T-2848-81
Rostal Sales Agency Ltd. (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Collier J.—Montreal, June 10;
Vancouver, November 22, 1982.
Income tax Income calculation — Deductions — Appeal
from reassessment by Minister of National Revenue denying in
part claim for small business deduction — Question whether
settlor of trust deed controlled voting rights — Defendant
arguing that particular clause had potential of vesting control
of voting rights in settlor — Ruling that no clause empowers
settlor to remove original trustee who has present right to
control voting rights — Trust deed not contract, and no right,
in equity or otherwise, to control plaintiff — Appeal allowed
Reassessment on basis plaintiff not associated by means of
trust deed with other companies — Income Tax Act, S.C.
1970-71-72, c. 63, ss. 125(1), 251(5)(6), 256(1)(d).
CASES JUDICIALLY CONSIDERED
APPLIED:
Lusita Holdings Limited v. The Queen, [1983] 1 F.C.
439 (T.D.); Commissioners of Inland Revenue v. Sil-
verts, Ltd. (1951), 29 T.C. 491 (C.A.).
REFERRED TO:
The Minister of National Revenue v. Dworkin Furs
(Pembroke) Limited, et al., [1967] S.C.R. 223.
COUNSEL:
Guy Du Pont for plaintiff.
Johannes A. Van Iperen and Beverly Hobby
for defendant.
SOLICITORS:
Verchère, Noël & Eddy, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
COLLIER J.: The plaintiff claimed, for its 1976
and 1977 taxation years, the small business deduc
tion permitted by subsection 125(1) of the Income
Tax Act.' The Minister of National Revenue
issued reassessments, revising downwards the
amount claimed by the plaintiff, on the basis that
the plaintiff company was associated, under sec
tion 256, with the following named companies:
Shirtmate Ltd.
Clothes to You Ltd.
Burton Sales Inc.
Robert Simon Shirt Ltd.
The parties conceded that if the plaintiff were
associated with Shirtmate, its appeal fails. If not
associated, the appeal succeeds. To decide that
issue, it is not necessary to go into the factual
interrelationship among the other named compa
nies.
The shareholders of Shirtmate were:
Allan Spector 33 1 / 2 %
Burton Spector 33 1 / 2 %
Marvin Zarr 33 1 / 2 %
The Spectors are brothers.
The sole shareholder of the plaintiff Rostal was
a trust, called the Carastalle Trust.
The trust was created by deed dated January 22,
1976. Allan Spector was the settlor. The trustee
was one Stanley Cyntranbaum, an attorney. He
was not related to any of the shareholders, or
groups of shareholders, in any of the companies.
There were five named beneficiaries. There was no
evidence before me as to their relationship with the
settlor. They appear to be members of his family.
I shall set out what, to me and for the purposes
of the tax problem, are the key portions of the
trust document.
"Trustee" is defined to mean the original trus
tee, and any substitute or additional trustees.
Clause 4 provides:
4. The term "Trustee" that is used in this instrument shall
mean not only Stanley Cyntranbaum being the original Trustee
but whoever may be Trustee or Trustees for the time being and
whoever may be appointed as Trustee or Trustees in replace
ment of Stanley Cyntranbaum.
' S.C. 1970-71-72, c. 63, as amended.
The trustee was given wide and generous powers
in respect of the handling, management, invest
ment and control of the trust estate.
Clause 19 deals with the appointment, replace
ment and removal of the trustee or trustees. I set it
out in full.
19. (a) The Trustee may, upon thirty (30) days notice resign as
Trustee hereunder and the Settlor shall appoint a replacement
trustee.
(b) The Settlor may remove any successor trustee without
cause by giving such trustee notice in writing to this effect and
any trustee may resign as trustee by giving the Settlor or the
remaining trustees notice in writing.
(c) Any two trustees, or the Settlor may appoint a successor
trustee in the event that a trustee or successor trustee is
removed or resigns as hereinabove provided.
(d) The Settlor may in his sole and absolute discretion at any
time and from time to time appoint new or other trustees
resident in any place in any part of the world and nothing
herein shall be construed as to limit the number of trustees
which may result from the exercise of this power to appoint
new or other trustees.
(e) Any powers conferred upon the Settlor under this para
graph may, in the absence of any other provision, be exercised
by the executor under the Settlor's last Will and Testament.
The Minister relied, in his submissions, on para
graph (d) of clause 19. He said: The settlor could,
under (d), dismiss the trustee or trustees and
appoint himself; he would then have a right, under
the trust deed, to control the voting rights of the
shares in the plaintiff; by paragraph 251(5)(b) of
the Income Tax Act, Allan Spector would then be
deemed to be in the same position as if he owned
the shares; Rostal and Shirtmate are therefore
"associated" because the control and sharehold-
ings fall within the provisions of paragraph
256(1)(d) of the Act.
