Enbridge Companies Book of Authorities

MH-001-2013 File OF-AF-SAC 01

NATIONAL ENERGY BOARD

IN THE MATTER OF the National Energy Board Act, R.S.C. 1985, c. N-7, as amended, and the regulations made thereunder;

IN THE MATTER OF the RH-2-2008 Reasons for Decision of the National Energy Board dated May 26, 2009;

AND IN THE MATTER OF a Joint Application by Alliance Pipeline Ltd., Enbridge Pipelines Inc., Enbridge Pipelines (NW) Inc., Foothills Pipe Lines Ltd., Kinder Morgan Cochin ULC, Maritimes & Northeast Pipeline LP, NOVA Gas Transmission Ltd., Trans Mountain Pipeline ULC for Trans Mountain Pipeline L.P., Trans Québec & Maritimes Pipeline Inc., TransCanada Keystone Pipeline GP Ltd., TransCanada PipeLines Limited, Trans-Northern Pipelines Inc., and Westcoast Energy Inc., carrying on business as Spectra Energy Transmission for Approval of the Process and Mechanism to Set Aside Pipeline Abandonment Funds, pursuant to the National Energy Board Act;

AND IN THE MATTER OF Applications by Enbridge Pipelines Inc. and Enbridge Pipelines (NW) Inc. for Approvals of Proposals for the Collection of Abandonment Funds;

AND IN THE MATTER OF Filings by Enbridge Bakken Pipeline Company Inc. on behalf of Enbridge Bakken Limited Partnership, Enbridge Pipelines (Westspur) Inc., Enbridge Southern Lights GP Inc. on behalf of Enbridge Southern Lights Limited Partnership, Niagara Gas Transmission Limited, 2193914 Canada Limited and Vector Pipeline Limited Partnership of Proposals for the Setting Aside and Collection of Abandonment Funds.

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ENBRIDGE COMPANIES' BOOK OF AUTHORITIES ______

February 5, 2014

6372782_2|NATDOCS - 2 -

Table of Contents

LEGISLATION

1. Bankruptcy and Insolvency Act, RSC 1985, c B-3

2. Income Tax Act, RSC 1985, c 1 (5th Supp)

3. Interpretation Act, RSC 1985, c I-21

4. Perpetuities Act, RSA 2000, c P-5

5. Trustee Act, RSA 2000, c T-8

CASE LAW

1. Bank of Montreal v Northguard Holdings Ltd, [1987] MJ No 5, 1987 CarswellMan 281 (CA)

2. Collins v Ontario (Pension Commission), 56 OR (2d) 274, 1986 CarswellOnt 155

3. CRA Ruling No 2012-0463471R3, Single Reclamation Trust, 2013

4. CRA Ruling No 2012-0463871R3, Qualifying Site, 2013

5. Garron Family Trust (Trustee of) v R, 2010 FCA 309, 2010 CarswellNat 4259

6. Garron Family Trust (Trustee of) v R, 2009 TCC 450, 2009 CarswellNat 2600

7. Guerin v R, [1984] 2 SCR 335, 1984 CarswellNat 813

8. Jewish National Fund v Royal Trust Co, [1965] SCR 784, 1965 CarswellBC 60

9. Re Greenstreet Management Inc (2007), 38 CBR (5th) 307, 2007 CarswellOnt 7514 (Ont Sup Ct)

10. Rutherford v Swanick, 2010 ONSC 4596, 2010 CarswellOnt 6180

LEGAL TEXTS

1. Eileen E Gillese & Martha Milzcynski, The Law of Trusts, Second Edition (Toronto: Irwin Law Inc, 2005)

CANADA

CONSOLIDATION CODIFICATION

Bankruptcy and Loi sur la faillite et Insolvency Act l’insolvabilité

R.S.C., 1985, c. B-3 L.R.C. (1985), ch. B-3

Current to January 23, 2014 À jour au 23 janvier 2014

Last amended on April 1, 2013 Dernière modification le 1 avril 2013

Published by the Minister of Justice at the following address: Publié par le ministre de la Justice à l’adresse suivante : http://laws-lois.justice.gc.ca http://lois-laws.justice.gc.ca Bankruptcy and Insolvency — January 23, 2014

the consumer debtor and to the official receiv- effet au débiteur consommateur et au séquestre er. officiel. Effect if (2) Subsection (1) does not apply in respect (2) Le paragraphe (1) ne s’applique pas si le Refus de se counselling of a consumer debtor who has refused or ne- débiteur consommateur a refusé ou omis de se prévaloir des refused consultations glected to receive counselling provided under prévaloir des consultations offertes aux termes paragraph 66.13(2)(b). de l’alinéa 66.13(2)b). 1992, c. 27, s. 32; 2005, c. 47, s. 56. 1992, ch. 27, art. 32; 2005, ch. 47, art. 56. Administrator’s 66.39 The form and content of the adminis- 66.39 La forme et le contenu des comptes de Comptes et accounts, trator’s accounts, the procedure for the prepara- l’administrateur ainsi que la procédure à suivre libération de discharge l’administrateur tion and taxation of those accounts and the pro- pour leur préparation et leur taxation et pour la cedure for the discharge of the administrator libération de l’administrateur sont déterminés shall be as prescribed. par les Règles générales. 1992, c. 27, s. 32. 1992, ch. 27, art. 32. Act to apply 66.4 (1) All the provisions of this Act, ex- 66.4 (1) Toutes les dispositions de la pré- Application de cept Division I of this Part, in so far as they are sente loi, sauf la section I de la présente partie, la présente loi applicable, apply, with such modifications as dans la mesure où elles sont applicables, s’ap- the circumstances require, to consumer propos- pliquent, compte tenu des adaptations de cir- als. constance, aux propositions de consommateur. Where consumer (2) Where a consumer proposal is made by a (2) Dans le cas d’une proposition de Application de debtor is consumer debtor who is a bankrupt, consommateur faite par un failli: la présente loi bankrupt (a) the consumer proposal must be approved a) la proposition doit être approuvée par les by the inspectors, if any, before any further inspecteurs, le cas échéant, avant que toute action is taken thereon; autre mesure ne soit prise à son égard; (b) the consumer debtor must have obtained b) le débiteur consommateur doit avoir obte- the assistance of a trustee who shall act as nu les services d’un syndic pour agir comme administrator of the proposal in the prepara- administrateur dans le cadre de la prépara- tion and execution thereof; tion et de l’exécution de la proposition; (c) the time with respect to which the claims c) le moment par rapport auquel les récla- of creditors shall be determined is the time at mations des créanciers sont déterminées est which the consumer debtor became celui où le débiteur consommateur est deve- bankrupt; and nu un failli; (d) the approval or deemed approval by the d) l’approbation — effective ou présumée court of the consumer proposal operates to — de la proposition par le tribunal a pour ef- annul the bankruptcy and to revest in the fet d’annuler la faillite et de réattribuer au consumer debtor, or in such other person as débiteur consommateur, ou à toute autre per- the court may approve, all the right, title and sonne que le tribunal peut approuver, le interest of the trustee in the property of the droit, le titre et l’intérêt complets du syndic consumer debtor, unless the terms of the aux biens du débiteur, à moins que les condi- consumer proposal otherwise provide. tions de la proposition ne soient à l’effet 1992, c. 27, s. 32; 1997, c. 12, s. 58. contraire. 1992, ch. 27, art. 32; 1997, ch. 12, art. 58.

PART IV PARTIE IV PROPERTY OF THE BANKRUPT BIENS DU FAILLI Property of 67. (1) The property of a bankrupt divisible 67. (1) Les biens d’un failli, constituant le Biens du failli bankrupt among his creditors shall not comprise patrimoine attribué à ses créanciers, ne comprennent pas les biens suivants: (a) property held by the bankrupt in trust for any other person;

106 Faillite et insolvabilité — 23 janvier 2014

(b) any property that as against the bankrupt a) les biens détenus par le failli en fiducie is exempt from execution or seizure under pour toute autre personne; any laws applicable in the province within b) les biens qui, selon le droit applicable which the property is situated and within dans la province dans laquelle ils sont situés which the bankrupt resides; et où réside le failli, ne peuvent faire l’objet (b.1) goods and services tax credit payments d’une mesure d’exécution ou de saisie contre that are made in prescribed circumstances to celui-ci; the bankrupt and that are not property re- b.1) dans les circonstances prescrites, les ferred to in paragraph (a) or (b); paiements qui sont faits au failli au titre de (b.2) prescribed payments relating to the es- crédits de taxe sur les produits et services et sential needs of an individual that are made qui ne sont pas des biens visés aux alinéas a) in prescribed circumstances to the bankrupt ou b); and that are not property referred to in para- b.2) dans les circonstances prescrites, les graph (a) or (b); or paiements prescrits qui sont faits au failli re- (b.3) without restricting the generality of lativement aux besoins essentiels de per- paragraph (b), property in a registered retire- sonnes physiques et qui ne sont pas des biens ment savings plan or a registered retirement visés aux alinéas a) ou b); income fund, as those expressions are de- b.3) sans restreindre la portée générale de fined in the Income Tax Act, or in any pre- l’alinéa b), les biens détenus dans un régime scribed plan, other than property contributed enregistré d’épargne-retraite ou un fonds en- to any such plan or fund in the 12 months be- registré de revenu de retraite, au sens de la fore the date of bankruptcy, Loi de l’impôt sur le revenu, ou dans tout ré- but it shall comprise gime prescrit, à l’exception des cotisations au régime ou au fonds effectuées au cours (c) all property wherever situated of the bankrupt at the date of the bankruptcy or that des douze mois précédant la date de la may be acquired by or devolve on the faillite, bankrupt before their discharge, including mais ils comprennent : any refund owing to the bankrupt under the c) tous les biens, où qu’ils soient situés, qui Income Tax Act in respect of the calendar appartiennent au failli à la date de la faillite, year — or the fiscal year of the bankrupt if it ou qu’il peut acquérir ou qui peuvent lui être is different from the calendar year — in dévolus avant sa libération, y compris les which the bankrupt became a bankrupt, ex- remboursements qui lui sont dus au titre de cept the portion that la Loi de l’impôt sur le revenu relativement à (i) is not subject to the operation of this l’année civile — ou à l’exercice lorsque ce- Act, or lui-ci diffère de l’année civile — au cours de laquelle il a fait faillite, mais à l’exclusion de (ii) in the case of a bankrupt who is the judgment debtor named in a garnishee la partie de ces remboursements qui : summons served on Her Majesty under the (i) soit sont des sommes soustraites à Family Orders and Agreements Enforce- l’application de la présente loi, ment Assistance Act, is garnishable money (ii) soit sont des sommes qui lui sont dues that is payable to the bankrupt and is to be et qui sont saisissables en vertu d’un bref paid under the garnishee summons, and de saisie-arrêt signifié à Sa Majesté en ap- (d) such powers in or over or in respect of plication de la Loi d’aide à l’exécution des the property as might have been exercised by ordonnances et des ententes familiales the bankrupt for his own benefit. dans lequel il est nommé comme débiteur; d) les pouvoirs sur des biens ou à leur égard, qui auraient pu être exercés par le failli pour son propre bénéfice.

107 CANADA

CONSOLIDATION CODIFICATION

Income Tax Act Loi de l’impôt sur le revenu

R.S.C. 1985, c. 1 (5th Supp.) S.R.C. 1985, ch. 1 (5e suppl.)

NOTE NOTE Application provisions are not included in the consolidated Les dispositions d’application ne sont pas incluses dans la text; see relevant amending Acts. présente codification; voir les lois modificatives appro- priées.

Current to January 23, 2014 À jour au 23 janvier 2014

Last amended on January 1, 2014 Dernière modification le 1 janvier 2014

Interest on (2) For the purposes of subsection 161(2) (2) Pour l’application du paragraphe 161(2) Intérêts sur les instalments and section 163.1 as they apply to this Part, a et de l’article 163.1 dans le cadre de la présente acomptes provisionnels life insurer is, in respect of a taxation year, partie, un assureur sur la vie est réputé, pour deemed to have been liable to pay, on or before une année d’imposition, avoir été redevable, au the last day of each month in the year, an instal- plus tard le dernier jour de chaque mois de l’an- ment equal to 1/12 of the lesser of née, d’un acompte provisionnel égal au dou- zième du moins élevé des montants suivants : (a) the annualized tax payable under this Part by the insurer for the year, and a) son impôt payable en vertu de la présente partie pour l’année, calculé sur une année; (b) the annualized tax payable under this Part by the insurer for the immediately pre- b) son impôt payable en vertu de la présente ceding taxation year. partie pour l’année d’imposition précédente, NOTE: Application provisions are not included in the con- calculé sur une année. solidated text; see relevant amending Acts. R.S., 1985, c. 1 NOTE : Les dispositions d’application ne sont pas incluses (5th Supp.), s. 211.5; 1994, c. 7, Sch. II, s. 173; 1998, c. 19, dans la présente codification; voir les lois modificatives ap- s. 215. propriées. L.R. (1985), ch. 1 (5e suppl.), art. 211.5; 1994, ch. 7, ann. II, art. 173; 1998, ch. 19, art. 215.

PART XII.4 PARTIE XII.4 TAX ON QUALIFYING ENVIRONMENTAL IMPÔT DES FIDUCIES POUR TRUSTS L’ENVIRONNEMENT ADMISSIBLE Definitions 211.6 (1) The definitions in this section ap- 211.6 (1) Les définitions qui suivent s’ap- Définitions ply for the purposes of this Part. pliquent à la présente partie.

