted on a form supplied by the financial institution
If the mention "in-trust" on an account may create a problem, it is perhaps a better solution than
the trust constituted on a form issued by a financial institution. A number of parents
unhesitatingly sign such trusts (hereinafter called "bank trusts") without consulting a legal expert
to find out what their effects are. They probably have the impression that their signature is of no
more consequence than it is on a form to open an account or to purchase mutual fund units, but
when they sign the bank trust form, a genuine trust is constituted between parent and child. This
has significant consequences of which the parents are doubtless unaware, including the fact that
this trust deed cannot be varied contractually. The provisions it contains could become a
problem until the time the child is old enough to receive the funds under the trust. For example,
we have seen that a trust deed provides that the trustee could not change the financial
institution… To modify that clause, one has to go to court!
Other particular features are directly imported from the forms used in common law jurisdictions,
which justifies their inclusion in this study. The use of such forms seems to be common among
our neighbours, and their legal system has developed a set of implied rules for such contracts
that may be different or absent in civil law. For example, we have seen a bank trust provide for
giving the property to the child's heirs in the event of death. However, if this form creates a real
trust, the reference to heirs constitutes a power of appointment that may be illegal in
Quebec.[179]
If the effect of the civil law is poorly understood in this case, what can be said of the tax aspects
of such transfers! Financial institutions often rely on their financial advisers to help their clients
complete the blanks on the form. Even though it is quite short, the bank trust deed usually
contains non-liability clauses for the financial institution with the recommendation that a specialist
be consulted. The individual's confidence in the financial institution and the amounts at stake
mean that this recommendation will probably not be followed so it should come as no surprise
that the choices made by the parents on the form are downright disadvantageous from a tax
point of view. The basic rule that the settlor must not be the only trustee of the trust in order to
comply with the civil law and avoid any application of subsection 75(2) I.T.A. might thus not be
followed. Consequently, by using this trust not only would the parent not succeed in splitting the
capital gain, because the gain will be attributed to him, but he might also trigger tax on the
portfolio gains when the trustee distributes the capital to the child at the age of majority.[180]
Furthermore, in order to achieve the objective of splitting the capital gain, one of two courses
must be followed: either the form must provide a possibility for the trustee to pay the capital gain
to the child every year -- if not, the gain not attributed to the parent under subsection 75(2) will
be taxed anyway at a very high rate at the level of the inter vivos trust -- or the strict rules in
subsection 104(18) I.T.A. must be followed, which deem that certain amounts are payable. A
mere notation that all income is to be distributed to the child is not sufficient in this respect since
a capital gain is not income.[181]
Parents who have made or will make transfers to this kind of trust are at risk of being assessed
not just on the capital gain realized plus interest and penalties, but also on the gain not yet
realized when it comes time to end the trust.
We should mention that all these tax problems can also arise in common law since the cause of
the problem lies not only in the differences between the common law trust and the civil law trust,
but also in the application of those differences in a Canada-wide banking system in conjunction
with the tax system.
It is hard to reproach parents for their conduct, especially when the information circulated in the
specialized media, as well as that provided by the financial institutions, urges them to rely on this
vehicle as if no problems were involved.
5.3 Canada child tax benefit
The Canada Child Tax Benefit, which used to be paid as a family allowance, is now given
special tax treatment, which adds to the confusion surrounding investments on behalf of children.
Under certain conditions, the benefit amount is distinguished by the feature that it is not covered
by any of the attribution rules, either in respect of the income or the capital gain. The situations
under which one could benefit from this exception arose from administrative practice and were
formerly listed in Information Circular 79-9R.[182] They may be summarized as follows:
1. The allowances are deposited in a bank account in the child's name;
2. The allowances are paid into an "in-trust" bank account whether or not the child's name
is mentioned;
3. The allowances are invested otherwise than in the child's name and the investment can
easily be designated as the child's property; and
4. The deposits are made to the parents' personal account, but on an exceptional basis it
can be shown that the interest comes only from the interest on the allowances and the
parents may later show that the capital is incontrovertibly intended to meet the future
needs of the child or children.
In brief, in order for the attribution rules not to apply, it sufficed to separate the family
allowances from the parents' other assets and identify the intention to have these amounts
earmarked for the children. It was also recognized that these amounts could be used to
purchase, in the children's names, the common shares of a private company on the occasion of
an estate freeze without triggering the attribution of the dividend income to the parents.
When the new Canada Child Tax Benefit legislation replacing the universal federal family
allowance plan was introduced, this exception was directly incorporated into the Act as
subsection 74.1(2) I.T.A., and Information Circular 79-9R was withdrawn.
In his notes to this subsection of the Act, David Sherman wrote as follows:
[TRANSLATION]
It provides for (the exception) that the child tax benefit may be paid to the children in
respect of whom it was paid; it operates to allow the benefit to earn income that will not
be attributed to the parents. Revenue Canada had long applied this administrative policy
with respect to family allowances paid before 1993. […][183]
It seems, however, that the legislative provision is less generous than the statements contained in
the Circular in that the parent is required to make a transfer to the child in order to use it and
cannot simply open a separate account that specifies that the money is saved for the child and
that withdrawals are made only to meet the child's needs.
In practice, how can a parent make the transfer referred to in subsection 74.1(2) I.T.A.? The
simplest method would be to set up an account in the child's name into which the benefit would
be paid directly. However, the internal policy of the financial institution might not permit such an
account to be opened; some refuse to open an account in the name of a newborn infant,
preferring to have it in the name of the parent. This is even truer because this solution will cause
problems when a second child is born. How can the direct payments be apportioned? By
withdrawing and depositing amounts to equalize the total in a new account for each child? This
could become a real head breaker because how can the fact be taken into account that one
child is older or that a third child increases the amount of the benefit? A single general account is
much simpler, since the total can be divided later into three parts and, if brokerage fees must be
paid, the more accounts there are, the greater the fees.
Some institutions will agree to having this account constituted for the benefit of present and
future children and let it be called something like "parent in trust account", allowing one to
specify on the form on whose behalf the parent is acting. But since the realisation of the transfer
might then be attacked, as discussed in section 5.2.3 above, it could happen that the parent
would be considered the owner of whatever taxable income is earned in this account.[184] If,
on the other hand, a transfer to a real trust was recognized, the scrutiny might turn towards the
possible application of subsection 75(2) I.T.A. followed by the application of subsection
107(4.1) I.T.A. when the capital was distributed, based on an analysis similar to the one made
earlier.[185]
It is true that this kind of account will not generally involve significant amounts, especially in view
of the fact that high-income taxpayers for the last few years are no longer entitled to receive the
benefit. However, to the extent that the accumulated amounts are then invested in more growth
investments, we can think that the amounts accumulated by the end of ten years, say, for several
children could be quite interesting, especially if Quebec's family allowances plus the allowances
for new-born children are included. Obviously, this scenario assumes that payments from the
Government of Quebec will benefit from the same administrative policy, although the policy is
not explicitly reflected in federal or Quebec legislation.[186]
The basic purpose of this discussion was to situate the issue of tax benefits in the chapter on
investment trusts for minor children so that their special features would be taken into account in
developing any amendments. The question seems of more importance for past situations than for
the future since such benefits are now paid only to low-income and medium-low income
families. Income splitting would certainly not be their primary concern.