Paragraph 256(1) (d) is as follows:
256. (1) For the purposes of this Act one corporation is
associated with another in a taxation year if at any time in the
year,
(d) one of the corporations was controlled by one person and
that person was related to each member of a group of persons
that controlled the other corporation, and that person or that
group of persons owned directly or indirectly, in respect of
each corporation, not less than 10% of the issued shares of
any class of the capital stock thereof, or
I set out, as well, paragraph 251 (5)(b):
251... .
(5) For the purposes of subsection (2) and section 256,
(b) a person who had a right under a contract, in equity or
otherwise, either immediately or in the future and either
absolutely or contingently, to, or to acquire, shares in a
corporation, or to control the voting rights of shares in a
corporation, shall, except where the contract provided that
the right is not exercisable until the death of an individual
designated therein, be deemed to have had the same position
in relation to the control of the corporation as if he owned
the shares; ...
It was submitted, on behalf of the defendant,
that Allan Spector's alleged right to control the
voting rights of the Rostal shares, arose from ".. .
a contract, in equity or otherwise (para.
251(5)(b)). The trust deed here, in my view, is not,
in law, a contract. I agree with the statement of
my colleague, Mahoney J., in Lusita Holdings
Limited v. The Queen 2 [at page 441}:
It is trite law that a trust is not a contract. It is unnecessary to
go beyond the textbooks, which enumerate the multitude of
distinctions, for authority for that proposition.
But, I also concur with Mahoney J., when he
concludes in the same case, that the "right"
referred to in paragraph 251 (5)(b) is not confined
to rights arising under a contract, but extends to
rights arising in "equity or otherwise", apart from
pure contract.
The next question is whether the terms of the
Carastalle trust deed gave Allan Spector a right,
in equity or otherwise, to control the voting rights
of the Rostal shares. The Minister's position, as I
have stated, is that clause 19(d) of the trust deed
confers that right: the settlor can, in effect,
appoint himself as a sole trustee.
I do not agree with that construction of the trust
document. Clause 19 must be read as a whole, and
in the context of the whole trust deed.
2 [1983] 1 F.C. 439 (T.D.).
The deed clearly indicates that Cyntranbaum is
the original trustee, but "trustee" includes who
ever may be appointed to replace him (clause 4).
He, and any new or future trustees, can resign,
whereupon Spector must appoint a replacement
trustee (clause 19(a)).
Clause 19(b) empowers the settlor to remove
any "successor trustee". It does not, in my opinion,
permit the removal, by Spector, of the original
trustee. Clause 19(c) then authorizes the settlor, or
any two trustees to appoint a successor trustee,
where a successor trustee, or trustee, is removed or
resigns, as set out in (a) and (b) of clause 19.
I turn now to clause 19(d).
This provision, in my opinion, does not deal with
the removal or appointment of "successor" or
"replacement" trustees. It deals with the appoint
ment of "new or other trustees". As I see it, the
drafter of the trust deed envisaged the trust poss
ibly having assets in various places and jurisdic-
tions (see, for example, clause 3(b), (c) and (d)).
A discretion, in this particular clause, was given to
the settlor to appoint additional trustees, not just
in Canada but anywhere. But this clause does not
authorize the settlor to remove or replace already
incumbent ones.
As I see it, the only power of removal Allan
Spector has, is in respect of a "successor" trustee.
He has no power to remove the original trustee.
My comments are confined to the trust deed.
There may be other avenues, at law, for removal of
trustees.
On that construction of the trust deed, the set-
tlor did not have the right, de jure, at relevant
times, to control the voting rights of the Rostal
shares. As to "de jure" vis-Ã -vis "de facto" con
trol, see The Minister of National Revenue v.
Dworkin Furs (Pembroke) Limited, et al. 3 . The
original trustee had the sole right, in law, over the
voting powers in respect of the Rostal shares held
by the Carastalle Trust.
3 [1967] S.C.R. 223.
I add this. The mere fact that, at some time the
settlor might be in a position to remove trustees at
will, does not necessarily mean that incumbent
trustees are mere nominees for the voting rights of
any shares held by the trust. The comments of Sir
Raymond Evershed, M.R., in Commissioners of
Inland Revenue v. Silverts, Ltd. 4 are, although the
factual situation was somewhat different to the
present case, apt (at page 507):
It does not of course follow that because the settlor ... could
remove Messrs. Lancashire and Lewis at will the latter can
therefore be regarded as mere nominees, for voting purposes, of
the settlor.
The plaintiff is, therefore, not associated with
Shirtmate or any of the other named companies.
The reassessments are referred back to the Min
ister for reassessment on the basis that the plaintiff
and the other named companies are not associated
corporations within paragraph 256(1 )(d) of the
Income Tax Act.
The plaintiff is entitled to costs.
.4 (1951), 29 T.C. 491 (C.A.).
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.