“excluded trust” “excluded trust”, at any time, means a trust that « contrat admissible » Relativement à une fidu- « contrat « fiducie exclue » cie, contrat conclu avec Sa Majesté du chef du admissible » (a) relates at that time to the reclamation of “qualifying er a well; Canada ou d’une province au plus tard le 1 contract” janvier 1996 ou, s’il est postérieur, le jour qui (b) is not maintained at that time to secure suit d’un an la date d’établissement de la fidu- the reclamation obligations of one or more cie. persons or partnerships that are beneficiaries under the trust; « fiducie exclue » À un moment donné, fiducie « fiducie qui, selon le cas : exclue » “excluded trust” (c) borrows money at that time; a) concerne, à ce moment, la restauration (d) if the trust is not a trust to which para- d’un puits; graph (e) applies, acquires at that time any property that is not described by any of para- b) n’est pas administrée, à ce moment, dans graphs (a), (b) and (f) of the definition “qual- le but de garantir l’exécution des obligations ified investment” in section 204; en matière de restauration d’une ou de plusieurs personnes ou sociétés de personnes (e) if the trust is created after 2011 (or if the qui sont bénéficiaires de la fiducie; trust was created before 2012, it elects in writing filed with the Minister on or before c) emprunte de l’argent à ce moment; its filing-due date for a particular taxation d) si elle n’est pas visée à l’alinéa e), ac- year to have subparagraphs (i) and (ii) apply quiert, à ce moment, un bien qui n’est pas vi- to it for the particular taxation year and all sé aux alinéas a), b) ou f) de la définition de subsequent taxation years, and that election « placement admissible » à l’article 204; is made jointly with Her Majesty in right of e) si elle est établie après 2011 ou si, ayant Canada or a particular province, depending été établie avant 2012, elle fait, conjointe- upon the qualifying law or qualifying con- ment avec Sa Majesté du chef du Canada ou tract in respect of the trust), d’une province, selon la loi admissible ou le (i) acquires at that time any property that contrat admissible qui lui est applicable, un is not described by any of paragraphs (a), choix qu’elle présente au ministre, au plus tard à la date d’échéance de production qui

2756 Impôt sur le revenu — 23 janvier 2014

(b), (c), (c.1), (d) and (f) of the definition lui est applicable pour une année d’imposi- “qualified investment” in section 204, or tion donnée, afin que les sous-alinéas (i) et (ii) s’appliquent à elle pour l’année donnée et (ii) holds at that time a prohibited investment; pour les années d’imposition postérieures : (i) soit acquiert, à ce moment, un bien qui (f) elected in writing filed with the Minister, before 1998 or before April of the year fol- n’est pas visé aux alinéas a), b), c), c.1), d) lowing the year in which the first contribu- ou f) de la définition de « placement ad- tion to the trust was made, never to have missible » à l’article 204, been a qualifying environmental trust; or (ii) soit détient, à ce moment, un placement interdit; (g) was at any previous time during its existence not a qualifying environmental trust (as f) a présenté au ministre, avant 1998 ou determined under the definition “qualifying avant avril de l’année suivant celle où un environmental trust” in subsection 248(1) as premier apport a été effectué à son profit, un it applied at that previous time). choix afin d’être considérée comme n’ayant jamais été une fiducie pour l’environnement “prohibited “prohibited investment”, of a trust at any time, admissible; investment” means a property that « placement interdit» g) à un moment antérieur au moment donné (a) at the time it was acquired by the trust, was described by any of paragraphs (c), (c.1) mais postérieur à son établissement, n’était or (d) of the definition “qualified invest- pas une fiducie pour l’environnement admis- ment” in section 204; and sible, selon la version de la définition de ce terme au paragraphe 248(1) qui s’appliquait (b) was issued by à ce moment antérieur. (i) a person or partnership that has con- « fiducie pour l’environnement admissible » Fi- « fiducie pour tributed property to, or that is a beneficia- ducie qui remplit les conditions suivantes : l’environnement admissible » ry under, the trust, “qualifying a) chacun de ses fiduciaires est : environmental (ii) a person that is related to, or a partner- trust” ship that is affiliated with, a person or (i) Sa Majesté du chef du Canada ou partnership that has contributed property d’une province, to, or that is a beneficiary under, the trust, (ii) une société résidant au Canada qui est or titulaire d’une licence ou par ailleurs auto- (iii) a particular person or partnership if risée par la législation fédérale ou provinciale à exploiter au Canada une entreprise (A) another person or partnership holds d’offre au public de services de fiduciaire; a significant interest (within the meaning assigned by subsection 207.01(4) b) elle est administrée dans l’unique but de with any modifications that the circum- financer la restauration d’un site admissible; stances require) in the particular person c) elle doit ou pourrait devoir être adminis- or partnership, and trée selon : (B) the holder of that significant inter- (i) soit les modalités d’un contrat admis- est has contributed property to, or is a sible, beneficiary under, the trust. (ii) soit une loi admissible; “QET income “QET income tax rate”, for a trust’s taxation d) elle n’est pas une fiducie exclue. tax rate” year, means the amount, expressed as a decimal « taux d’impôt sur le revenu des fraction, by which « loi admissible » Relativement à une fiducie : « loi admissible » “qualifying law” FEA » (a) the percentage rate of tax provided under a) loi fédérale ou provinciale édictée au plus paragraph 123(1)(a) for the taxation year tard le 1er janvier 1996 ou, s’il est postérieur, le jour qui suit d’un an la date d’établisse- exceeds ment de la fiducie; (b) the total of

2757 Income Tax — January 23, 2014

(i) the percentage that would, if the trust b) si la fiducie est établie après 2011, ordon- were a corporation, be its general rate re- nance rendue : duction percentage, within the meaning (i) par un tribunal constitué en vertu assigned by subsection 123.4(1), for the d’une loi visée à l’alinéa a), taxation year, and (ii) au plus tard le jour qui suit d’un an la (ii) the percentage deduction from tax date d’établissement de la fiducie. provided under subsection 124(1) for the taxation year. « placement interdit » Est un placement interdit « placement d’une fiducie à un moment donné le bien qui, à interdit » “qualifying “qualifying contract”, in respect of a trust, “prohibited la fois : investment” contract” means a contract entered into with Her Majesty « contrat admissible » in right of Canada or a province on or before a) au moment de son acquisition par la fidu- the later of January 1, 1996 and the day that is cie, était visé à l’un des alinéas c), c.1) ou d) one year after the day on which the trust was de la définition de « placement admissible » à created. l’article 204;

“qualifying “qualifying environmental trust” means a trust b) a été émis par l’une des entités suivantes : environmental trust” (a) each trustee of which is (i) une personne ou une société de per- « fiducie pour sonnes qui a fait un apport de biens à la fi- l’environnement (i) Her Majesty in right of Canada or a ducie ou qui est bénéficiaire de celle-ci, admissible » province, or (ii) une personne liée, ou une société de (ii) a corporation resident in Canada that personnes affiliée, à une personne ou à is licensed or otherwise authorized under une société de personnes qui a fait un ap- the laws of Canada or a province to carry port de biens à la fiducie ou qui est bénéfi- on in Canada the business of offering to ciaire de celle-ci, the public its services as trustee; (iii) une personne ou société de personnes (b) that is maintained for the sole purpose of donnée à l’égard de laquelle les faits ci- funding the reclamation of a qualifying site; après s’avèrent : (c) that is, or may become, required to be (A) une autre personne ou société de maintained under personnes détient une participation no- (i) the terms of a qualifying contract, or table, au sens du paragraphe 207.01(4), (ii) a qualifying law; and compte tenu des adaptations néces- saires, dans la personne ou société de (d) that is not an excluded trust. personnes donnée, “qualifying law” “qualifying law”, in respect of a trust, means (B) le détenteur de cette participation « loi admissible » notable a fait un apport de biens à la fi- (a) a law of Canada or a province that was enacted on or before the later of January 1, ducie ou est bénéficiaire de celle-ci. 1996 and the day that is one year after the « site admissible » Relativement à une fiducie, « site day on which the trust was created; and site au Canada qui est ou a été utilisé principa- admissible » “qualifying site” lement à l’une ou plusieurs des fins suivantes : (b) if the trust was created after 2011, an order made a) l’exploitation d’une mine; (i) by a tribunal constituted under a law b) l’extraction d’argile, de tourbe, de sable, described by paragraph (a), and de schiste ou d’agrégats, y compris la pierre de taille et le gravier; (ii) on or before the day that is one year after the day on which the trust was creat- c) l’entassement de déchets; ed. d) si la fiducie a été établie après 2011, l’ex- “qualifying site” “qualifying site”, in respect of a trust, means a ploitation d’un pipeline. « site site in Canada that is or has been used primarily admissible » for, or for any combination of,

2758 Impôt sur le revenu — 23 janvier 2014

(a) the operation of a mine, « taux d’impôt sur le revenu des FEA » Pour « taux d’impôt une année d’imposition d’une fiducie, l’excé- sur le revenu des (b) the extraction of clay, peat, sand, shale FEA » dent, exprimé en fraction décimale, du taux vi- “QET income or aggregates (including dimension stone and tax rate” gravel), sé à l’alinéa a) sur le total visé à l’alinéa b) : (c) the deposit of waste, or a) le taux d’impôt fixé à l’alinéa 123(1)a) pour l’année; (d) if the trust was created after 2011, the operation of a pipeline. b) le total des pourcentages suivants : (i) le pourcentage de réduction du taux général, au sens du paragraphe 123.4(1), qui s’appliquerait à la fiducie pour l’année si elle était une société, (ii) le taux de la déduction d’impôt prévue au paragraphe 124(1) pour l’année. Charging (2) Every trust that is a qualifying environ- (2) La fiducie qui est une fiducie pour l’en- Assujettissement provision mental trust at the end of a taxation year (other vironnement admissible à la fin d’une année than a trust that is at that time described by d’imposition, à l’exception d’une fiducie qui, à paragraph 149(1)(z.1) or (z.2)) shall pay a tax ce moment, est visée aux alinéas 149(1)z.1) ou under this Part for the year equal to the amount z.2), est tenue de payer en vertu de la présente determined by the formula partie pour l’année un impôt égal à la somme A × B obtenue par la formule suivante : where A × B A is the trust’s income (computed as if this où : Act were read without reference to subsec- A représente son revenu, calculé en vertu de tions 104(4) to (31) and sections 105 to la partie I pour l’année compte non tenu des 107) under Part I for the year; and paragraphes 104(4) à (31) ni des articles B is the QET income tax rate for the year. 105 à 107; B le taux d’impôt sur le revenu des FEA pour l’année. Return (3) Every trust that is a qualifying environ- (3) La fiducie qui est une fiducie pour l’en- Déclaration mental trust at the end of a taxation year shall vironnement admissible à la fin d’une année file with the Minister on or before its filing-due d’imposition est tenue de produire auprès du date for the year a return for the year under this ministre, au plus tard à la date d’échéance de Part in prescribed form containing an estimate production qui lui est applicable pour l’année, of the amount of its tax payable under this Part une déclaration pour l’année en vertu de la pré- for the year. sente partie sur formulaire prescrit contenant une estimation de son impôt payable en vertu de la présente partie pour l’année. Payment of tax (4) Every trust shall pay to the Receiver (4) Toute fiducie est tenue de payer au rece- Paiement de General its tax payable under this Part for each veur général son impôt payable en vertu de la l’impôt taxation year on or before its balance-due day présente partie pour chaque année d’imposi- for the year. tion, au plus tard à la date d’exigibilité du solde qui lui est applicable pour l’année. Provisions (5) Subsections 150(2) and 150(3), sections (5) Les paragraphes 150(2) et (3), les ar- Dispositions applicable to 152, 158 and 159, subsections 161(1) and ticles 152, 158 et 159, les paragraphes 161(1) et applicables Part 161(11), sections 162 to 167 and Division J of (11), les articles 162 à 167 et la section J de la

2759 CANADA

CONSOLIDATION CODIFICATION

Interpretation Act Loi d’interprétation

R.S.C., 1985, c. I-21 L.R.C. (1985), ch. I-21

Current to January 23, 2014 À jour au 23 janvier 2014

Last amended on April 1, 2005 Dernière modification le 1 avril 2005

any act or thing, all such powers as are neces- des mesures ou de les faire exécuter comporte sary to enable the person, officer or functionary les pouvoirs nécessaires à l’exercice de celui-ci. to do or enforce the doing of the act or thing are deemed to be also given. Powers to be (3) Where a power is conferred or a duty (3) Les pouvoirs conférés peuvent s’exercer, Modalités exercised as imposed, the power may be exercised and the et les obligations imposées sont à exécuter, en d’exercice des required pouvoirs duty shall be performed from time to time as tant que de besoin. occasion requires. Power to repeal (4) Where a power is conferred to make reg- (4) Le pouvoir de prendre des règlements Pouvoir ulations, the power shall be construed as in- comporte celui de les modifier, abroger ou rem- réglementaire cluding a power, exercisable in the same man- placer, ou d’en prendre d’autres, les conditions ner and subject to the same consent and d’exercice de ce second pouvoir restant les conditions, if any, to repeal, amend or vary the mêmes que celles de l’exercice du premier. regulations and make others. L.R. (1985), ch. I-21, art. 31; L.R. (1985), ch. 27 (1er sup- R.S., 1985, c. I-21, s. 31; R.S., 1985, c. 27 (1st Supp.), s. pl.), art. 203. 203. Forms 32. Where a form is prescribed, deviations 32. L’emploi de formulaires, modèles ou Formulaires from that form, not affecting the substance or imprimés se présentant différemment de la pré- calculated to mislead, do not invalidate the sentation prescrite n’a pas pour effet de les inform used. valider, à condition que les différences ne R.S., c. I-23, s. 26. portent pas sur le fond ni ne visent à induire en erreur. S.R., ch. I-23, art. 26. Gender 33. (1) Words importing female persons in- 33. (1) Le masculin ou le féminin s’ap- Genre clude male persons and corporations and words plique, le cas échéant, aux personnes physiques grammatical importing male persons include female persons de l’un ou l’autre sexe et aux personnes mo- and corporations. rales. Number (2) Words in the singular include the plural, (2) Le pluriel ou le singulier s’appliquent, le Nombre and words in the plural include the singular. cas échéant, à l’unité et à la pluralité. grammatical Parts of speech (3) Where a word is defined, other parts of (3) Les termes de la même famille qu’un Famille de mots and grammatical speech and grammatical forms of the same terme défini ont un sens correspondant. forms word have corresponding meanings. L.R. (1985), ch. I-21, art. 33; 1992, ch. 1, art. 90. R.S., 1985, c. I-21, s. 33; 1992, c. 1, s. 90.