Two alternatives could be considered:
* Combine treatment of the tax benefit with the solution chosen for other kinds of
children's accounts;
* In future avoid transfers and hence any discussion about the attribution rules by letting
the parent choose whether the amounts would be paid directly to her child or children.
The fact that the child owned the amounts would make him liable to pay income tax or
capital gains tax.[187]
5.4 Proposals to promote consistency in the use of child investment trusts
In their attempts to translate common law trusts into the civil law, financial institutions are
deforming the ownership relation over amounts that should belong to the children. Although the
Income Tax Act is powerless to solve the deficiencies in such trusts in law, it could be amended
so that a trust would no longer regarded as the only way to evidence a transfer to the child
without being restricted to presumed sound investments.
In our opinion, it should be acknowledged that the parent's retention of ownership over an
account for his minor children to allow growth investments is a simple method that is good for
the economy and one that merits encouragement. Direct ownership would avoid the expenses
and legal problems associated with setting up a trust as well as the unexpected application of
subsection 75(2) I.T.A. On the other hand, a good solution would not be one that prevents
parents from making direct transfers to their children or transfers through a traditional trust. The
solution proposed here should apply only to bank trusts and the so-called "in-trust" accounts not
supported by a trust deed. Lastly, there should be no costs or only minimal fees associated with
its use.
The objective would be to encourage financial institutions to stop requiring trusts and
taxpayers to preclude using trusts to invest cash earmarked for a minor child where tax
planning fees are not warranted.
If we correctly understand the basis of the Department of Finance's policy, splitting the capital
gain would be allowed to the extent that the property belong to the child. However, in view of a
minor's legal incapacity, it does not seem necessary for the property to belong to the child
before he reaches the age of majority, except to shelter such amounts from the parents' financial
problems. We do not think that this kind of protection is an essential element of income splitting,
and the concern to shelter the funds from creditors, including the Agency, could continue to be a
factor in deciding to use a traditional trust.
Since the purpose of these reflections is to discover legal and uncomplicated ways of
guaranteeing that ownership of the property would revert to the child when he reaches the age
of majority, but would meanwhile remain in the adult's name, we have selected two options: a
term gift or donation under the civil law and opening a specific government-sponsored account
that would be available all over Canada.
The solution sought is one that would guarantee the transfer of the property to the child
when he reaches the age of majority. The solution, because of the minor child's incapacity
to administer his property, would no longer require a direct transfer to the minor child in
order to benefit from the exception to the attribution rules.
5.4.1 Gift subject to a term
The government could simply decide that a gift subject to a term[188] from parent to child for the
amounts accumulated in the investment account would suffice to constitute a transfer and it
could recognize that the capital gain on such investments could be taxable in the hands of the
child. The parent would continue to be the legal owner of the account, but the effect of the gift
would be to create a commitment to return it to the child at a predetermined age, with the
possibility of reserving the right to make advance payments. Under Quebec law, such a gift
would have to be notarized and published, since it could not be accomplished by delivery. This
would have the advantage of ensuring its authenticity,[189] but the cost involved would be a great
deal less than the cost of preparing a personalized trust.
The first difficulty with this gift might be the absence of yet unborn children. We could consider
making the gift to the first child and imposing on him the responsibility of paying each brother
and sister a share equal to his when the term ends.[190] However, when the gift is with a charge,
the authorization of the tutorship council is required.[191] To avoid the additional fees this
represents, it would be better to have one child per account and make the appropriate transfers
accordingly.
Second, care must be taken not to draft the gift so that it amounts to a gift of future property,
which is null in such circumstances.[192] For example, we could not make a gift of amounts to
be received as child tax benefit payments. At first glance, however, we think that the gift of a
specific account, that is, the right to claim from the banking institution the amounts accumulated
in that account under the terms of a brokerage or banking contract, should be considered as
present property, even though the make-up of the account will be constantly changing. What is
involved is an assignment of right in a contract. However, the concept of gifts of future property
must be studied in depth before such a solution can be adopted.
The principal terms and conditions of the deed of gift could include something like this:
"Parent" gives immediately, but to take effect on the occurrence of the term established
below, the right to receive the amounts accumulated in the account established under the
terms of the brokerage agreement signed on XX with XXX and constitutes himself as
the debtor in favour of his child XX, herein represented by "Parent," his tutor.
Consequently, "Parent" promises to transfer this property to the child when the child
reaches the age of 21. The donor reserves the right to pay this gift to the child in whole
or in part before maturity.
5.4.2 Opening an account created by the government
To counteract recourse to bank trusts, allow funds to be invested without constraint and ensure
that the amounts will be distributed to the children, we thought that one person common to all
Canadians that could be used to hold such an account could be the Agency or the Government
of Canada! The account would be opened in the name of the Agency or the government and the
parent could make transfers to it and would be the administrator or agent with the power not
to be restricted to investments deemed sound. The form on which the account would be set up
would list its terms and conditions, including an undertaking that the Agency or the government
would distribute the amounts accumulated in the account to the child named on the account, no
later than the date on which he attains the age of majority. Advance payments to meet the child's
needs could be drawn from the account, and the agent could be asked to provide documents
supporting such withdrawals.
Obviously, this solution would not stand up given the many obstacles it would face. It would in
fact make the government responsible for accounts opened in the name of Canada's minor
children.
In a discussion with a government representative who explained these obstacles, she suggested
that similar results could be achieved by using something on the order of a "registered growth
savings plan for child." In our opinion, this would be worth exploring.
With a product entirely designed by the Department of Finance along the lines of a registered
education savings plan, every financial institution in the country could offer parents a vehicle
whereby they could transfer amounts to their children for their financial welfare. At the same
they could avoid the attribution rules when realizing capital gains but would not be restricted to
investments presumed sound since the parents would continue to be the owners of the amounts.
This plan would avoid the application of subsection 75(2) I.T.A. and would let the gain be taxed
in the hands of the child even though it was not paid to him. Ideally, it would also make it
possible to group several children together under one account in order to keep brokerage costs
down, and it would authorize withdrawals for the children's benefit on presentation of supporting
documentation.
This kind of plan has the advantage of being a simple alternative to the bank trust. It avoids the
costs associated with a deed of gift of property subject to a term and the future property
problem, while guaranteeing that the funds set aside for the exclusive benefit of the children
would be administered flexibly.
However, the use of a term gift or a special account first and foremost implies a policy decision
that capital gains can be taxed in the hands of the child, even where the transfer of the
ownership of the investment to the child is deferred.
5.4.3 The Canada Child Tax Benefit
As mentioned above,[193] we believe that any new measure should offer a solution that
includes this benefit as well.
It would be important to discourage people from continuing to use bank trusts to receive the
child tax benefit when the use of such trusts for other investments has been discontinued.