OFFENCES INFRACTIONS Indictable and 34. (1) Where an enactment creates an of- 34. (1) Les règles suivantes s’appliquent à Mise en summary fence, l’interprétation d’un texte créant une infrac- accusation ou conviction procédure offences tion : sommaire (a) the offence is deemed to be an indictable offence if the enactment provides that the of- a) l’infraction est réputée un acte criminel si fender may be prosecuted for the offence by le texte prévoit que le contrevenant peut être indictment; poursuivi par mise en accusation; (b) the offence is deemed to be one for b) en l’absence d’indication sur la nature de which the offender is punishable on summa- l’infraction, celle-ci est réputée punissable ry conviction if there is nothing in the con- sur déclaration de culpabilité par procédure text to indicate that the offence is an in- sommaire; dictable offence; and c) s’il est prévu que l’infraction est punis- (c) if the offence is one for which the of- sable sur déclaration de culpabilité soit par fender may be prosecuted by indictment or mise en accusation soit par procédure som- for which the offender is punishable on sum- maire, la personne déclarée coupable de l’in-

Province of Alberta

PERPETUITIES ACT

Revised Statutes of Alberta 2000 Chapter P-5

Current as of May 27, 2013

Office Consolidation

Alberta Queen’s Printer 5th Floor, Park Plaza 10611 - 98 Avenue Edmonton, AB T5K 2P7 Phone: 780-427-4952 Fax: 780-452-0668 E-mail: [email protected] Shop on-line at www.qp.alberta.ca RSA 2000 Section 21 PERPETUITIES ACT Chapter P-5

invalid from the time of its creation, are entitled to the unexpended income or capital. RSA 1980 cP-4 s20

Rule in Whitby vs. Mitchell abolished 21 The rule of law prohibiting the disposition, after a life interest to an unborn person, of an interest in land to the unborn child or other issue of an unborn person is hereby abolished, but without affecting any other rule relating to perpetuities. RSA 1980 cP-4 s21

Rules not applicable to employee benefit trusts 22 The rules of law and statutory enactments relating to perpetuities and to accumulations do not apply and are deemed never to have applied to the trusts of a plan, trust or fund established for the purpose of providing pensions, retirement allowances, annuities or sickness, death or other benefits to employees or persons not being employees engaged in any lawful calling or to their widows, widowers, dependants or other beneficiaries. RSA 1980 cP-4 s22

Application to Crown 23 This Act and the rule against perpetuities bind the Crown except in respect of dispositions of property made by the Crown. RSA 1980 cP-4 s23

Accumulations of income 24(1) The Accumulations Act, 1800, 39 & 40 Geo. III c98 (U.K.), does not apply in Alberta.

(2) When property is settled or disposed of in such manner that the income of the property may or must be accumulated wholly or in part, the power or direction to accumulate that income is valid if the disposition of the accumulated income is or may be valid but not otherwise.

(3) Nothing in this section affects the rights of any person to terminate an accumulation that is for the person’s benefit or any jurisdiction or power of the court to direct payments from accumulations pursuant to any statute.

Province of Alberta

TRUSTEE ACT

Revised Statutes of Alberta 2000 Chapter T-8

Current as of February 1, 2012

Office Consolidation

(b) that the trustee has acted honestly and reasonably and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which the trustee committed that breach,

then the court may relieve the trustee either wholly or partly from personal liability for the breach of trust. RSA 1980 cT-10 s41

Variation of Trusts Variation of trusts 42(1) In this section, “beneficiary”, “beneficiaries”, “person” or “persons” includes charitable purposes and charitable institutions.

(2) Subject to any trust terms reserving a power to any person or persons to revoke or in any way vary the trust or trusts, a trust arising before or after the commencement of this section, whatever the nature of the property involved and whether arising by will, deed or other disposition, shall not be varied or terminated before the expiration of the period of its natural duration as determined by the terms of the trust, except with the approval of the Court of Queen’s Bench.

(3) Without limiting the generality of subsection (2), the prohibition contained in subsection (2) applies to

(a) any interest under a trust where the transfer or payment of the capital or of the income, including rents and profits

(i) is postponed to the attainment by the beneficiary or beneficiaries of a stated age or stated ages,

(ii) is postponed to the occurrence of a stated date or time or the passage of a stated period of time,

(iii) is to be made by instalments, or

(iv) is subject to a discretion to be exercised during any period by executors and trustees, or by trustees, as to the person or persons who may be paid or may receive the capital or income, including rents and profits, or as to the time or times at which or the manner in which payments or transfers of capital or income may be made,

and

(b) any variation or termination of the trust or trusts

(i) by merger, however occurring;

22 RSA 2000 Section 42 TRUSTEE ACT Chapter T-8

(ii) by consent of all the beneficiaries;

(iii) by any beneficiary’s renunciation of the beneficiary’s interest so as to cause an acceleration of remainder or reversionary interests.

(4) The approval of the Court under subsection (2) of a proposed arrangement shall be by means of an order approving

(a) the variation or revocation of the whole or any part of the trust or trusts,

(b) the resettling of any interest under a trust, or

(5) In approving any proposed arrangement, the Court may consent to the arrangement on behalf of

(a) any person who has, directly or indirectly, an interest, whether vested or contingent, under the trust and who by reason of minority or other incapacity is incapable of consenting,

(b) any person, whether ascertained or not, who may become entitled directly or indirectly to an interest under the trusts as being, at a future date or on the happening of a future event, a person of any specified description or a member of any specified class of persons,

(d) any person in respect of any interest of the person’s that may arise by reason of any discretionary power given to anyone on the failure or determination of any existing interest that has not failed or determined.

(6) Before a proposed arrangement is submitted to the Court for approval it must have the consent in writing of all other persons who are beneficially interested under the trust and who are capable of consenting to it.

(7) The Court shall not approve an arrangement unless it is satisfied that the carrying out of it appears to be for the benefit of each person on behalf of whom the Court may consent under subsection (5), and that in all the circumstances at the time of the application to the Court the arrangement appears otherwise to be of a justifiable character.

Page 1

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

Bank of Montreal v. Northguard Holdings Ltd.

The Bank of Montreal, (Plaintiff) Respondent v. Northguard Holdings Limited and Northguard Acceptance Corpo- ration Ltd., (Defendants) Respondents/Defendants v. R. Sures & Associates Ltd., R. Sures & Associates (B.C.) Ltd., Estelle Sures as Trustee for Nathan Sures, Estelle Sures as Trustee for Michele Sures, Estelle Sures as Trustee for Gary Sures, Estelle Sures as Trustee for Corrine Sures and Tabala Oreck (hereinafter collectively referred to as "the Sures Group"), Appellants v. Tri-State Products Limited, Philip Kives Holdings Ltd., National Developments Ltd., P & M Developments Ltd., Gay Corman, Dr. Harry Corman, Lillian Posner, Tasmara Posner, Elliot Posner, Sophie Elfen- bein, and Philip Kives representing the estate of Lillian Schacter, Appellants/Respondents v. Hercules Management Ltd., Emarjay Holdings Ltd., Arlington Management Consultants Ltd., Guardian Finance of Canada Ltd., Max Freed and David Korn, (Complainants) Appellants v. Philip Kives Holdings Ltd. and Gay Corman, (Applicants) Appellants v. R. Sures & Associates Ltd., Corrine Tapley and Tel Ventures Ltd., (Applicants) Appellants v. Kenneth Lander, Respondent v. R. Sures & Associates Ltd., Tabala Oreck, Corinne Tapley, Tel Ventures Ltd., Mark Tapley, David Brodovsky, William Brodovsky, Sharon Brodovsky, Sidney Brodovsky, Bernard W. Brown Agencies and Hilderman Environmental Design, Respondents

Manitoba Court of Appeal

Monnin C.J.M., Huband, Twaddle JJ.A.

Judgment: January 5, 1987 Docket: Docs. 219/86, 220/86, 221/86, 365/86, 374/86, 375/86

Proceedings: affirming Bank of Montreal v. Northguard Holdings Ltd. (1986), (sub nom. ) 1986 CarswellMan 185, (sub nom. ) 40 Man. R. (2d) 260 (Man. Q.B.); (1986), (sub nom. ) 1986 CarswellMan 23, (sub nom. ) 42 Man. R. (2d) 194 (Man. Q.B.)

Counsel: K.A. Filkow, Q.C. and P.A. Sim, for R. Sures et al.

D.C.H. McCaffrey, Q.C. and G.P.S. Riley, for Tri-State, Philp Kives et al.

A.D. MacInnes, Q.C. and A.L. Clearwater, for Hercules Management et al.

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

D.A. Bedford and L.J. Bird, for Bank of Montreal.

W.T. Wright and D.M. Jackson, for Northguard Holdings et al.

B.E. Cristall, for investor Lander.

R.C. Dixon, for investor Dixon.

Subject: Corporate and Commercial

Receivers --- Conduct and liability of receiver — Rights

Twaddle, J.A.:

1 TheseappealsarefromordersofSimonsen,J.[(1986)40Man.R.(2d)260and42Man.R.(2d)194]made inthe course of an interim receivership. The learned judge

(i) declined to approve a proposal submitted by the receiver for the settlement of claims to trust interests in property held by the receiver;

(ii) authorized the receiver to distribute funds, claimed as trust property, subject to holdbacks to secure the payment by the beneficiaries of their possible obligations to the receiver;

(iii) dismissed an application by the shareholders of the companies in receivership for leave to commence proceedings in the name of the companies.

The receiver asks that the settlement proposal be approved whilst the shareholders ask that no funds be distributed until all issues are resolved. The shareholders also ask the court to help in the resolution of disputes by directing the trial of certain issues.

The Facts

2 Northguard Holdings Limited and Northguard Acceptance Corporation Ltd. (respectively, "Holdings" and "Acceptance": collectively, "the companies") carried on, in one way or another, the business of lending money on the security of property mortgages. Although distinct corporations, the companies were controlled by the same two individuals, David Korn and Max Freed (together, "the principals"). To finance a mortgage loan, Holdings or Ac- ceptance would obtain funds from a number of investors. In return for the money advanced by an investor, Holdings or Acceptance, whichever was the mortgagee, gave a declaration that it held a fractional interest in a particular mortgage for the benefit of the investor, the interest being that fraction of the mortgage loan that the investor's money was of it. In the case of some mortgages the total of fractional interests did not amount to a whole interest, whilst in one case, at

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 least, the total of fractional interests exceeded the whole.

3 The trust declarations obligated Holdings or Acceptance, as the case might be, to account to the investor for the investor's share of monies (including interest) received by it from the mortgagor. The liability to account was subject to a right to deduct expenses incurred by the trustee in respect of the mortgage. The declarations expressly provided that the trustee's obligation was limited to accounting for monies which came into its hands.

4 The mortgage loans made by the companies were to earn interest at a stated percentage rate above prime which, in the instances disclosed in the evidence, was quite high. The interest rates were disclosed in the trust declarations.

5 The companies were customers of The Bank of Montreal (the "bank") which had advanced monies to them from time to time. In 1981 the bank obtained a debenture from the companies securing the repayment of the monies lent and to be lent. The obligations under the debenture were undertaken jointly by the companies. As between them and the bank no distinction was made as to which owned what assets. The obligations of the companies were guaranteed by the principals.

6 Payments due under many of the mortgages held by Holdings or Acceptance fell into arrears. The companies paid out monies for real property taxes and legal costs to protect the security. Proceedings to enforce the security were taken.

7 Notwithstanding the absence of receipts for which one or other of the companies was liable to account, Holdings made payments under 16 of the mortgages to those investors claiming equitable interests in them. The payments were on account of the amounts Holdings should have received from the mortgagors, assuming no default had occurred. No deduction was made with respect to the expenses incurred.

8 No payments in advance of receipts were made with respect to another group of mortgages, 13 or 14 in number, administered by one Alexander Cox, a partner from before 1981 until mid-1982 in the firm of auditors engaged by the companies. Full information as to how it came about that Cox administered these mortgages, and as to how he did so, is not before us.

9 By August, 1984, the companies, jointly, were indebted to the bank in an amount in excess of $4,000,000.00. The bank commenced an action against the companies for an accounting of monies due, the appointment of a receiver and manager and an order that the property of the companies be sold. In that action the bank moved for an interloc- utory order appointing a receiver and manager of both of the companies. This appointment was agreed to by the companies. The order appointing the receiver authorized it to settle proceedings by or against it as was necessary for the protection of the property the subject of the receivership.

10 At the time the receiver was appointed, the assets of the companies free of claims to equitable interests by investors were worth far less than the amount due to the bank. The bank's interest was thus in direct conflict with the interests of the investors as equitable claimants. Notwithstanding this clear conflict, the receiver retained as its counsel the lawyer who was acting for the bank. The receiver then advanced its claims against the investors.

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

11 The bank's position, adopted apparently by the receiver, was that the investors' claims to equitable interests in the mortgages were invalid and that the bank was entitled to receive as a secured creditor all of the monies realized from the mortgages. The bank says that, even if the investors have equitable interests, each is liable to repay the monies advanced to him in excess of what the companies received from the mortgagors and to pay a pro rata share of the monies expended to protect the security in which he had an interest. Additionally, the bank says, the investors are liable to pay interest on the advanced payments and on the monies expended.

12 The investors (or at least those of them represented before this court) admitted that payments had been made to some of them to which those investors were not entitled. They said, however, that the payments were made voluntarily with full knowledge of the facts and that the recipients of them are not liable to refund the amounts advanced, to contribute to the expenses or to pay interest.

13 The principals of the companies take a third position. They say that the monies advanced to investors were advanced without the knowledge or consent of the principals: that the advances were part of a fraudulent conspiracy between Morris, Cox and some investors to benefit themselves at the expense of the companies.

14 A compromise of the positions taken by the bank and on behalf of the investors was proposed. The persons purporting to represent the investors in the settlement negotiations were Cox and those investors alleged by the principals to be involved in a conspiracy. These representatives did not have the authority of all investors. Once the terms of the compromise had been agreed upon by the bank and those investors who were represented, a letter was written to all investors inviting them to consent to the proposed settlement. The invitation was expressed as being made on behalf of the bank, but the lawyer sending it was also the lawyer for the receiver. The vast majority but not all of the investors gave their consent.

15 The proposed settlement was not a compromise between the bank and each investor individually. It was expressed to be a compromise between the bank and all investors. A majority of investors, it was argued, could bind all investors. The settlement proposed payment

(a) to an investor, of a share in the monies realized from the sale of the mortgage security in which the investor alleged he had an interest calculated in accordance with a complicated formula which reflected his potential liability to repay monies paid in error and contribute to the expenses incurred to protect the security;

(b) to the bank, of a greater share of the funds realized from the securities than it would have received if trusts existed and the monies paid in error were irrecoverable.

16 The receiver applied to the Court of Queen's Bench for an order approving the settlement. The receiver's application invited the court, in effect, to impose the settlement on the dissenting minority and, to shield the receiver from suit by the principals. The court did not give its approval.

17 At the same time the court rejected a motion by the principals for an order permitting them to commence an

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 action in the name of the companies against Messrs. Morris and Cox and two of the investors for damages for fraudulent conspiracy.

18 Not long after the court declined to approve the settlement, a number of investors in the group of mortgages administered by Cox applied to the court for an order requiring the receiver to pay to the beneficiaries of the trusts involved their pro rata shares of monies obtained on the realization of those mortgage securities. Many of the investors, who were beneficiaries of these alleged trusts, were also claimants to interests in the other group of 16 mortgages. The application was opposed by the bank, the principals, and the receiver. The bank disputed the validity of the trusts. The principals argued that no disbursement should be made until all possible claims against investors have been decided. The receiver argued that if monies were to be paid out, there should be held back

(i) from all investors, funds to cover the receiver's costs (5% of the distribution was the amount suggested); and

(ii) from those investors with equitable claims to interests in the group of 16 mortgages, funds to cover such investors' potential liability to repay, with interest, the amounts incorrectly advanced to them.

19 Mr. R. C. Dixon, a claimant to funds realized under one of the mortgages administered by Cox, filed his own application for an order that the receiver pay him the full amount due to him without deduction, the loan in which he had an interest having been repaid in its entirety.

20 The principals asked that, instead of ordering disbursement of funds, the court direct the trial of issues as to

(a) whether or not the monies realized on the mortgages were trust funds;

(b) the right of the receiver to set off against the portion of a trust fund due an investor any amount previously advanced to that investor by the companies in error;

(c) the obligation of investors to pay the receiver the amounts advanced in error, the costs incurred by the companies in protecting the securities, the amount the companies should have paid themselves, on account of their own equitable interests, and interest on any amounts payable; and

(d) the liability of investors who received advance payments to pay damages for participating in a scheme which damaged the business of the companies.

21 The court ordered an interim distribution of the funds realized from the group of mortgages administered by Cox to all with beneficial interests in them, except to specified persons, but subject to holdbacks on account of the receiver's costs and of the payments made in error, to those investors in a Cox administered mortgage who also had an interest in a mortgage in the other group. The court made no order as to the trial of issues and no specific order on Mr. Dixon's application.

The Issues

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

22 From these several dispositions several parties now appeal. The matters in issue before this Court by reason of the different appeals are:

1. Did the learned judge in Motions Chambers err in refusing to approve the settlement proposed?

2. Did the learned judge in Motions Chambers err in approving a distribution of monies under the Cox administered mortgages?

3. Did the learned judge in Motions Court err in authorizing holdbacks from the monies to be distributed?

4. Did the learned judge in Motions Court err in failing to authorize the commencement of derivative actions or to direct the trial of issues?

The Settlement

1. Trust Property

23 A receiver has no right to possession or control of property which the debtor holds in trust for another. A receiver who takes possession of trust property does so as a constructive trustee. If more than one trust is involved the interposition of the receiver does not cause the several trusts to merge. The receiver is bound by each trust separately.

24 In the case of property alleged to be held in trust, a receiver may not disregard a beneficial interest or compromise it without the agreement of the beneficial claimant. The receiver cannot deal with beneficial claimants as a group unless the group representative has authority from each claimant to bind each to the dealings.

25 The fact that the receiver regards the equitable claimants as ordinary creditors does not alter the entitlement of each claimant to have the nature of his interest determined by a court.

26 In Winnipeg Mortgage Exchange Ltd. (1982), 43 C.B.R. (N.S.) 119, claimants had invested money with the debtor before it became bankrupt. Some of the claimants alleged that they had a beneficial interest in specific trust property. Notwithstanding, this court held that all of the assets should be pooled and distributed among the investors according to their respective claims. In that case, however, the debtor's property was being administered in bankruptcy and the court held, as a fact, that it had been the intention of all of the parties at the time when the monies had been invested that all of the investors would be treated on the same footing regardless of the particular document given as evidence of the investment.

2. The Majority of Creditors

27 Insolvency legislation provides a scheme of distribution among creditors of whatever assets of the debtor are available. As a creditor of a bankrupt usually has no recourse against the debtor other than in the bankruptcy, all

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 creditors of equal rank share evenly in the assets available. The creditors collectively, therefore, have a right to participate in the decision-making process relating to the trustee's pursuit of assets and the acceptance or rejection of a debtor's proposal.

28 In a receivership, ordinary creditors are not limited in the enforcement of their claims to a share in the funds left in the hands of the receiver after satisfaction of the secured creditor. The debtor remains liable to his creditors when the receiver is discharged. There is no law, other than that found in legislation dealing with insolvency, which gives a majority of creditors a right to impose a settlement of all claims against the debtor on a minority of creditors.

3. A Settlement with some Creditors

29 There is nothing to prevent a receiver authorized to do so from compromising several claims by or against the debtor on a common formula. For an agreement of compromise to be binding, however, the agreement itself must specify which persons are party to it and accordingly bound by it. A creditor who agrees to a compromise involving all creditors is not bound by an agreement that is with some creditors only.

4. Criteria for Court Approval

30 In reviewing a settlement proposed by a receiver the court must consider not only the interests of the secured creditor and of third parties dealing with the receiver, but also those of the debtor and of its shareholders. The secured creditor may be able to recover by way of the settlement sufficient to retire the balance owing to it. The third party may, in these circumstances, welcome a compromise which reduces its exposure to liability. The debtor may be less enamoured with a compromise which denies it the opportunity of advancing a claim which, if successful, would result in the recovery of monies surplus to the amount due the secured creditor. The shareholders may wish to litigate a claim for damages which, if successful, would reduce their liability on a guarantee of the company's indebtedness to the secured creditor.

31 The court must balance the conflicting interests taking into account

(i) the amount due to the secured creditor;

(ii) the value of all assets available to the secured creditor;

(iii) the amount of the contingent liability of shareholders under personal guarantees;

(iv) the amount claimed against a third party;

(v) the merits of that claim;

(vi) the costs of pursuing the claim.

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

The compromise should be approved only if the court is satisfied that it is reasonable having regard to all the interests.

5. The Court Order

32 On the facts of the present case the learned trial judge was, in my view, correct in refusing to approve the settlement because

(i) each of the persons with whom the receiver purported to effect a settlement claimed a separate right to a specific interest in trust property;

(ii) a majority of creditors has no right to impose a settlement on an unwilling minority of creditors in a receivership;

(iii) insufficient facts were placed before the court to enable it to determine the reasonableness of the settlement.

33 On the hearing of the appeal we were asked to carve out of the overall settlement a partial settlement involving only those claimants who had given their consent. It is impossible to say, however, that all of those who did consent would have done so if they had known that other claimants were to be treated differently.

34 There are other reasons for rejecting a partial settlement at this time. There is insufficient evidence as to the value of other assets available to the bank and, hence, of the amount for which principals may be liable as guarantors. The amount erroneously paid to each claimant is not stated. The claimants are associated in an amorphous group without regard to the vulnerability of each to an action for the repayment of monies paid to a claimant in error.

The Distribution of Assets

35 A receiver who has possession of funds which he acknowledges to be the subject of trusts is a trustee of them. He is obliged to disburse them in accord with the terms of the trust. It is incorrect to refer to this disbursement as a distribution of funds as though it was intended to divide available assets rateably amongst creditors of equal rank.

36 A beneficiary who claims an interest in trust funds for which a receiver has failed to account may apply to the court for an order that the receiver do so. It is desirable that such an application be supported by evidence as to the creation of the trust, the circumstances in which the trust obligation was assumed by the receiver, a demand for an accounting and the calculation of the amount alleged to be due. The beneficiary should limit his application to his own beneficial interest.

37 If there is a dispute as to the entitlement of a beneficial claimant to an accounting, any party interested in the proceedings may oppose the application. If there is any merit to the dispute, the court should direct the trial of an issue. If there is more than one claim, one or more issues may have to be directed.

38 In the present case the bank does not acknowledge the existence of trust interests. Except in Mr. Dixon's case,

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 the claimants did not support their applications for distribution with adequate information. In their cases it is impossible to decide on the information available whether or not trusts exist. Before any monies can be disbursed the entitlement of the claimants to trust interests must be determined. For that reason I would set aside the order of distribution made by the learned judge in Motions Court.

39 Mr. Dixon did support his application with affidavit evidence establishing a prima facie case that the receiver held funds in trust for his account with National Trust Co. Ltd. The bank tendered no evidence on this point, but argued that there was doubt as to a relationship of trustee and beneficiary between Holdings and Mr. Dixon. That argument has merit with respect to other investors in whose cases virtually no evidence is before us as to the circumstances in which the funds were invested with the companies, but in the case of Mr. Dixon there is sufficient evidence of a trust relationship to require the bank to offer something more than its general argument in opposition. In the circumstances, I would order the receiver to account to Mr. Dixon for the current balance of the fund identified in its letter to him of March 19, 1985, and to pay the amount due to National Trust Co. Ltd.

40 The receiver asks that a deduction be made from the amount due Mr. Dixon on account of its costs. The evidence is that the mortgage in which Mr. Dixon had an interest was paid in full. There were, therefore, no costs of realization such as would have been deductible from amounts realized by Holdings under the express terms of the trust. Holdings was not entitled to remuneration for its role as trustee, the consideration, if any, for it agreeing to act as trustee being something other than a charge against the mortgage proceeds. In that circumstance, Mr. Dixon should not be placed in a worse position because the receiver assumed control of the trust property. The receiver is entitled to no remuneration from Mr. Dixon.

41 In view of the disposition of the appeal against the order of distribution which I propose, it is unnecessary to consider the propriety of the holdbacks.

The Derivative Action

42 A cause of action vested in a company placed in receivership is, as a general rule, enforceable by the receiver in the name of the company. If the cause of action is not of sufficient merit, in the opinion of the receiver, to justify the costs of pursuing it or if the assets of the company, apart from the cause of action, are sufficient to discharge the security of the creditor who obtained the order of receivership, the receiver need not pursue the claim. If the receiver decides not to do so, the shareholders of the company should be permitted to bring the action, assuming it not to be frivolous, in the name of the company, but subject to the charge of the security holder on the amount recovered.

43 If more than one cause of action exists against a third party, the court must consider, on an application by shareholders for leave to commence action on one of them, what effect the assertion of that claim will have on the receiver's right to enforce the other claim.

44 In the present case, the receiver has not decided to abandon the cause of action which the principals wish to assert. Following the court's refusal to approve the settlement proposed, the receiver indicated that its position would have to be reconsidered. It would be premature, in my view, to authorize the principals to commence an action which the receiver might wish to take until the receiver has had an opportunity, following the decision on this appeal, to

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 decide whether or not to do so.

45 Inanyevent

(a) the persons against whom an action for fraudulent conspiracy would be taken claim an interest in assets of the receivership;

(b) there remains a claim for the recovery of monies paid in error, which the receiver may wish to assert.

The inter-relationship of the several claims is such that, in the circumstances of this case, the shareholders should not be given leave to commence an action at this time.

The Trial of Issues

46 The court has a supervisory jurisdiction over its receiver. That jurisdiction should be exercised when necessary to resolve difficulties which a receiver encounters. In this case the nature of the obligations owed by the companies to investors and the liability of some of those investors to account for monies received by them from the companies are difficult questions which may have to be answered by the court.

47 Each investor is entitled to have the issue of whether or not his funds are held in trust and the bank's claim, if any, for the recovery of money paid to him in error decided by the court. That does not mean that each claim must be separately litigated. The claims by and against several claimants with similar interests may be consolidated. The bank, the principals and a claimant may agree to compromise a particular claim. Such a compromise may be agreed to immediately or after the court has rendered its decision in a similar case. A compromise without the consent of the principals may be approved by the court if it is otherwise reasonable having regard to all the circumstances.

48 The court before which the issues are to be tried should have control of its own proceedings. Having indicated in general terms the nature of the issues to be tried, I propose leaving the more precise definition of them to the trial court. The bank should now apply, on notice to all claimants and to the principals, to the Court of Queen's Bench for an order directing the trial of issues. At the hearing of the application the issues should be defined and the procedure for their resolution determined.

49 The claim for damages for fraudulent conspiracy should not be proceeded with at this time. The right to apply for leave to commence such an action in the future is not precluded.

Costs

50 Some of the parties have been more successful on these appeals than others, but success has, nonetheless, been divided. To order that the costs of the proceedings to date should be reserved for the decision of the judge trying the issues would further complicate a matter which is complicated enough already. I would therefore make no order as to costs except in the case of Mr. Dixon. Mr. Dixon should have his costs in the Court of Queen's Bench (where he was

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 represented by counsel) paid to him by the bank, which I would fix in the amount of $500.00. No costs should be payable to him in this court before which he represented himself.

Other Jurisdiction

51 The Supreme Court of British Columbia also appointed the receiver as receiver of certain assets of the companies situated in that jurisdiction. Those assets were already the subject of the receivership in this jurisdiction. It might have been argued that further proceedings with respect to real estate in British Columbia or the money into which it had been converted should be taken in the court of that province, but that argument was not raised. In those circumstances, I am of the view that the proceedings in the Court of Queen's Bench of this province should continue unless its jurisdiction is challenged and found to be wanting.

Huband, J.A.:

52 I am in agreement with the reasons for judgment of Twaddle, J.A. I wish to add some comment of my own. I will use the same terminology to describe the parties as used by Twaddle, J.A.

53 It would seem abundantly clear that the companies are insolvent. Counsel representing the principals conceded as much. Yet neither the companies, nor any investors, nor the bank as the major secured creditor, nor any other potential creditor, has formalized matters by obtaining an order appointing a trustee in bankruptcy.