5.4.4 Immediate solutions
In the short term, a solution that would address the existing use of in-trust accounts and bank
trusts would involve a policy decision that provided very flexible guidelines for the tax treatment
of this kind of account.
The policy might include not having subsections 75(2) and 107(4.1) I.T.A. apply to such
accounts. Depending on the case, it could also ensure that capital gains would not have to
become payable before they can be included in the child's income to the extent that the form on
which the trust is constituted authorizes the distribution of civil income only and provides that
subsection 104(18) I.T.A. cannot be applied.[194]
The solution would involve taking the position that the funds are separate from those of the
parents and are deemed to belong directly to the children already for tax purposes.
This seems to emerge from the Agency's position affirming that in-trust accounts are often
considered mere agency relationships,[195] since the arrangement is often solely for the
purpose of making up for children's legal incapacity to enter into contracts.
6. MORE FOOD FOR THOUGHT
In addition to the illegality of an unlimited power of appointment, the mysteries of indefeasible
vesting, the impossibility of constituting resulting and constructive trusts, the distinctions between
income and capital and the pitfalls of bank trusts, the Income Tax Act contains many other
obstacles for taxpayers in a civil law jurisdiction. We have chosen to make a few comments on
the application of section 43.1 I.T.A., on trusts with a reversionary interest and bare trusts.
These points are not documented in the same way as the issues discussed above were and what
follows is only an overview of the problems associated with them and some solutions that might
offer rewarding approaches.
6.1. Section 43.1
At common law, it appears that only real property can be subject to successive interests, such
as a life estate and a remainder interest. Thus, it is permissible to give a charitable organization a
remainder interest in a real property, while retaining a life estate in it so that the property can
continue to be used by the donor during his lifetime. Subsection 43.1(1) I.T.A. makes it
possible, in such a case, to avoid a deemed disposition of the life estate retained by the donor.
Accordingly, the donor will be taxed only on the fraction of the value of the property that
corresponds to his gift and is the subject of the charitable donations credit.
Since these concepts do not exist in Quebec, it would be hard to apply them, especially since
subsection 248(3) I.T.A. has now clarified what tax treatment is to be given to dismemberments
of the right of ownership specific to the Civil Code.
However, the effect of subsection 248(3) I.T.A. is to provide for the deemed disposition not
just of the value of what is given, but of what is retained as well, since the creation of a
substitution or a usufruct or even a mere possessory right involves the deemed disposition of the
entire property that is its subject.
At an APFF Round Table, the author asked whether in Quebec it was possible to use the
exception in subsection 43.1(1) I.T.A. to avoid taxes on the interest retained when a gift over
was made. The answer of the Department of Finance was favourable[196] but so far there has
been no amendment.
We believe that this significant difference should be corrected as soon as possible.
6.2. Trust with a reversionary interest
We should admit having some hesitation in introducing this topic. The Act in any case is fairly
specific in subsection 75(2) I.T.A. in its definition of criteria for evaluating whether or not a trust
complies with the subsection, regardless of whether the trust is governed by the common law or
the civil law. However, civil law practitioners have the clear impression that the common law
concept of a revocable trust transcends this provision and should be a very important element in
interpreting this provision.
An example will illustrate our thinking.
To repeat the wording of the Act, subsection 75(2) I.T.A. applies according to the first test if:
Property is held on condition
(a) that it or property substituted therefor may
(i) revert to the person…
The restrictive interpretation provided by the Agency could make us believe that the key words
are "revert to the person" in order for subsection 75(2) I.T.A. to apply as soon as there is a
possibility that the trust property would revert to the settlor. This reasoning has, among other
things, led to concerns that article 1297 C.C.Q., which provides for an automatic return to the
settlor when there is no beneficiary, would trigger the application of 75(2) I.T.A., hence the
recommendation to provide a charitable organization to be the beneficiary if all the other
beneficiaries are dead, as in the following passage:
[TRANSLATION]
Finally, we should note that Revenue Canada takes the position in Interpretation Bulletin
IT-369R that subsection 75(2) I.T.A.. can also apply in cases where the property may
revert to the transferor as a consequence of the death of the last of all other beneficiaries
under the trust. Thus, the settlor's residual right to receive the trust capital under article
1297 C.C.Q. could, according to the tax authorities, trigger the application of
subsection 75(2) I.T.A. Therefore, in order to prevent this, it is recommended that it be
provided that the trust residue will be distributed to a charitable organization in the event
that no beneficiary is able to receive the capital.[197]
Why did the Agency not accept this reasoning, and stated instead that the article 1297 C.C.Q.
did not bring about the enforcement of subsection 75(2) I.T.A.?[198] Because the initial phrase,
i.e., "on condition" takes precedence over the rest. In our opinion, the settlor must have
explicitly included[199] in the deed a condition that, notwithstanding the transfer to the trust, he
personally reserves the right to revoke the trust by taking back his property or, on its
distribution, act as if he had not ceased to be the owner, thus reserving the right to take back the
property at his discretion or to exercise an unlimited power of appointment, or reserving the
power to dispose of the property as if the trust was only his agent.
The deed of trust should thus be the sole element to consider when determining whether the
settlor imposed such conditions to the trust on a way that it would correspond to a revocable
trust.
However, the absence of this concept in civil law and ignorance of the case law behind the
concept is a major handicap for civil law practitioners attempting to interpret its real meaning.
It is really strange that a few years ago the presence of this subsection in the Act did not bother
tax professionals in Quebec whereas it has now become a specter hovering over every trust
deed.[200]
This subsection should be rethought, at least to verify whether the terms it uses have the same
meaning and the same impact in the two legal systems.
6.3. Bare trust (Simple fiducie)
This trust was criticized, in the report submitted in the harmonization process by the Association
de planification fiscale et financière, as a common law concept at variance with the civil law.
It is certain that in the civil law a bare trust may not be constituted as a trust. The legal nature of
a bare trust is similar in fact to a type of agency in which the trustee, like an agent, cannot act
except in accordance with the settlor's instructions and must return the property to the settlor on
demand.
For the time being, however, the difference between the two legal systems seems to have no tax
consequences because a bare trust is no longer treated as a trust for tax purposes since the
amendment to subsection 104(1) I.T.A., the settlor, like a mandator in Quebec, being deemed
to remain the owner of the property.[201]
Accordingly, we have no recommendations to make on this subject unless that Quebec law
should be taken into account in the wording of subsection 104(1) I.T.A., as Me Régnier has
proposed in these terms:[202]
[TRANSLATION]
As an additional condition to avoid any disposition, it is added that the trustee must be
an agent in respect of the property received by him. This condition may be explained by
the ambivalence recognized in the English case law about the possibility that a person
might combine the dual attributes of trustee and agent. In the context of the Civil Code
of Québec, this situation has no sense. A person can be either a trustee or an agent of a
third person, but not both. The property of the principal does not belong to his agent,
whereas the property of the trust may only belong to the trust.
CONCLUSION
Harmonizing tax law in order to make it applicable to two fundamentally different legal systems
so that each is independent of the other would be a really remarkable achievement. In fact, an
awareness that Quebec legal doctrine respecting taxation is not even accessible to the majority
of tax professionals in the common law provinces because of the language problem makes it
understandable that, although the task is certainly a laudable one, it will require a significant and
continuing effort.