54 I do not think it is appropriate to use receivership as a mechanism to identify and pay trust claims and to pay the claims of secured and non-secured creditors, leaving nothing but the shells of insolvent companies. Receivership is a mechanism to provide temporary control of assets, and sometimes management, in order to protect the interest of creditors while the debtor has the opportunity to right its affairs, and having done so, the receivership is ended and the debtor continues its business.

55 In this case the real estate market tumbled, and mortgage investments turned sour. When the legal disputes are all over and done the companies will continue to be insolvent.

56 Bankruptcy laws were passed in order to provide the administrative system for dealing with insolvent companies. The problem in this litigation is that everyone is trying to deal with these insolvent companies through a different system, and it is working to no one's satisfaction.

57 This court has previously stated that where a company is insolvent bankruptcy should follow. A situation somewhat parallel to the present case developed in Re Winnipeg Mortgage Exchange Ltd. et al.; Manitoba Securities Commission v. Winnipeg Mortgage Exchange Ltd. et al. (1980), 7 E.T.R. 239. In that case a receiver/manager had been appointed for two insolvent companies, which by coincidence happened to be in the same business as the Northguard companies. In the context of the receivership, an application was made to the Court of Queen's Bench by the receiver for the opinion of the court as to certain legal questions on which the receiver sought an answer. An opinion was provided by Wright, J. of the Court of Queen's Bench. Then there was an appeal to this court with respect

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 to his opinions. This court stated, in reasons by O'Sullivan, J.A., that the procedure being followed was inappropriate, and that the receiver should make an assignment in bankruptcy at the direction of the court. O'Sullivan, J.A. said at p. 245:

... I think that once it appears that the debtor is insolvent it is not appropriate to continue proceedings under provincial law. Indeed it may well be unconstitutional to do so. I think the proper course is to direct the receiver to make an assignment in bankruptcy.

58 O'Sullivan, J.A. referred to Re The Companies Act; Western Hemlock Products Ltd., Re (1961), 35 W.W.R. 184 (B.C. S.C.), where Macfarlane, J. of the British Columbia Supreme Court expressed similar sentiments. In that case Macfarlane, J., having found the company to be insolvent, refused to give directions in the winding-up proceedings, since bankruptcy law should apply. At p. 187 [W.W.R.] he said:

Once a company in a voluntary winding-up is shown to be insolvent, I think the proper course for the liquidator to take is to file an assignment in bankruptcy, or take other appropriate action to put the company in bankruptcy and proceed under that Act.

59 There are also compelling practical reasons for bankruptcy.

60 The Bankruptcy Act provides that property held by the bankrupt in trust for any other person forms no part of the estate in bankruptcy. In the present case, investors who claim an equitable interest based upon a trust declaration would be entitled to claim their monies as being exempt from bankruptcy. Assuming the existence of a trust, those investors would be entitled to their funds together with identifiable accumulated interest, without deduction of costs for the administration of the bankruptcy.

61 If it were felt that the trust declarations in favour of various investors might not in fact establish a valid trust, that issue could be adjudicated in the context of the Bankruptcy Act. Alternatively, with the concurrence of the inspectors, the trustee in bankruptcy would be entitled to reach a compromise or settlement with investors advancing a claim to alleged trust funds.

62 With respect to suggested overpayments to certain investors, bankruptcy legislation would give the trustee the scope to claim repayment, and have the right to repayment adjudicated, or alternatively, once again, to exercise his authority to settle with those who have received overpayments, if a compromise were considered appropriate.

63 Settlements or compromises could be handled by the trustee working in conjunction with inspectors, without the need to seek court approval.

64 Upon concluding matters, the trustee is entitled to his discharge, and upon receiving his discharge he is not left facing a potential action by unhappy shareholders of the bankrupt companies, or by the bankrupt companies themselves. Short of fraud on his part, when the trustee in bankruptcy is discharged, he is released from all liability.

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

65 Upon discharge of the trustee in bankruptcy, the bankrupt companies are defunct, and save for highly unusual circumstances, the bankrupt companies cannot institute or maintain any further court actions against another party. In Gibson and Ridqe v. Manitoba Development Corporation (1982), 44 C.B.R.N.S. 113, this court also stated that shareholders of the bankrupt companies were not entitled to bring a derivative action under s. 232 of The Corporations Act, C.C.S.M., c. C-225, once there has been an intervening bankruptcy.

66 In the instant case, the trustee in bankruptcy would take over the defence to the action for close to $5,000,000.00 commenced by the bank, and if the trustee concluded that the claim was a proper one, it could be resolved as well. The trustee would have the authority to abandon what I can only describe as a fanciful setoff for an equivalent sum claimed by the companies against the bank.

67 When the question of bankruptcy was raised in the proceedings before us, the parties indicated that bankruptcy was inappropriate in this case because there were no funds available with which to pay the trustee's fees. I do not see very much sense to this argument, because someone is going to have to pay the costs of the receiver, and the costs of receivership are likely to exceed the costs of a bankruptcy.

68 Since there is resistance to bankruptcy from all quarters, I am reluctant to make the kind of order which was made in the Re Winnipeg Mortgage Exchange Ltd. et al. case, supra, where the court directed the receiver to make an assignment in bankruptcy. I think that it will be regretted, however, that disputes are left to be worked out in the context of receivership when bankruptcy provides a more desirable, and in the end result, probably less costly mechanism.

69 In the absence of bankruptcy I am of the view that the receivership should proceed as outlined in the reasons for judgment of Twaddle, J.A.

Monnin, C.J.M.:

70 Six notices of appeal were filed with respect to two orders of Simonsen, J.The hearings in this court were held on October 7 and 8, 1986 in the presence of twelve counsel who are all familiar with this litigation. Consequently I shall only recite those facts necessary for the decisions reached herein.

71 The first order of Simonsen, J. was dated April 8, 1986 and reflects his reasons for judgment delivered on that date. The second order was made on July 4, 1986, pursuant to motions dated May 1 and 14, 1986, and it also reflects his reasons for judgment delivered on that date.

72 Northguard Holdings Limited ("Holdings") and Northguard Acceptance Corporation Ltd. ("Acceptance") carried on the business of mortgage brokers in Manitoba and in British Columbia.

73 Acceptance would sell to syndicated investors a percentage interest in certain mortgages in which it had invested or was investing monies. At times it sold all one hundred percent of the equity and on other occasions it sold a substantial equity in such mortgages but retained for itself a percentage of the equity in its own name. Whenever it did

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 retain an equity in the mortgage, it does not seem to have executed a trust deed. There is no clear indication on the record to show its exact involvement in these mortgages, but the Receiver and the parties are fully aware of the situation.

74 Acceptance signed a trust declaration in favour of each syndicate investor stating the percentage each investor held in a particular detailed mortgage. Thus there were what appear to be valid trust deeds.

75 In 1982, at some point in time, some of these mortgages fell into arrears. The executive officers of Acceptance, in order not to disturb the nature of their business and their relationship with their investors and also in order to make the monthly issuing of cheques easier, regularly paid the investors the amounts which they expected to receive on a regular basis even though the mortgagors had failed to make payments on their respective mortgages. Some investors were thus given preferential treatment and received monies to which they were not entitled. We are informed that some investors received approximately $4,000,000.00 in respect of mortgages which were in default or were in arrears. Thus capital and interest were repaid to some investors when the trustee was not in receipt of the necessary mortgage payments so to do.

76 Holdings and Acceptance, or most probably The Bank of Montreal (the "bank") by virtue of its loan to those two companies, were advancing these monies out of future profits hopefully to be obtained. The bank was unaware that this procedure had been adopted. The two principal shareholders and officers of Holdings and Acceptance also claim that they were unaware of what was going on and that such a course of action was the doing of their general manager and his staff either in the Winnipeg or Vancouver offices.

77 Thecaseatbarbearssomeresemblanceto whatoccurredin Re Winnipeg Mtge. Exchange Ltd. [Man.] (1982), 43 C.B.R. N.S. 119, but the number of investors in this case total approximately 104 while in the Winnipeg Mtge. Exchange case there were some 950 investors. All trust deeds in this case are identical and it would appear that valid efforts to create a proper trust deed were made. Such was not the case in Winnipeg Mtge. Exchange, supra, where many types of trust deeds or certificates were executed. Unfortunately the draftsman of the trust deed in this case did not provide for the non-payment by the mortgagors and for the eventuality of foreclosure. The trust deed is an inept effort to protect the investors. Be that as it may, we have to work with the trust deeds as they were executed.

78 The bank loaned some $5 million to Holdings and Acceptance and took a debenture as a security therefor together with the personal guarantees of the principal officers and shareholders.

79 On August 13, 1984, with the written consent of Holdings and Acceptance, Kennedy, J. appointed Coopers & Lybrand Limited as Receiver/Manager with the following powers: to take over the assets, properties and undertakings; to manage, to compromise or to settle; to incur obligations not exceeding $450,000.00 and to receive reasonable fees and expenses from the monies realized on the sale of the assets. The same firm was appointed Receiver by the British Columbia Supreme Court and it now has in hand some $5 million from collections on those mortgages.

80 Of the 104 investors, some 87% of them, representing over 90% of the mortgage investments, have reached a compromise with the Receiver. The bank, the secured creditor, is favourable to this settlement. The bank has an interest in attempting to effect the maximum recovery so that it can recoup a portion of its advances. For the balance of

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 the monies owing, it will have to rely on the personal guarantees which it obtained from the principal shareholders and officers. The bank has already launched suit in order to recover on the guarantees.

81 There is some dispute as to whether the 87% of consenting investors does in fact represent 90% of the monies advanced. Suffice it to say that the majority of the investors have consented in writing to the proposed settlement. A major stumbling block is the fact that some of the investors have received reimbursement of monies to which they are not entitled. Holdings and Acceptance as well as Messrs. Freed and Korn, the principal shareholders, and a few other investors are not in favour of the proposed settlement and insist that no monies be paid out until all efforts have been exhausted in order to obtain recovery from those who have been paid even though the mortgage files have been closed and the monies received prior to and some after 1982.

82 The whole issue is a mess. It is fraught with innumerable problems. It is the ideal case situation for a paper or essay by third year law students on the problems of trust, trustees, recovery of monies paid by mistake, fraud and other matters.

83 On the one hand, the Receiver in this case was empowered to effect compromises and should be encouraged by courts to do so. A receiver should seek compromises rather than embarking on lengthy legal disputes which may enhance legal knowledge but only at substantial expense to the investors.

84 Simonsen, J. refused to sanction the compromise and dismissed the Receiver's motion for approval; he did so on the basis that it would have been inappropriate for the court to sanction such compromise unless all investors participated and because there were significant areas of factual dispute and troublesome questions of law which he stated he could not properly address on such a motion.

85 I have reached the conclusion that Simonsen, J. erred. That the facts are unclear is not in dispute. That there are many troublesome questions of law cannot be denied. However these were not sufficient or valid reasons to refuse what the Receiver was requesting. Receivers must be encouraged to effect compromises and to protect themselves. They can also request the court which appointed them to decide whether the settlement is of a reasonable commercial nature. Those investors who have not accepted the Receiver's offer are free to attempt to make whatever settlement they can but on an individual basis. They have now lost the effect of the majority compromise but they are free to proceed as they wish and the Receiver is empowered to settle with each as he deems appropriate. A receiver is a court-appointed officer and is always free to request the assistance and the sanction of the court. Courts should favour such requests. Having appointed him and given him wide powers, a court should be slow to refuse its advice or its blessing when he acts reasonably and with diligence. In this case the Receiver acted with diligence and with great reasonableness.

86 Simonsen, J. properly refused to order a derivative action or the trial of issues on the matter of fraud and other questions. Simonsen, J. questioned whether a bankruptcy should not have been invoked rather than a receivership. At the hearing before the Court of Appeal this panel also expressed the same view. In retrospect, it would seem that it would have been preferable to proceed by way of bankruptcy but it is too late in the day to change course and start afresh. Furthermore, someone would have to guarantee the trustee's fees and disbursements. Bankruptcy is no longer the preferable route. However, in future, receivers faced with similar situations, should accept these appointments with

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16 great hesitation. If the debtor is not meeting his obligations as they become due, the remedy is bankruptcy with all the mechanisms that are then put into action.

Mr. Richard Chester Dixon

87 Mr. Dixon invested $25,000.00 and received what appears to be a valid trust deed for 4.167% in a mortgage registered in the Vancouver Land Titles Office under number L 59480. This mortgage has now been repaid in full and Mr. Dixon should receive his money but he has refused to share in any portion of the Receiver's costs, fees or disbursements. Mr. Dixon maintains that he has a valid trust deed and should be reimbursed in capital and interest in its entirety without any deduction. By separate motion he moved the court to order the Receiver to pay him in full. This motion was apparently forgotten by Simonsen, J. It would appear that on May 9, 1986 counsel for Hercules Man- agement Ltd. and the Receiver consented to an order as sought by Mr. Dixon. It is not clear whether the bank did likewise.

88 By his order of July 4, 1986, Simonsen, J. authorized full distribution - less standard deductions - to those investors who had an interest in the Cox mortgages and who had not received any improper payments. Dixon is "clean" as he has not received any improper payments. I repeat that Mr. Dixon maintains that he should recover all his capital and interest without any holdback whatsoever. The court, having appointed a receiver and having guaranteed him his fees and disbursements, must look to the general funds provided by the receivership in order to guarantee such fees and disbursements. In this case all or most of the monies are impressed with a trust in favour of a named investor and there are few general funds if any. There may be general funds by way of interest which was payable to Holdings and Acceptance and by whatever surplus Holdings and Acceptance hoped to generate in order to pay for their management costs and profits, if any, for their shareholders. Obviously at this stage of the game there is nothing left, as the two companies are insolvent. In such an event, does a receiver work for nothing and is Mr. Dixon entitled to recover his full capital and interest?

89 Like the others he made an investment which turned sour except that his mortgagor has paid his indebtedness in full. If, like the others, Mr. Dixon is prepared to accept a standard deduction, he is free to ask for a reimbursement subject to that deduction. If he insists on being paid in full, he will have to sue the Receiver specifically. The costs, the disbursements and the time spent may hardly merit a separate lawsuit but if Mr. Dixon wishes to proceed, he is free to do so. A court-appointed receiver can hardly be expected to work for nothing or to pay some investors in full while making a deduction for his fees and services from other investors. If a receiver had not been appointed and had not taken charge of the securities, Mr. Dixon would have had to fend for himself and recovery might possibly have been difficult.

Mr. Harvey Sinder

90 Mr. Sinder has an investment of some $25,389.00. Like Mr. Dixon he is "clean" and should be treated in identical fashion.

Mr. Kenneth Lander

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

91 Mr. Lander is a chartered accountant whose claim is of a different nature and the facts surrounding it are most unusual.

92 Prior to October 7, 1982, and subsequent thereto, Mr. Lander was an employee of The Northguard Financial Group as was Mr. Murray Morris who was also the general manager of all these corporations.

93 Prior to October 7, 1982, Mr. Lander had a self-administered registered retirement savings plan which was administered by the National Trust Company. On that date Acceptance, on the letterhead of Northguard Financial Group in an unauthorized, improper and wrongful method, obtained $40,500.00 from this R.R.S.P. and purchased a 12.756% interest for Mr. Lander in a mortgage known as the Fraser mortgage covering lands in British Columbia. Holdings executed a trust declaration to that effect. The unauthorized removal of these funds was made by way of a letter and was, as I have already indicated, typed on the letterhead of The Northguard Financial Group and signed by Acceptance per one R. A. Frechette, Comptroller. The letter dated October 7, 1982 addressed to National Trust Company, attention of Shelly Williams, reads as follows:

Dear Madam:

Re: R.R.S.P. #55579 - Ken Lander

This letter is your authority to issue a cheque to Northguard Holdings Ltd., in the amount of $40,500.00 from the above Pension Plan, which represents a 12.756% of a mortgage known as FRASER due approximately June 1, 1983.

The trust agreement will follow.

94 Mr. Lander never authorized the removal of these funds and knew nothing about such removal until much later. Upon learning of this situation and investigating it further, he discovered that prior to October 7, 1982 the Fraser mortgage had been fully syndicated to the extent of 100%, that it was in arrears and already in foreclosure proceedings. It would appear that the mortgage was foreclosed or at least that foreclosure proceedings had been initiated in August 1982, thus three months prior to this unauthorized investment. Upon discovering that the mortgage had been fully syndicated to the extent of 100%, Mr. Lander knew that he could not have obtained a valid interest in it.

95 Mr. Lander is further incensed at the fact that he never authorized this investment and knew nothing about it. He has since also discovered that Mrs. Helen Steel and Mr. William Shields, two of the initial investors in that mortgage, were repaid their full investment in April 1983 and he, after numerous attempts, can obtain nothing.

96 Mr. Lander received a letter from the Receiver's solicitors dated April 30, 1985 together with a form of consent for the disbursement of monies. He did not sign the form and objects to any payment out of any funds by the Receiver until recovery has been obtained from Mrs. Steel and Mr. Shields and other persons who may have profited as they did.

1987 CarswellMan 281, 34 D.L.R. (4th) 1, 46 Man. R. (2d) 16

97 On February 23, 1986 Mr. Lander caused to be issued in the Court of Queen's Bench, Winnipeg Centre, a statement of claim naming Murray Morris as defendant whereby he seeks reimbursement of the sum of $40,500.00 plus interest from Morris. He has also attempted to garnishee the Receiver but has been unsuccessful. He did not sue any of the Northguard corporations.

98 That there is something terribly amiss in this situation can hardly be denied. The Fraser mortgage was already in a state of foreclosure when R. A. Frechette requested the funds from National Trust Company. Mr. Lander had never authorized such an investment and it may be that the money was fraudulently removed from his R.R.S.P. By virtue of this course of conduct, he is probably at best an unsecured creditor.

99 Regretfully however no recourse can be given to Mr. Lander in these proceedings. He has sued Mr. Murray Morris and probably should have requested permission to sue Holdings, Acceptance and/or The Northguard Financial Group as well as Messrs. Freed and Korn. It would appear that he has a legitimate claim against someone for having invested, without permission, his monies in an already overly subscribed mortgage. The value of his security - a trust deed - remains to be seen. It may have no value or little value but this question cannot be decided in these motions. It may be that his only chance of recovery is from the general assets of Holdings and Acceptance, if such assets exist. There is unfortunately nothing this court can do for him at this time even to the extent that it cannot compensate him for his costs because his remedy and possible recovery lie elsewhere.

100 I do not think that this was a case for pooling of assets as this court decided in Winnipeg Mtge. Exchange, supra. The scheme of investment clearly indicated that each investor purchased a certain percentage of a named mortgage. On two occasions the record discloses that investors received a non-existent share since the mortgage had already been fully subscribed. I doubt that such a certificate has much value in law but this is not the place to decide that issue. This is not a case for pooling on the basis that all investors should be treated alike. The scheme was otherwise.

Conclusions

101 In the result, Messrs. Dixon and Sinder can either accept the compromise settlement with all the deductions or proceed on their own. Mr. Lander must proceed as best he can. The compromise suggested by the Receiver is approved in toto. There shall be no derivative action and no issues are directed. The Receiver is encouraged to effect all settlements and compromises possible. If he needs the Court's assistance, he is free to ask for it. The costs of these various motions will also have to be borne by the investors unless they were already provided for in the various discussions and settlements.

END OF DOCUMENT

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

Collins v. Ontario (Pension Commission)

COLLINS et al. v. PENSION COMMISSION OF ONTARIO et al.; BATCHELOR et al. v. PENSION COMMIS- SION OF ONTARIO et al.

Ontario Divisional Court

Reid, Montgomery and Ewaschuk JJ.

Judgment: August 18, 1986 Docket: Nos. RE358/86 and RE452/86

Counsel: Raymond Koskie, Q.C., and Mark Zigler, for Collins applicants.

D.C. Moore, for Batchelor applicants.

H. Lorne Morphy, Q.C. and Sheila Block, for Dominion Stores.

Thomas C. Marshall, Q.C. and Anita Lyon, for Pension Commission of Ontario.

Subject: Corporate and Commercial; Public

Pensions --- Surplus funds — General

Pension plans — Pension commission required to give notice to pension plan members prior to consenting to withdrawal of surplus funds from plan.

D Ltd. established a pension plan (the "plan") for its employees in 1944. The plan was funded by mandatory contributions made by employees and by D Ltd. D Ltd. represented on various occasions to its employees that the funds in the plan were for the exclusive benefit of plan members and could not revert to D Ltd. D Ltd. had always retained the unilateral right to change or discontinue the plan but amendments after 1977 were subject to collective bargaining between D Ltd. and the union representing its employees. In 1979, the plan was amended to provide that on its ter-

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 mination, any surplus assets after satisfying all pension obligations under the plan would revert to D Ltd. The plan did not entitle D Ltd. to remove any surplus while the plan was continuing.

In November 1985, D Ltd. applied to the Pension Commission (the "Commission") under s. 21(2) of Reg. 746 made pursuant to the Pension Benefits Act (Ontario) (the "Act") for the consent of the Commission to remove surplus from the plan. In a bulletin dated March 14, 1984, the Commission had issued guidelines governing applications for consent. Its concern was to ensure the continuing solvency of the plan. The guidelines indicated that where there was uncertainty as to the right of a company to remove surplus, it could recommend that a judicial determination as to entitlement be made. The guidelines also provided that the Commission could require that notice be given to plan members or their agents in certain situations. A number of D Ltd.'s employees heard rumours of the pending application and they requested information on the application and that no decision be made without giving them an opportunity to be heard. On December 17, 1985, the Commission permitted D Ltd. to withdraw in excess of $37 million from the plan. No notice of the application was given to the plan members and no information respecting the application was given by the Commission to the plan members either before or after the decision. On January 14, 1986, D Ltd. amended the plan, retroactive to January 1, 1986, to permit it to withdraw surplus funds from the plan at any time and not just on termination. The amendment by D Ltd. was not made subject to the collective bargaining process as required by the terms of D Ltd.'s union contract.

The applicants, consisting of the union and its members and members of the plan, brought an application for judicial review of the Commission consent and for an order quashing the consent and directing D Ltd. to return the funds to the plan.

Held:

The applications were allowed.

The Commission granted its consent with no notice to the union or the plan members at a time when by the terms of the plan, D Ltd. had no apparent right to the surplus. Although the Commission was not subject to the Statutory Powers Procedure Act (Ontario), it was under a common law duty to act fairly. The funds in the plan were trust funds and the duty owed by the Commission to the plan employees and D Ltd. as beneficiaries of the trust was a fiduciary duty. The plan members had a substantial interest in the disposition of the assets of the plan. The Court held that judicial review was available as a remedy against a failure of the duty of fairness affecting the interests of persons. In this case, the duty of fairness required, at the very least, that notice of D Ltd.'s application be given to the union and the plan members so that they would have an opportunity to defend their interests.

Although the Act did not specifically authorize the passing of regulations relating to the removal of pension surplus from ongoing plans, the omnibus power in the Act to make regulations respecting any matter necessary or advisable to carry out effectively the intent and purpose of the Act was sufficient to authorize s. 21(2) of Reg. 746.

The Court had the authority to direct that D Ltd. return the surplus removed to the plan. The posting of letters of credit was not an adequate safeguard. Cases considered:

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

A.G. Can. v. Silk, [1983] 1 S.C.R. 334, 83 C.L.L.C. 14,025, 145 D.L.R. (3d) 121, (sub nom. Re Silk) 47 N.R. 57 (S.C.C.) — considered

Baldwin v. Pouliot, [1969] S.C.R. 577, 7 D.L.R. (3d) 367 (S.C.C.)considered

Bedesky and Ont. Farm Products Marketing Bd., Re (1975), 8 O.R. (2d) 516, 58 D.L.R. (3d) 484 (Ont. Div. Ct.), affirmed (1975), 10 O.R. (2d) 105, 62 D.L.R. (3d) 265 (Ont. C.A.). Application for leave to appeal to Supreme Court of Canada dismissed (1975), 10 O.R. (2d) 106n, 62 D.L.R. (3d) 266n, 8 N.R. 268 (S.C.C.) — considered

Dart (Steve) Co. and D.J. Duer & Co., Re (1974), 46 D.L.R. (3d) 745 (Fed. T.D.) — considered

Doctors Hospital and Min. of Health, Re (1976), 12 O.R. (2d) 164, (sub nom. Doctors Hospital v. Min. of Health) 1 C.P.C. 232, 68 D.L.R. (3d) 220 (Ont. Div. Ct.) — referred to

Downing v. Graydon (1978), 21 O.R. (2d) 292, 78 C.L.L.C. 14,183, 92 D.L.R. (3d) 355 (Ont. C.A.) — referred to

Gach v. Director of Welfare (Brandon), [1973] 3 W.W.R. 558, 10 R.F.L. 333, (sub nom. Re Gach and Director of Welfare (Brandon)) 35 D.L.R. (3d) 152 (Man. C.A.) — considered

Grant Bus Lines Ltd. and Pension Comm. of Ont., Re (1980), 30 O.R. (2d) 180, 116 D.L.R. (3d) 336 (Ont. Div. Ct.), affirmed (1981), 33 O.R. 652, 125 D.L.R. (3d) 325 (Ont. C.A.). Leave to appeal to the Supreme Court of Canada refused (1981), 41 N.R. 374 (S.C.C.) — referred to

Martineau v. Matsqui Institution Disciplinary Bd., [1980] 1 S.C.R. 602, 13 C.R. (3d) 1, 15 C.R. (3d) 315 (Fr.), 50 C.C.C. (2d) 353, 106 D.L.R. (3d) 385, 30 N.R. 119 (S.C.C.) — followed

Nicholson v. Haldimand-Norfolk Regional Bd. of Police Commrs., [1979] 1 S.C.R. 311, 78 C.L.L.C. 14, 181 88 D.L.R. (3d) 671, 23 N.R. 410 (S.C.C.) — referred to

Reevie v. Montreal Trust Co. of Can. (1986), 53 O.R. (2d) 595, 11 C.C.E.L. 44, C.E.B. & P.G.R. 8016, 25 D.L.R. (4th) 312, 13 O.A.C. 233 (Ont. C.A.) — considered

R. v. Race Relations Bd.; Ex parte Selvarajan, [1975] 1 W.L.R. 1686, [1976] 1 All E.R. 12 (C.A.) — referred to

Webb and Ont. Housing Corp., Re (1978), 22 O.R. (2d) 257, 93 D.L.R. (3d) 187 (Ont. C.A.) — referred to

Statutes considered:

Judicial Review Procedure Act, R.S.O. 1980, c. 224, ss. 1, 2.

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

Pension Benefits Act, R.S.O. 1980, c. 373, ss. 10, 23, 25(1), 37, 38.

Statutory Powers Procedure Act, R.S.O. 1980, c. 484.

APPLICATION for an order quashing consent of Ontario Pension Commission and directing the return of certain moneys to a pension plan. Regulatons considered:

Pension Benefits Act, R.S.O. 1980, c. 373 —

R.R.O. 1980, Reg. 746, ss. 14, 21(2).

The judgment of the Court was delivered by Reid J.:

1 These applications were heard together. In Collins, applicants are the Union and its members. In Batchelor, applicants are members of the pension plan maintained by Dominion for its employees. Both seek judicial review of the Pension Commission's consent to Dominion's removal of $37,951,000 from the pension plan funds. They request an order quashing the consent and directing Dominion to return the funds.

2 The plan was, and is, funded by contributions made by employees and by Dominion. Employees' contributions were mandatory and were deducted from wages. Dominion's obligation was, and is, to contribute such further amount, or amounts, as were necessary to ensure that the plan was actuarially sound.

3 I shall refer throughout to "the plan" but that is merely a convenient reference to the series of documents, and amendments, that set out the provisions of the plan from time to time.

4 Certain provisions in the plan and certain changes in the plan that have occurred over the years are relevant to the issues before us. Certain representations made over the years by Dominion to members are also relevant.