Many of the differences noted in this text are the result of the evolution of private law, including
the power of appointment, the conditions for applying the resulting trust and the definition of
income. Tax law must adapt to these changes as well.
Trusts are still an area of expertise in Quebec. Oddly enough it is the tax professionals who have
taken over this area of the law. In one sense this is fortunate because it means that only trusts
that do not cause too many tax problems are currently being created. Although, by dint of
requesting technical interpretations and discussions, tax professionals have more or less
managed to demarcate the clauses needed to make up for the areas in the Act that are difficult
to interpret. They have done so well in fact that nothing more resembles a trust deed in Quebec
than another trust deed.
However, as soon as the attempt is made to go beyond the pre-determined framework, as we
saw in the example where the client wanted to preserve the business for the children using a
spousal trust, unanswerable existential questions sprout up.
If the harmonization project allowed practitioners in a civil law environment to use their own
tools to answer some of these questions, without having first to ascertain the meaning of terms
used in the common law system, which is uncodified and difficult of access, it would already be
an enormous improvement.
[1] Louise BÉLANGER-HARDY and Aline GRENON, Éléments de common law et
aperçu comparatif du droit civil québécois (Carswell, 1997), 656 pp., at p. 480.
[2] R.S.C. 1985 (5th Supp.), c.1, as amended (hereinafter the "I.T.A." or the "Act").
[3] Jean-Charles Hare, "Comparaison entre fiducies de droit civil et trusts de la
Common law", in Congrès 98, (Montreal: Association de planification fiscale et financière,
1999), p. 7:7, at p. 17.
[4] S.Q. 1991, c. 64, as am. (hereinafter the "Code", the "Civil Code" or the "C.C.Q.").
[5] Choosing another provincial jurisdiction for a trust which beneficiaries are in Quebec
is more complex since the publication by the Minister of Finances of Quebec of the
Information Bulletin 2002-8.
[6] Infra, section 3.4. The concept of a tacit or deemed partnership has been applied
only to unincorporated businesses, and it can also be used in common law jurisdictions.
[7] Jacques BEAULNE, Droit des fiducies (Montreal, Wilson et Lafleur, 1998), 345
p., pp. 70-71. Is it a personal trust or a private utility trust? Me Beaulne opts for the latter.
[8] Marc CUERRIER, "L'impôt des fiducies" (1996), 18:4 Revue de planification
fiscale et successorale 805-871, at 870.
[9] For an analysis of these remedies, see, inter alia, Michel LEGENDRE, "L'utilisation
de la fiducie à titre de mécanisme de protection des actifs dans un contexte de difficultés
financières" (1997), 19:1 Revue de planification fiscale et successorale 11-67; and Lucie
BEAUCHEMIN, "Fiducies entre vifs de protection des actifs" in Congrès 95 (Montreal:
Association de planification fiscale et financière, 1996), pp. 12:1-47.
[10] More specifically in subsection 73(1.01), I.T.A.
[11] According to the condition in (i) of subs. 107.4(1), I.T.A.
[12] New subs. 104(1.1) I.T.A. confirms by implication that a corporation may use the
mechanism of a qualifying disposition to a trust without triggering a disposition for tax purposes
(107.4(1)(e) I.T.A.) since, according to subs. 104 (1.1), I.T.A., there will be no other
beneficiaries because of the fact that shareholders may receive the property of the corporation
that is a beneficiary under the trust.
[13] These requirements have long been applied in administrative practice to this kind of
trust for the protection of assets. They are described in CANADA CUSTOMS AND
REVENUE AGENCY, Technical News on Income Tax, No. 7, February 21, 1996, pp. 2-3.
[14] Subs. 107.4(3) I.T.A.
[15] Subpara. 73(1.02)(b)(ii) I.T.A. It should be noted that, according to the Explanatory
Notes, there will be no change in the beneficial ownership if the settlor reserves a general power
of appointment.
[16] Art. 1297 C.C.Q.
[17] Sophie BÉLANGER and Isabelle GOUIN, "Fiducie en faveur de soi-même,fiducie
mixte au profit du conjoint et autres modifications législatives" (2000-2001), 22:2 Revue de
planification fiscale et successorale 467-511, at 494.
[18] Marc JOLIN, "Les nouveaux types de trusts et les possibilités de planification", in
Colloque sur les Fiducies, (Association de planification fiscale et financière,May 2001), p. 37,
at p. 39 of the preliminary version.
[19] The second requirement, that there be no other beneficiaries, would thus be merely
an expression of the retention of beneficial ownership.
[20] See Richard GAUTHIER, "Les transferts entre fiducies et les dispositions
admissibles faites à une fiducie" in Colloque sur les fiducies, (Association de planification
fiscale et financière, May 22, 2001), where the author states that subs. 248(3) I.T.A. no longer
applies to the concept of beneficial ownership. His reasoning is based on the development of
this concept in relation to lease-backs, however. For trusts, the Act is somewhat clearer in that
it refers to a right as a beneficiary in its description of beneficial ownership. However, it is clear
that to retain the beneficial ownership of a property does not mean that just any kind of interest
may be held in the trust!
[21] S. BÉLANGER and I. GOUIN, loc. cit., note 17, p. 487.
[22] There are two way to interpret article 1297 C.C.Q. on this subject. The first
interpretation would be that all the article does is appoint the new trust beneficiaries who will
thus receive all the property directly from the trust. The second interpretation is based on the
kind of appointment that is made and claims that, since it provides for the return of the property
to the settlor or, failing that, to his heirs, the pass to the heirs means in fact that the property
passes through his succession. This is the opinion of Professor Beaulne, among others, who sees
in it the effects of lapse as did Faribault in his analysis of article 964 C.C.L.C. : see Jacques
BEAULNE, op. cit., note 7, at p. 300. This position is also supported by the Quebec Ministry
of Justice commenting that the rule is consistent with earlier law. See MINISTÈRE DE LA
JUSTICE DU QUÉBEC, Commentaires du ministre de la Justice, vol. I, (Les publications
du Québec, 1993) p. 773. Article 964 C.C.L.C., the precursor of art. 1297 C.C.Q., stated
that the property passes to the heir or the legatee who receives the succession in the event of
lapse or impossibility of using the property for the purposes intended. On the other hand, by
analogy, insurance payable to the succession or the assigns, heirs, liquidators or other legal
representatives pursuant to a stipulation in which those terms or similar terms are employed
forms part of the succession of such person, pursuant to article 2456 C.C.Q.
[23] From a tax point of view, there will be a disposition of the trust property on the
death of the settlor under subsection 104(4)(a.4), I.T.A. Even if immediately before the settlor's
death he holds an interest in the capital that is also subject to a deemed disposition, the
disposition will not result in tax for the deceased since a new presumption adjusts the cost of his
interest in order as to avoid double taxation under paragraph 108(1)(a.1) "cost amount ".