5 Uncontradicted evidence of those representations is before us. Over the years, Dominion has represented that:

(a) The plan was for the benefit of the employees of Dominion and if the plan was discontinued, all of Dominion's contributions would "remain in the Plan for the benefit of employees".

(b) The changes made to the plan from time to time were for the purpose of improving the benefits and protections thereunder, and that as a result the plan was "outstanding" and "second to none".

(c) All of the contributions made to the plan were for the "exclusive benefit of the members of the Plan", and that payments made by Dominion to the plan as contributions "could not revert to the company".

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

(d) The plan was provided for "the use and benefit of the employees and was protected by law" and that the funds in the plan could not be used in any way by Dominion except for the provision of pensions.

6 A booklet describing the 1972 plan contained a letter from T.G. McCormack, then president of Dominion. It indicated that there had been some changes in the plan between 1956 and 1972. Mr. McCormack described the changes in the following way:

The first pension plan of Dominion Stores Limited was inaugurated in 1944. The Plan was revised and improved upon in 1951, 1956, 1963, and again in 1966.

However, the company is never satisfied with things as they are. Times change. With the assistance of a leading firm of consulting actuaries, the company has made an exhaustive study of modern pension planning. As a result of this study, a new Retirement Income Plan was introduced on January 1, 1972. The Plan is outlined in this booklet. You will find it a very real advance in bringing to you financial security for your years of retirement and also excellent protection for your dependents.

7 His letter concluded:

I am sure that this valuable protection will bring to you greater peace of mind and an increased sense of security. Please read carefully the summary of these plans which follows.

In the description of the plan that followed, the following statement occurred:

All contributions whether by members or the Company are used for the exclusive benefit of members, retired members or their beneficiaries. They cannot revert to the company.

Thus, before the introduction of the 1979 plan, the plan contained the following provision,

Should contributions be reduced, the amount of pensions purchased thereafter will be reduced accordingly but this will not affect the amount of pension already purchased at the time of change. Should the Plan be discontinued, no further increase in the amounts of pensions of the members will take place, but all contributions made by the Company will remain in the Plan for the benefit of members.

(Emphasis added)

8 These repeated assurances led to the belief among plan members that "the entire Plan belonged to the employees and that Dominion could not assert any claim to it" (Batchelor factum, para 4(7)). However, at least as far back as the 1975 plan, Dominion had retained the right unilaterally to amend the plan. The 1975 plan contained the following:

Change or Discontinuance of the Plan

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

Every effort has been made to develop the Plan as a safeguard to the member and as an undertaking which will meet future conditions insofar as they can be anticipated at the present time. The Company hopes to continue the Plan indefinitely but necessarily must reserve the right to change, modify or discontinue the Plan or amend the contributions from the Company and/or members if future conditions should warrant such action.

9 Prior to 1977, the documents constituting the plan had to be read in the light of that provision. But that unilateral right was modified by the fact that the plan thereafter became subject to collective bargaining between the Union and Dominion. Amendments made since 1977 by Dominion have thus been subject to the scrutiny of the Union.

10 The 1979 plan carried forward the foregoing provision for amendment by Dominion. The provision that on discontinuance, "all contributions made by the Company will remain in the plan for the benefit of the members" was, however, significantly changed. The new provision stated that, on termination of the plan, the assets would no longer "remain in the plan for the benefit of members". Rather, they would revert to Dominion. The new provision read:

In the event that the Plan shall be terminated by the Company, the assets then remaining in the pension fund shall be applied in accordance with the terms of the Pension Benefits Act 1965 of Ontario (or other applicable legislation) as shall be determined in consultation with an Actuary. Any assets remaining after the satisfaction of all benefit rights or contingent rights accrued under the Plan shall revert to the Company.

(Emphasis added)

11 We have no reason to think that this amendment was not known to applicants or was not dealt with in accordance with the collective bargaining process.

12 There was not, and never had been, anything in the plan documents entitling Dominion to any surplus funds while the plan was on-going. Thus, when in November 1985, Dominion applied to the Commission for consent to remove surplus, the plan had not been terminated, and Dominion had no right, under the plan documents, to apply to remove the surplus.

13 The application was required by s. 21(2) of Reg. 746 made under the Pension Benefits Act, R.S.O. 1980, c. 373, as amended (the Act). It provided:

Except as provided in section 14, no funds shall be paid out of a pension plan to an employer unless consent of the Commission is obtained.

14 In a bulletin, dated March 14, 1984, the Commission furnished guidelines governing applications for consent. They make it clear that the Commission was concerned to protect pension plans against an undue reduction of surplus. Its concern was, in a word, solvency.

15 The bulletin bore the heading, "Refund of Surplus Assets to Plan Sponsors". The first of its three pages was

The Pension Commission of Ontario (the Commission) has been requested to publish its current practices regarding refundable amounts when a surplus exists in a pension plan.

The following should be used as a guide to give some insight into the analytical and approval processes utilized by the Pension Commission of Ontario.

THE COMMISSION WILL APPROVE A REQUEST FOR REFUND OF SURPLUS ONLY WHERE THERE ARE NO REMAINING UNFUNDED LIABILITIES OR EXPERIENCE DEFICIENCIES AND ONLY TO THE EXTENT THAT SURPLUS IN ONGOING SITUATIONS IS IN EXCESS OF CERTAIN WITH- HOLDING AMOUNTS.

AS PART OF ITS CONSIDERATION, THE COMMISSION WILL REVIEW THE PROVISIONS OF THE GOVERNING DOCUMENTS RESPECTING ENTITLEMENT TO SURPLUS. IN THE EVENT THAT DOCUMENTS GIVE CLEAR TITLE TO ALL ASSETS TO OTHER THAN THE PLAN SPONSOR, THE REQUEST WILL BE DENIED. IN THE EVENT OF AMBIGUITY, CONTRACTUAL CONFLICT OR A RECENT AMENDMENT TO PERMIT A REFUND, THE COMMISSION MAY RECOMMEND THAT THE PLAN SPONSOR AND TRUSTEE SEEK LEGAL ADVICE OR COURT DETERMINATION AS TO EN- TITLEMENT. THE COMMISSION RESERVES THE RIGHT ALSO TO REQUIRE, IN CERTAIN SITUA- TIONS, THAT NOTICE OF THE REFUND REQUEST BE GIVEN TO MEMBERS AND THEIR AGENTS.

FINALLY, IT MIGHT BE NOTED THAT COMMISSION APPROVAL OF A SURPLUS REFUND RELATES TO THE SOLVENCY OF THE PLAN AND THE APPLICATION OF THE PENSION BENEFITS ACT AND REGULATIONS. IT SHOULD IN NO WAY BE INTERPRETED AS A DEFINITIVE STATEMENT OF SURPLUS OWNERSHIP.

16 The bulletin went on to describe the required documentation. That included "an actuarial report and cost certificate prepared as of a current date showing the funded status of the plan". It went on:

When the Commission is satisfied that the report has been prepared using assumptions which are appropriate in the given circumstance (including a minimum reserve, individually determined, of the values of employee accumulated contributions) it will approve a refund to the plan sponsor, in such amounts as are outlined below:

17 According to Dominion's factum, the Commission required "all relevant documents respecting entitlement to surplus", and "an actuarial report and cost certificate showing the funded status of the plan". We may presume, therefore, that the absence of any provision in the documents constituting the plan at that time entitling Dominion to withdraw assets from an on-going plan was apparent to the Commission.

18 Applicants state, and it is uncontested, that plan members were given no notice of the application either by Dominion or by the Commission. Yet the matter was one of real concern to plan members. Dominion's application was

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 the consequence of severe difficulties the company had begun to experience, at least as far back as 1983. Stores were being sold, employees were being laid off or dismissed, and substantial losses were occurring. This situation led plan members to wonder about the security of their pensions.

19 Dominion's managers saw the pension funds as a source of succour. This is reflected in the interim report of Hollinger Inc. dated November 22, 1985, and signed by Mr. Conrad M. Black, chairman of the board, president and chief executive officer of Hollinger. Hollinger is Dominion's parent company. Mr. Black concluded his report with the following:

Retailing and Wholesaling

Hollinger's wholly-owned subsidiary, Dominion Stores Limited, currently owns Willett Foods in Ontario (including its interest as franchisor in 46 Mr. Grocer franchise retail stores in Ontario together with three food service operations in Ontario under the names Marsh Foods, Chef Foods and K.W. Foods), Eplett Dairies, Hiway Market, a 60% interest in a joint venture in retailing and wholesaling in Newfoundland and also 50 retail su- permarkets and certain other real estate holdings. At September 30, 1985, after deducting consolidated liabilities of approximately $256,675,391 Dominion had a consolidated net book value of approximately $125,197,680.

Dominion applied in November, 1985 for regulatory approval for recovery of a portion of the surpluses in its pension plans resulting from over funding by Dominion. The amount of such recovery is expected to be approximately $60 million but the actual recovery will be dependent upon the value of assets to be retained in the plans in respect of continuing employees. It is possible that the aggregate amount of surpluses eventually recovered could be somewhat greater, perhaps as much as a further $15 million, but this is dependent upon a number of factors, including eventual levels of continuing employment by Dominion which will be determined by the nature and extent of future rationalization and winding-down activities. All such surplus recoveries are expected to be offset very significantly by costs related to the winding-down and rationalization of Dominion's ongoing activities including non-recurring adjustments, employee termination costs, possible damage payments in respect of alleged violations of collective bargaining agreements and expenses of further store closures and by losses from continuing operations which are substantial at the present time (for the 39 week period ended on September 28, 1985, Dominion had a net operating loss of $29.7 million). Because of the many conditions and uncertainties relating to the winding-down and rationalization of the on-going operations, Dominion is unable to determine the ultimate net effect on operating results. However, depending upon the actual occurrence and timing of events and transactions, an overall improvement in consolidated net book value could result.

20 Employees who were being laid off or dismissed as a result of "the winding-down and rationalization" of the business received notices from Dominion in which they were put to an election regarding their pension, asked to sign waivers in respect of recall rights, and to endorse cheques purporting to release Dominion from any liability arising from their employment. This, apparently, increased their apprehensions.

21 Why, in the absence of any provision entitling Dominion to withdraw assets, the Commission did not require Dominion to give notice to plan members, has not been explained. The Commission has chosen to remain silent on the point, notwithstanding its bulletin, which, it will be recalled, stated, "The Commission reserves the right also to re-

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 quire, in certain situations, that notice of the refund request be given to members or their agents." The word "agents" presumably includes unions.

22 However, employees and plan members heard rumours of Dominion's intention to apply for the 60 to 75 million dollars contemplated by Mr. Black. One applicant (Dixon) learned of it in December 1985, from Mr. Black's report referred to above. Alarmed, plan members sought to obtain information. None was forthcoming from Dominion and attempts to gain information from the Commission failed. Some of these attempts are summarized in the Batch- elor factum as follows:

(1) Calderone attempted without success to contact Gemma Salamat, the Superintendent of Pensions, who is the chief administrative officer of the Commission. After two unsuccessful attempts in December and early January, Calderone wrote to Salamat expressing his opposition to Dominion's application. To date, [i.e. the date the affidavit was sworn: February 17, 1986] other than an indication by Salamat that a response will be forthcoming, the Commission has not replied to this correspondence.

(2) Dixon attended at the Commission in early December and wrote to the Commission on December 16, 1985, expressing his objection to the application and seeking an opportunity to be heard. The Commission's response was, inter alia, to suggest that Dixon contact Dominion with any concerns about the Plan. A further request to be heard was made by counsel on Mr. Dixon's behalf in a letter delivered to the Commission on January 14, 1986. The Commission did not provide Dixon with an opportunity to be heard, nor did it respond to the correspondence from his counsel.

(3) Gaull attempted without success to contact Salamat regarding the application. In addition, Gaull contacted the Chairman of the Commission in the middle of January, advised of his interest in and opposition to Dominion's application, and indicated that if a change had been made to the Plan by which Dominion was claiming to be entitled to any of the money contained therein, this had occurred without the knowledge of the employees. He was advised by the Chairman of the Commission that the employees 'might have a case' and that the Chairman would be contacting him further. To date, Gaull has heard nothing further from the Chairman or Mrs. Salamat.

(4) After several unsuccessful attempts, Ritchie was able to contact Salamat on January 21st, 1986. She was advised that the withdrawal had been approved but was not provided with any details of the application, the date of the decision, or the amount of money involved. Salamat also advised Ritchie that the withdrawal had been possible because the union had agreed to this or had arranged the Plan in a manner which provided for this. This was contrary to Ritchie's understanding of the actual facts.

23 Indeed, one response made by the Commission could be regarded as distinctly misleading. Applicant Dixon wrote to the Commission on December 16, 1985, expressing concern over Dominion's rumoured application and requesting an opportunity to file a submission and be heard. The letter expressed the concern felt by both current and past employees over the reference in the Hollinger report to Dominion's application for the removal of $60 million and went on to say:

We are very concerned about the appropriateness of this move. When we joined Dominion, the pension fund was

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

ours — now it appears that the Company has contrived (through a new plan filed after Mr. Black took control and without telling us about the change in the plan) to get rid of its employees and capture the funds which we thought were there to assure our retirement.

This is to request that the Commission not make a decision on this application by Dominion Stores Ltd. until we have had an opportunity to file a formal submission and be heard on the matter.

I would be grateful if the Commission would write back to me confirming that we will have an opportunity to be heard. I also would be grateful if you would advise me of the criteria which Dominion Stores Ltd. must satisfy to pursue this unfortunate course, and what time frame may be anticipated for resolution of this matter.

Thank you for your kind consideration of this request.

24 The letter was addressed to the attention of Mr. Nurez Jiwani, the Senior Pensions Officer. From its date, the 16th of December, and the fact that it was sent through the mail, it is unlikely that it reached Mr. Jiwani until after the Commission's decision had been made on the 17th of December 1985.

25 In his reply, dated December 27, Mr. Jiwani made no reference to the fact that the decision had already been made. His letter said, in its entirety:

Dear Mr. Dixon:

Re: Dominion Stores Limited

Further to your letter of December 16, 1985 we are enclosing a copy of our bulletin dated March 14th, 1984 which outlines our guidelines and procedures in reviewing applications for refunds of surplus from pension plans.