[24] Arts. 619 and 739, C.C.Q., and Germain BRIÈRE, Le nouveau droit des
successions, Collection bleue, (Montreal: Wilson & Lafleur, 1994) 523 p., at p. 2, para. 2.
[25] This results, among other things, from the position expressed by CANADA
CUSTOMS AND REVENUE AGENCY in Technical Interpretation # 9901435, February 16,
1999.
[26] The article of S. BÉLANGER and I. GOUIN, loc. cit., note 17, p. 499, contains
the following passage indicating the lack of certainty in the law at the present time:
[TRANSLATION] "Whereas article 1282 C.C.Q. imposes the requirement to specify the
class of persons from which the power to appoint may be exercised, the question then
arises as to how the article 1282 C.C.Q. limitation should be expressed so that subsection
104(1.1) I.T.A. will be considered as having been complied with in that context. "
[27] John E.C. BRIERLEY, "Powers of Appointment in Quebec Civil Law" (first
part), (1992), 95:3-4 Revue du notariat 131-167.
[28] Richard GAUTHIER, "Les nouvelles règles concernant les fiducies en faveur de
soi-même et les fiducies mixtes au profit du conjoint " in Congrès 2000 (Montreal: Association
de planification fiscale et financière, 2001), p.17:1-23, at p. 17:13, note 20.
[29] Marc JOLIN, loc.cit., note 18.
[30] MINISTÈRE DE LA JUSTICE DU QUÉBEC, Commentaires du ministre de la
justice, Vol. I, Les publications du Québec, 1993, 1144 pp., at 764.
[31] Royal Trust v. Brodie ( Succession de), (1989) 25 Q.A.C. 22 (C.A.) and J.E.
89-1185 (C.A.); Royal Trustv. SMRQ, [1990] RDFQ 3 (Q.C.A.); Godbout v. Godbout.,
[1993] R.L. 414 (C.A.); Rodrigue v. Fiducie Desjardins Inc. J.E. 97-12967 (C.A.) reversing
certain conclusions of the judgment of first instance J.E. 96-966 (Sup. Ct.); Trust La
Laurentienne du Canada inc. v. Beullac; J.E. 98-163 (Sup. Ct.); Trust Général du Canada
c. Poitras, J.E. 99-30 (Sup. Ct.).
[32] John E.C. BRIERLEY, "Wills - General Powers of Appointment in Wills - Bare
Powers and Trust Powers - Ontario and Quebec Compared: Re Nicholls: Royal Trust v.
Brodie " (1990), 69:2 Can. Bar. Rev. 364-379.
[33] Royal Trust v. Brodie, supra, note 31., J.E. 89-1185, p. 16.
[34] J.E.C. BRIERLEY loc.cit., note 32, p. 373.
[35] Madelaine CANTIN CUMYN, Les droits des bénéficiaires d'un usufruit, d'une
substitution et d'une fiducie (Montreal: Wilson &Lafleur, 1980), 134 p., at p. 18.
[36] Royal Trust v. Tucker, [1982] 1 S.C.R. 250. ( S.C.C.).
[37] Trust Royal v. Brodie, supra, note 31., J.E. 89-1185, p. 18. See also the
commentary of Marcel FARIBAULT, La fiducie dans la province de
Québec,Montreal,Wilson & Lafleur, 1936, p. 159, at p. 199.
[38] J.E.C. BRIERLEY, loc. cit., note 27, p. 166.
[39] John E.C. BRIERLEY, "De certains patrimoines d'affectation ", La réforme du
Civil Code, Title Six of Les Textes réunis par le Barreau du Québec et la Chambre des
notaires du Québec (Sainte-Foy: Presses de l'université Laval, 1993) pp. 735-782, at p. 766.
[40] Technical Interpretations #9832537 of March 11, 1999, #9830105 of February
26, 1999 and #9701605 and #9708685 of February 10, 1999, which would require a general
power of appointment and, as Marc Jolin reports, the Techncial Notes provided on the tabling
of subsection 73(1.02) also refer to the requirement for an unlimited power of appointment.
[41] Marc JOLIN, loc.cit., note 18, pp. 42-43 of the preliminary text. Marc JOLIN
recommends its use to avoid a transfer of the "beneficial ownership"..
[42] For example, the Agency stated that, if a general power of appointment were
exercised in the will, the property would be generally available for the decedent's debts and the
availability of the assets to pay the debts of the decedent would ensure the collection of any
taxes owing. Technical Interpretation #9832537, March 11, 1999.
[43] Technical Interpretation #9701605, February 10, 1999.
[44] CANADA CUSTOMS AND REVENUE AGENCY, loc. cit., note 13.
[45] Marc JOLIN recommends its use to avoid transferring the "beneficial
ownership",loc.cit., note 18, p. 41. The practice is also mentioned in note 27 of the article by S.
BÉLANGER and I GOUIN, loc.cit., note 17, p. 487.
[46] Nussey Estate v. Canada, 2001 F.C.A. 99. See the commentary of A.
DRACHE, "Governements have more "deeming" powers" (2001), 23:11 The Canadian
Taxpayer 85-86.
[47] In particular those in subsections 70(6), 104(18) and 108(1) "trust", I.T.A.
[48] Art. 613 C.C.Q. and Book Three, Title Three, entitled: "Legal devolution of
successions".
[49] Subss. 248(9.2) and 104(18) I.T.A.
[50] Canadian Common Law Dictionary: Law of Property and Estates, The
National Program for the Integration of Both Official Languages in the Administration of Justice,
Canadian Bar Association, (Cowansville, QC, Editions Yvon Blais, 1997) p. 158.
[51] See also subsections 70(9) and 70(9.1) I.T.A. for transfers of farm property on
death.
[52] CANADA CUSTOMS AND REVENUE AGENCY, Interpretation Bulletin IT-
449R "Meaning of "Vested Indefeasibly", September 25, 1987.
[53] Marc JOLIN, Les impôts sur le revenu et le décès (Montreal: Association de
planification fiscale et financière (Loose-leaf Service, vol. 1), pp. I-13 to 1-23, at p. 29.
[54] Arts. 625, 645, 738 and 739 C.C.Q.
[55] CANADA CUSTOMS AND REVENUE AGENCY, loc. cit., note 52, first para.
[56] See JOLIN, op.cit., note 53, pp. I-13-1-10, which reports the decision in Hillis v.
The Queen (82 D.T.C. 6249) (F.C.) and 83 DTC 5365 (F.C.A.), in which the judges were
divided on the issue of whether they should recognize retroactivity on death under The
Dependant's Reliefs Act. A distinction was drawn between the acquisition of a right in the
succession and the transfer of a specific property.
[57] In civil law, the acceptance may be tacit (art. 637 C.C.Q.) and the fact of claiming
the tax treatment that arises from that acceptance should be enough to give effect to it.
[58] Art. 884, C.C.Q.
[59] Art. 822 C.C.Q.
[60] CANADA CUSTOMS AND REVENUE AGENCY, loc. cit., note 52, second
para.
[61] Id., para. 8(d) and JOLIN, op. cit., note 53, p. I-13-1-23, at I-13-1-30.
[62] DEPARTMENT OF FINANCE OF CANADA, Notice of Ways and Means
Motion with Technical Notes -Technical Amendments, (Bill C-92; S.C. 1993, c. 24) subss.
44(4) to (6).
[63] Id., para. 2.
[64] See as an illustration Darling v. Quebec [1996] R.D.F.Q. 28 to 34 (Q.A.C.)
[65] Article 1282 C.C.Q. does not provide that the power to appoint may be exercised
by the beneficiary although the term "third person" could be broad enough to include the
beneficiary.
[66] Art. 1279 C.C.Q providing that the beneficiary must not be deceased at the
opening of his right.
[67] Article 1279 C.C.Q.
[68] Tax Window Files, loc. cit., note 25, Technical Interpretations #9901375,
#9807495, #9702825 and #9633875. It should be noted that the latter two interpretations
state that, to comply with subsection 104(18) I.T.A., it may be provided that the beneficiary's
vested rights to the property may be extinguished if the beneficiary dies before attaining 40 years
of age since this is specifically provided for by the Act. This confirms to us that the concept of
vested implies that the beneficiary's interest would normally not be extinguished on his death.
Another condition, it is indicated, is that the trustee may have a discretionary power regarding
the timing of the distribution of the income or the capital; however, the exercise of a
discretionary power should not affect the share intended for the beneficiary. The shares, as well
as the persons who are the beneficiaries of them, must be specified.
[69] 72 D.T.C. 1191 ( T.R.B.).
[70] 81 D.T.C. 8 (T.R.B.).
[71] Marc JOLIN, Examen testamentaire, Brochure distributed by the Association de
planification fiscale et financière, 1998, Question 17, p. 11.
[72] For the common law analysis, we have essentially relied on the article by Catherine
BROWN and Cindy L. RAJAN, "Constructive and Resulting Trusts: Challenging Tax
Boundaries" (1997), 45:4 Revue fiscale canadienne 659-689. Accordingly, we have not
taken into account more recent common law cases, since our research has focused on how
these doctrines have been applied in tax litigation.
[73] Lise MORENCY, "La fiducie (trust): une institution de Common Law dans un
contexte de droit civil", in Conférences sur le nouveau Civil Code du Québec - Actes des
Journées louisianaises (Cowansville: Editions Yvon Blais 1991) at p. 7.
[74] Jacqueline Drapeau v. The Queen, 99 DTC 763 (T.C.C.).
[75] 96 D.T.C. 1001 (T.C.C.).
[76] BROWN and RAJAN, loc. cit., note 72.
[77] 87 D.T.C. 624 (T.C.C.).
[78] In civil law it would be a mandate.
[79] As reported by BROWN and RAJAN, loc. cit., note 72, p. 665.
[80] BROWN and RAJAN, loc. cit., note 72, p. 675.
[81] "Revenue Canada Round Table" in Conference Report 1998 (Toronto:
Association canadienne d'études fiscales, 1989) 53:1-188, p. 53:47, Question 31.
[82] 95 D.T.C. 758 (T.C.C.) commented on at p. 6039 by Robert JARMAN, and in
BROWN and RAJAN, loc. cit., note 72, p. 667-668.
[83] Savoie v. The Queen, 93 D.T.C. 552 ( T.C.C.), commented on in BROWN and
RAJAN, loc. cit., note 72, p. 667-668.
[84] It should be explained that, in this case, since the deemed trustee had died, leaving
his property to his wife, who was also a beneficiary of the trust, the recognition of this trust
could not have any financial impact other than the tax advantage it provided.
[85] Donavan W. M. WATERS, Law of trusts in Canada, 2d ed., (Toronto:
Carswell), 1240 p., at 299.
[86] BROWN and RAJAN, loc. cit., note 72, p. 668-669.
[87] Canada v. Mervin Holizki, 98 D.T.C. 6530 (F.C.A.); 95 D.T.C. 5591 (F.C.).
[88] Id., 95 D.T.C. 5593 (F.C.).
[89] 2000 D.T.C. 2587 (T.C.C.) summarized in "Half of capital gain held in trust for
taxpayer's wife" (2001), Tax Topics, #1508, CCH, February 1, 2001, pp. 5-6. and "Existence
d'une fiducie malgré l'absence de document écrit " (2000), 9:4 Flash Fiscal, Association de
planification fiscale et financière, Nov. 23, 2000.
[90] They include, inter alia, Sura v. M.N.R. 62 D.T.C. 1005 (S.C.C.); Faure Estate
v. M.N.R., 77 D.T.C. 5228 (S.C.C.); Laporte v. M.N.R., 84 D.T.C. 1208. The problem of
taxing income and capital gains in relation to matrimonial regimes has been analysed in André
DIONNE and Michel TURCOT, "Aspects fiscaux des diverses étapes de la vie conjugale selon
le nouveau droit familial", [1981] C.P. du N. 393-444 and a historical note is contained in Marc
JOLIN, Les impôts sur le revenu et le décès (Montreal:Association de planification fiscale et
financière), p. 1.13.1-1-1. The legal battle finally led to the inclusion in the I.T.A. of specific
dispositions to eliminate the advantage that some spouses married in a community matrimonial
regime might enjoy in Quebec: subss. 248(22) to (23.1) I.T.A.
[91] The Queen v. Dumais, 89 D.T.C. 5543, at p. 5548.
[92] See, for example, the decision in Fletcher v. M.N.R., supra, note 77.
[93] Id.
[94] loc. cit. , note 76, p. 682.
[95] Id., p. 680.
[96] In this regard, a judgment from a tax court should be distinguished from a judgment
from a court settling a dispute between private parties.
[97] As we have seen, the two doctrines are often pleaded in the alternative.
[98] Arts. 1493 to 1496 C.C.Q.
[99] Arts. 427 to 430 C.C.Q.
[100] Violaine BELZILE "Recours entre conjoints de fait: enrichissement injustifié et
action de in rem verso" in Développements récents sur l'union de fait, Service de la formation
permanente, Barreau du Québec, (Montreal: Éd. Yvon Blais, 2000) 125-173, at 139.
[101] [1984] 1 S.C.R. 2, at 9.
[102] Savoy v. S.M.R.Q., [1996] R.D.F.Q.316. (C.Q.).
[103] See, for example, Desrochers v. The Queen, 99 D.T.C. 962 (T.C.C.) and
Graves v. The Queen, 90 D.T.C. 962 (T.C.C.).
[104] In Quebec, generally restricted to a context involving the operation of an
unincorporated business, tacit partnership between spouses involves evidence of a common
intention by the partners (affectio societatis), which is not always present when the services
rendered correspond to those resulting from a matrimonial situation. Furthermore, since the tax
authorities are a third person with respect to the taxpayers, the partnership could not be set up
against them as long as the partnership declaration has not been published and it would be an
undeclared partnership. (Arts. 2189, 2195 and 2252 C.C.Q.)
[105] MacDougall v. The Queen, 98 D.T.C. 2180 (T.C.C.). In a case from Quebec,
the taxpayer argued that he held the beneficial ownership of a property so that he would not be
subject to the application of section 160 I.T.A. with respect to a transfer without consideration
to which he was party. The judge rejected this claim because the principle is unknown in
Quebec, even taking subsection 248(3) of the Act into account, and because the facts would
not have permitted a different conclusion under the common law.
[106] Subs. 104(1) and s. 248 "disposition" I.T.A., which provide that a bare trust is not
a trust for the purpose of the application of tax rules. The settlor continues to pay tax since he
did not actually transfer the ownership of his property to the trust acting as an agent for him.
[107] This proposal is taken from BROWN and RAJAN, loc. cit., note 72, p. 668-669,
at p 684.
[108] Fletcher v. MNR, supra, note 77.
[109] Anderson Estate v. The Queen, supra, note 82.
[110] Experience shows that the attribution rules and their exceptions require at least
three hours of instruction for third year law school students.
[111] Despite the constructive and resulting trust concepts, the split will be more certain
with a transfer.
[112] By application of subsections 74.5(1) and 160(1) I.T.A.
[113] Diane BRUNEAU and Richard CHAGNON, "Aspects fiscaux de la loi 146 du
Québec" (1990), vol. 38:1 Revue fiscale canadienne 21-47, at pp. 45-46.
[114] Savoie v. The Queen, supra, note 83, at p. 555 (note 2).
[115] BROWN et RAJAN, loc. cit., note 72, p. 684.
[116] See, to the same effect, Jean-Marie FORTIN, "Transferts de biens entre
personnes liées et conséquences fiscales", in Congrès 91 (Association de planification fiscale et
financière, 1992), pp. 639-667, at pp. 666-667.
[117] Violaine BELZILE, loc. cit., note 100.
[118] 97 D.T.C. 338 (T.C.C.). See also MacDougall v. The Queen, supra, note 105.
[119] It should be noted that articles 427 and 430 of the Civil Code expressly provide
that the allowance may be payable or paid voluntarily during the marriage.
[120] Benoit MANDEVILLE, "Revenu Canada et le Code civil," in Congrès 93
(Association de planification fiscale et financière, 1994), pp. 18:1 to 54, at pp. 18:17 to 18:19.
[121] Dupuis v. The Queen, 93 DTC 723 (T.C.C.).
[122] Other judgments favourable to the taxpayer were rendered in Ferracuti v. The
Queen, 99 D.T.C. 194 (T.C.C.) and Michaud v. The Queen, 99 D.T.C. 439 (T.C.C.).
[123] Raphael v. The Queen, 2000 DTC 2434 (T.C.C.).
[124] Note that only personal trusts involve income interests that are separate from
capital interests.
[125] Subs. 108(1) I.T.A. "income interest ".
[126] Subs. 108(3) I.T.A.. The same concept is found in subsection 104(13.1). The
Minister of Revenue indeed falls back on private law in order to define income of a trust, as
expressed by CANADA CUSTOMS AND REVENUE AGENCY in Technical Interpretation
#2001-0076895, April 26 2001, Tax Window Files, loc. cit., note25.
[127] Ss. 106 and 107 I.T.A.
[128] It should be noted that our description of the situation in the common law
provinces is limited to reporting the analyses made by other authors. Furthermore, it does not
take into account specific trust legislation that may have been enacted in those jurisdictions.
[129] A rollover would not be granted if the deed provided for giving the taxable income
to the spouse. See M. JOLIN, op.cit., note 53, p. I-13-2-7.
[130] Subs. 108(3) I.T.A.
[131] M. JOLIN, op. cit. note 53, p. I-13-2-7.
[132] Estate of the Late Gordon Clark Terrill v. M.N.R., 87 D.T.C. 504 (T.C.C.).
[133] Subs. 108(3) I.T.A.
[134] The Civil Code uses the terms "fruits and revenues", thus distinguishing corporeal
fruits from economic revenues. The concept of income referred to in the Income Tax Act
probably corresponds to the civil concept of fruits and revenues.
[135] This list is found in article 910 C.C.Q.
[136] Article 909 C.C.Q.
[137] This question is raised in Guy FORTIN, "Concepts de revenu et de capital d'une
trust: Importance de l'interaction en droit civil et en droit fiscal" (1994), vol. 42:5 Revue fiscale
canadienne, 1236-1262, p. 1251.
[138] J.E. 92-1230, C.S. Montréal 500-05-005322-894, July 1992. See Fred
PURKEY, "Les concepts de capital et de revenu à l'égard des fiducies dans un contexte de
planification fiscale", in Colloque 109- Les fiducies, (Montreal : Association de planification
fiscale et financière, 2001), who comments that decision.
[139] [1972] Sup. Ct. 342.
[140] MINISTER OF JUSTICE, op.cit, note 30, pp. 532-533. This wording differs
from the comments to article 1413 C.C.Q., for example, stating that "Although new, the article
is nonetheless consistent with the previous law. "
[141] D.W.M.WATERS, op. cit., note 85, p. 837.
[142] Id., p. 838.
[143] But see G. FORTIN, loc cit, note 137, p. 1253. He is of the opinion that the
proceeds of the redemption that would correspond to the profits of the year in progress would
be income. However, it is not clear if this conclusion flows from the articles establishing a
distinction between income and capital or from the fact that the trustee must act equitably in
accordance with article 1345 C.C.Q.
[144] G. FORTIN, loc cit, note 137, p. 1253.
[145] But see M. JOLIN, op. cit., note 53, p. I-13-2-8, who maintains that a stock
dividend constitutes capital first and repeats the divergent opinions of other authors. The
situation is summarized by Pierre LESSARD and André MORRISSETTE in "The New Civil
Code of Quebec, " Conference Report 1993, (Association canadienne d'études fiscales,
1994), pp.51:31 and 32 as follows: " As well, there will undoubtedly be some confusion
over the classification of dividends payable as capital stock, since such a dividend could
conceivably fall under both headings. One author has concluded that the courts will
simply look carefully at whether the dividend was paid out as a distribution of surplus
capital or as a true dividend from profits."
[146] G. FORTIN, loc cit, note 137, p. 1249.
[147] M. JOLIN, op. cit., note 53, p. I-13-2-9.
[148] Dominique LAFLEUR, "Quelques problèmes d'interaction entre le Code civil du
Québec et la planification fiscale" in Congrès 94 (Montreal: Association de planification fiscale
et financière, 1995), 23:1-76 at p. 23:33.
[149] G. FORTIN, loc cit, note 137, pp. 1250-1251.
[150] We have not identified any cases since 1994 that deal with articles 909 and 910
C.C.Q.
[151] Subs. 104(13.1) I.T.A.
[152] Subs. 104(24) I.T.A.
[153] Subss. 104(6) and 104(13) I.T.A.
[154] G. FORTIN, loc cit, note 137, pp. 1254-1255.
[155] This is because of article 909 C.C.Q., which prescribes that retained income is
added to the capital. This position could be strongly criticized. Why would an income
beneficiary only receive profits and not be affected by losses?
[156] For other similar examples, see D. LAFLEUR, loc. cit. note 148, p. 23:20 and G.
FORTIN, loc cit, note 137, p. 1254.
[157] D.W.M.WATERS, op. cit., note 85, p. 857.
[158] Arts 1346 and 1347 C.C.Q. For the Minister of Justice of Quebec, these
examples aim to guide the trustee. MINISTER OF JUSTICE, op.cit., note 30, p. 811
[159] Article 1345 C.C.Q.
[160] "the revenue account is generally debited for the following expenditures…", "the
capital account is generally debited …".
[161] MINISTER OF JUSTICE, op. cit., note 30, arts. 1346-1347.
[162] D.W.M.WATERS, op. cit., note 85, p. 845.
[163] See the example provided by Me Lafleur in this regard: D. LAFLEUR, loc. cit.
note 148, pp. 23:25 and 26.
[164] Id., p. 23:26.
[165] Articles 1256 to 1259 C.C.Q.
[166] Subss. 106(2) and 107(1) I.T.A.
[167] These investments are described in article 1339 C.C.Q. They include immovables,
guaranteed bonds, preferred and common shares of certain companies and certain mutual funds
60% of whose portfolio consists of presumed sound investments.
[168] The tutor may, however, retain investments that were not presumed sound but
were part of the minor's assets before the trustee assumed his duties. Thus, if a minor were
given shares in a private company, the tutor that would be appointed would have no problem
keeping such shares for the trust.
[169] Art. 1307 C.C.Q. He is in fact an administrator charged with full administration
and therefore may make any form of investment.
[170] Art. 1343 C.C.Q.
[171] Gérard BÉRUBÉ, "Les enfants et le creux du marché". This article appeared on
the Web at http://www.quicken.ca/dated August 6, 2001. It is explained that Mr. Bérubé is the
business section editor of Le Devoir and the author of a number of popular and introductory
works on stock market investing.
[172] Mathieu c. Tardif, J.E. 97-1067 (Court of Québec). This decision was cited in
Jacques BEAULNE, op. cit., note 7, at p. 112.
[173] Madeleine CANTIN CUMYN, L'administration du bien d'autrui, Traité de
droit civil (Montréal, Ed. Yvon Blais, 2000), 467p., pp. 132-136.
[174] Technical Interpretation #0014595, November 14, 2000. (Tax Window Files,
loc. cit., note 25.).
[175] Id., Technical Interpretation #9717475, September 22, 1997.
[176] D. W. M. WATERS, op. cit, note 85, at p. 43.
[177] Arts. 1482 to 1490 C.C.Q. Although the management of affairs provisions are
provided as legal safeguards for the intervention of a third person in an emergency situation, it is
not impossible that they could be used to allow a person to act as the administrator of the funds
that he intends to give to a minor person.
[178] Arts. 208 and 1484 C.C.Q.
[179] See section 1.3.2 for a discussion of the power of appointment. It is understood
that this commentary only applies to cases where the age of distribution is later than the age of
majority, since a minor may not dispose of any part of his property by will, except articles of
little value (although one might wonder whether stock market securities of little value can be
included in this…) Art. 708 C.C.Q.
[180] Subs. 107(4.1) I.T.A.
[181] The reader is referred to Chapter 4 , which deals with the distinction between
income and capital.
[182] REVENUE CANADA, TAXATION, Information Circular 79-9R, "Family
Allowances", July 7, 1986, para. 16. This circular was withdrawn on January 31, 1993, by
Information Circular 93-2 "Index of Information Circulars" August 9, 1993.
[183] David M. SHERMAN, The Practitioner's Income Tax Act, 18th ed. (La loi du
praticien - Loi de l'impôt sur le revenu, 4th ed, (Carswell, 2001)), subs. 74.1(2) I.T.A.
[184] Amounts received before 1993 could be apparently be exempt from the
application of the attribution rules according to Information Circular 79-9R.
[185] The exception for the Child Tax Benefit in subs. 74.1(2) I.T.A. is limited to this
subsection and is therefore not valid for subs. 75(2) I.T.A.
[186] Quebec's Taxation Act is perfectly harmonized with the federal legislation and the
exception in section 462.2 T.A. refers to the same definition of benefit as is found in the federal
statute. The definition could include the Quebec allowance since it is a program that
complements the federal program.
[187] Therefore, it would not be necessary to invest in investments that are not presumed
sound in order to escape the attribution rules by seeking a return in the form of a capital gain.
[188] A gift subject to a term is permitted. It gives rise to actual divesting in that it makes
the donor the debtor of the donee, even if the delivery or transfer is made later. Art. 1807
C.C.Q.
[189] Art. 1824 C.C.Q.
[190] A gift may be made with a charge. Art. 1831 C.C.Q.
[191] Art. 212 C.C.Q.
[192] Arts. 1818 and 1819 C.C.Q.
[193] See section 5.3.
[194] For example, because of a discretion given to the trustee to distribute the capital to
one of the children.
[195] Tax Window Files, loc. cit., note 174.
[196] "Table ronde sur la fiscalité fédérale", in Congrès 98 (Montréal: Association de
planification fiscale et financière, 1999), pp. 43:13-60, Question 8.1, pp. 43:57-58.
[197] André MORRISSETTE, "Trusts", in Colloque 63 - La réforme du Civil Code
et son impact sur l'impôt sur le revenu, (Association de planification fiscale et financière,
1993) see the section entitled: "La désignation du bénéficiaire et ses droits".
[198] See for an example Technical Interpretation #2001-0096935 (Tax Window Files,
loc. cit, note 25, November 8 2001). The conclusion of this discussion is reported by Marc
JOLIN, "Le fractionnement du revenu et les pièges insoupçonnées des règles d'attribution", in
Colloque 88 - La fiducie: le véhicule fiscal du nouveau millénaire, (Association de
planification fiscale et financière, 1999) see section 2.2. (trust with right of reversion).
[199] See D.W.M. WATERS, op.cit., note 85, at p. 291. " A settlor cannot revoke
his trust unless he has expressly reserved the power to do so. This is a cardinal rule […]
the trust is a mode of disposition […] it is sometimes said that the trust is a mode of
"restricted transfer." So indeed it is, but the restriction does not mean that by employing
the trust the settlor inherently retains a right or power to intervene once the trust has
taken effect, whether to set the trust aside, change the beneficiaries, name other
beneficiaries, take back part of the trust property, or do anything else to amend or
change the trust." This description of a revocable trust conjures up the possibility that the
settlor could change his mind with respect to the provisions of the trust, which under the civil law
would be a kind of conditional transfer, rarely used in practice.
[200] For instance, the doctrinal discussion of the possibility that subsection 75(2)
applies if a loan to the trust is not considered genuine. Marc JOLIN, loc.cit., note 198.
[201] See the Explanatory Notes accompanying the Notice of Ways and Means
Motion of March 16, 2001, concerning the introduction of subs. 107.4 I.T.A.
[202] Maurice RÉGNIER, "De la morosité " (1998), vol. 20:1, Revue de planification
fiscale et successorale, p. 7, at p. 9.