As discussed in the bulletin, in reviewing an application for refund of surplus, the Commission takes into consideration the solvency of the plan, provisions of the plan documents and the Act and Regulations. If the Com- mission guidelines are met, the application is approved.

If you have any concerns with respect to the provisions of the plan, we advise you to contact the Company.

On its face, this letter suggests that no decision had yet been made. Again, through the silence of the Commission, we are not informed as to why Mr. Jiwani did not see fit to inform Mr. Dixon that the consent to withdrawal had already been given.

26 I have already observed that, throughout, the Commission has chosen to remain silent. Like Dominion, it has filed no affidavit. Its counsel, Mr. Marshall, has relied entirely on legal argument based, when necessary, on the af- fidavits filed by applicants. It has not sought to explain its reluctance to reveal any information that might have been of assistance to this Court. While this Court has the undoubted power to demand such information, we were not requested

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 to do so by applicants. The Commission's motive in stone-walling applicants, and revealing nothing to the Court, remains a matter for speculation.

27 There might, however, be an explanation. A newspaper report is not normally regarded as evidence, but the following would explain the Commission's attitude, if it is accepted as accurate. No challenge has been offered to its accuracy. It appeared as part of a news report in the Globe and Mail newspaper of February 14, 1986.

Gemma Salamat, Ontario's Superintendent of Pensions argues that it is 'not necessarily desirable for employees to know.'

'If I say company ABC is taking out of its pension plan, it can cause a lot of labor unrest,' she said '(The worker) wonders: is the company stripping me, ripping me off?'

Mrs. Salamat said sophisticated employees would not think they were being ripped off, but others might.

28 It is accepted by counsel that the Commission's consent was given to Dominion on December 17, 1985. Well after that date, Dominion amended the plan to enable it to withdraw the funds. On January 14th, an amendment to the plan was made by officers of Dominion in the following terms,

Effective January 1, 1986, Dominion Stores Limited (the 'Company') hereby amends the terms of the Retirement Income Plan for Union Employees of Dominion Stores Limited (1979) (the 'Plan') in accordance with Section 15 of the Plan, as follows:

1. Amend Section 15 by adding the following new paragraph 15.4 thereto:

Subject to the approval of the Pension Commission of Ontario, if, at any time in the opinion of the Actuary the assets of the Pension Fund exceed the actuarial liabilities of the Pension Fund in respect of benefits specifically described under the Plan, such excess assets or any portion thereof may be refunded to or used by the Company in a manner to be determined solely by the Company.

29 Whythat amendment was made retroactive onlyto January1, 1986, instead ofat least December 17, 1985, has not been explained. It could not have been in the documents filed with the Commission. Beyond that, Mr. Collins states that, while the Union and Dominion have bargained collectively with respect to pension coverage for the employees as part of their collective agreement since 1977, "at no time has the matter of Dominion's purported entitlement to pension fund 'surplus' from the pension plan been the subject of collective bargaining negotiations or any agreement between the Union and Dominion" (Collins Record p. 9). Mr. Collins goes on to refer to the provision in the 1979 plan for the reversion to the company of any assets remaining after the satisfaction of all benefits rights or contingency rights accrued under the plan "in the event that the plan shall be terminated". His reference thus appears to be the fact that Dominion had no entitlement to surplus from an ongoing plan, and that the retroactive amendment had never been subject to the collective bargaining process before it was made. It appears that Dominion did not mention to the Commission that amendments were subject to the collective-bargaining process.

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

30 It is difficult to see how the amendment could have been the subject of collective bargaining. Indeed, as I understood Mr. Morphy, on behalf of Dominion, he did not suggest that it had. His submission was, rather, that the 1979 amendment providing for reversion to Dominion of the surplus assets on discontinuance of the plan should be read to mean that Dominion had the right to remove surplus funds from an ongoing plan. Yet, if that were so, why did Dominion bother to create the retroactive amendment of January 14, 1986?

31 To sum up, the consent given by the Commission was given notwithstanding that on the documents before it Dominion had no apparent right to receive the surplus; without any notice by Dominion to plan members or their Union of the application despite its history of assurances to them at odds with it; without any requirement by the Commission that Dominion give such notice notwithstanding the Commission's statement in its guidelines that it reserved the right to require it, and notwithstanding the Commission's awareness of the interest of plan members in the matter before the consent was given.

32 The first question that arises is, was there a duty on the Commission to give notice, or to require that Dominion give notice, to members of the plan or their agent, the Union?

33 The source of the Commission's authority was the Act by which it was established. It is a legal truism that administrative tribunals have no powers beyond those given to them by legislation. The specific authority that the Commission purported to act upon was s. 21(2), of the regulation, already quoted. There is no requirement there, or elsewhere in the regulation, or in the Act, that any notice be given to anyone of an application for consent.

34 The question is therefore whether any requirement for notice arises from any other source. Certainly it does not arise from the Statutory Powers Procedure Act, R.S.O. 1980, c. 484, which applies to a host of other tribunals, for the Act has recently been amended to state that the Statutory Powers Procedure Act "does not apply to determinations of the Commission under this Act or the Regulations": the Act, s. 37.

35 Is requirement of notice imposed by common law? Does the doctrine of fairness require it? Those questions require consideration of the nature of the Commission's mandate, and the nature of the interest that members of the plan, or their agent, the Union, had in the subject matter of the Commission's deliberations.

36 First, it appears that the Commission was established to ensure that certain interests were protected. While there is no doubt that those interests included the employer's, there appears to be equally no doubt that the Commission was established to safeguard the plan members' interests as well. The Commission, in effect, acknowledges that in its guidelines which stress its concern to prevent the removal of so much of the surplus funds from a plan that would endanger the plan's solvency. While the Commission may not, strictly speaking, be a trustee for the members, for it holds no money belonging to the plan, it would be artificial to conclude that Commission's obligation to members is lower than the high standard of fiduciary obligation imposed on trustees.

37 Under the plan documents Dominion has the duty to administer the plan. The contributions it receives from employees are trust funds in its hands: the Act, s. 23(1) and contributions required from Dominion are as well: the Act s. 23(4). Para 13.1 of the 1979 plan provided that all contributions by members and Dominion made pursuant to the

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 plan "will be deposited in a pension fund", and that, "The pension fund shall be administered by a fund manager in accordance with the terms of an agreement executed between the Company and the fund manager, which agreement shall constitute part of this plan."

38 There is no question that the fund manager held the funds in trust for plan members and Dominion. Thus, in consenting to the withdrawal of funds in the hands of the fund manager, the Commission was consenting to the withdrawal of trust funds.

39 I can see no significant distinction between this case and Reevie v. Montreal Trust Co. of Can. (1986), 53 O.R. (2d) 595, 11 C.C.E.L. 44, C.E.B. & P.G.R. 8016, 25 D.L.R. (4th) 312, 13 O.A.C. 233 (Ont. C.A.), in which the Court of Appeal held that such funds were trust funds. Indeed, that decision could have important ramifications here, with respect to Dominion's retroactive amendment, for it applied the principle that a settlor cannot revoke his trust. On the face of things, this raises the question of the efficacy of the retroactive amendment, quite apart from the time when it was made. However, I merely point to the issue; to decide it would require careful consideration of the plan documents and comparison with the plan documents in that case, and we did not have the advantage of such a comparison in the arguments made at the hearing before us.

40 My conclusion is that the duty owed by the Commission, to both plan employees and Dominion as beneficiaries of the trust, was equivalent to that of a trustee. I have no hesitation in calling it a fiduciary duty; the law knows none higher.

41 It is difficult to imagine why the Commission was established without accepting that its principal function was to protect the interests of plan members. Who is more interested in the solvency of a pension plan than its members, who are either depending upon it as a source of income in their retirement years, or looking forward to the day when they will, or must? The Commission stresses its concern for solvency in its guidelines. Since solvency can be of greater interest to none than plan members, the Commission appears to be well aware of its duty to those members.

42 While an attempt was made before us to depreciate the Commission's role as watchdog over the interests of plan members, to the extent of a suggestion that its consent really was of no effect at all, it can hardly be suggested that plan members had no interest at all in the decisions of the Commission. The Commission itself, in its guidelines, acknowledged that there might be circumstances in which the members' interests might require them to be notified of an application to remove funds. It also acknowledged in the guidelines that there might be competing claims to those funds, and that where entitlement to surplus funds was unclear because of "contractual conflict or a recent amendment to permit a refund", the Commission "may recommend that the plan sponsor and trustee seek legal advice or Court determination as to entitlement". Since the only claimants would be the members of a plan and an employer, this is further recognition that both had, or could have, an interest in surplus funds.

43 Since, on the face of the documents before the Commission in this case, the employer had no right to surplus funds except on the termination of the plan, one wonders why the Commission did not, at the very least, require that notice be given to members. It is difficult to think of a case where that would be more appropriate.

44 While it is not necessary on this aspect of the matter to consider whether plan members had a right to the

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 surplus funds, any more than on the face of things Dominion had no right, it seems obvious that they had a vital interest in them, in particular, whether they remained in the plan in order to fund its present and future obligations, or were withdrawn from it. It is difficult to see how the interest of the plan members was of any lesser quality or degree than Dominion's.

45 Yet respondents submit that plan members had neither a right nor an interest sufficient to merit the attention of this Court, or to justify its intervention. Fine distinctions need no longer be drawn between rights and interests in light of the broad mandate conferred on the Courts of Canada by recent proclamations of the Supreme Court of Canada. These decisions include, in particular, Martineau v. Matsqui Institution Disciplinary Bd., [1980] 1 S.C.R. 602, 13 C.R. (3d) 1, 15 C.R. (3d) 315 (Fr.), 50 C.C.C. (2d) 353, 106 D.L.R. (3d) 385, 30 N.R. 119 (S.C.C.). At p. 619 [S.C.R.] Dickson J. (now Chief Justice) said:

When concerned with individual cases and aggrieved persons, there is the tendency to forget that one is dealing with public law remedies, which, when granted by the courts, not only set aright individual injustice, but also ensure that public bodies exercising powers affecting citizens heed the jurisdiction granted them. Certiorari stems from the assumption by the courts of supervisory powers over certain tribunals in order to assure the proper functioning of the machinery of government. To give a narrow or technical interpretation to 'rights' in an individual sense is to misconceive the broader purpose of judicial review of administrative action. One should, I suggest, begin with the premise that any public body exercising power over subjects may be amenable to judicial supervision, the individual interest involved being but one factor to be considered in resolving the broad policy question of the nature of review appropriate for the particular administrative body.

Later, he said, at pp. 622-23:

The authorities to which I have referred indicate that the application of a duty of fairness with procedural content does not depend upon proof of a judicial or quasi-judicial function. Even though the function is analytically administrative, courts may intervene in a suitable case.

.....

In my opinion, certiorari avails as a remedy wherever a public body has power to decide any matter affecting the rights, interests, property, privileges, or liberties of any person.

Still later, he said, in a now celebrated passage (at pp. 628-29):

The authorities, in my view, support the following conclusions:

1. Certiorari is available as a general remedy for supervision of the machinery of government decision-making. The order may go to any public body with power to decide any matter affecting the rights, interests, property, privileges, or liberty of any person. The basis for the broad reach of this remedy is the general duty of fairness resting on all public decision-makers.

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

2. A purely ministerial decision, on broad grounds of public policy, will typically afford the individual no procedural protection, and any attack upon such a decision will have to be founded upon abuse of discretion. Simi- larly, public bodies exercising legislative functions may not be amenable to judicial supervision. On the other hand, a function that approaches the judicial end of the spectrum will entail substantial procedural safeguards. Between the judicial decisions and those which are discretionary and policy-oriented will be found a myriad decision-making processes with a flexible gradation of procedural fairness through the administrative spectrum. That is what emerges from the decision of this Court in Nicholson. In these cases, an applicant may obtain certiorari to enforce a breach of the duty of procedural fairness.

3. Section 28 of the Federal Court Act, that statutory right of review compels continuance of the classification process in the Federal Court of Appeal, with clear outer limits imposed on the notion of 'judicial or quasi-judicial'. No such limitation is imported in the language of s. 18, which simply refers to certiorari, and is therefore capable of expansion consistent with the movement of the common law away from rigidity in respect of the prerogative writs. The fact that a decision-maker does not have a duty to act judicially, with observance of formal procedure which that characterization entails, does not mean that there may not be a duty to act fairly which involves importing something less than the full panoply of conventional natural justice rules. In general, courts ought not to seek to distinguish between the two concepts, for the drawing of a distinction between a duty to act fairly, and a duty to act in accordance with the rules of natural justice, yields an unwieldy conceptual framework. The Federal Court Act, however, compels classification for review of federal decision-makers.

46 I gather from those passages that judicial review is available as a remedy against a failure of the duty of fairness that affects not only the rights, but the interests, of persons. I gather further that it is no longer necessary to logic-chop over the distinction between the exercise of administrative and judicial powers which was necessary prior to Marti- neau and the earlier decision of the Court in Nicholson v. Haldimand-Norfolk Regional Bd. of Police Commrs., [1979] 1 S.C.R. 311, 78 C.L.L.C. 14,181, 88 D.L.R. (3d) 671, 23 N.R. 410 (S.C.C.).

47 I understood Mrs. Block to submit that the Commission's decision was "merely ministerial", and that therefore no duty of fairness was owed. I can say only that a ministerial decision has for long been accepted as one involving the exercise of no discretion at all. That is not this case. The Commission was not bound to consent.

48 While Dickson J.'s statements were made in the context of an application for certiorari, they do not appear to be confined to it, but to apply to judicial review in general. In any event, this Court's jurisdiction on an application for judicial review, however narrowly the application itself might be framed, is to grant "any relief that the applicant would be entitled to" in any one or more of proceedings by way of mandamus, prohibition or certiorari, or an action for declaration or injunction. Thus any application for judicial review brings into play the Court's traditional jurisdiction by way of certiorari, if it is applicable. Thus, in my opinion, Dickson J.'s observations would apply to the exercise of this Court's jurisdiction in this case even if they were narrowly construed so as to apply only to the exercise of jurisdiction by way of certiorari.

49 It is no longer necessary, as it was before the emergence of the doctrine of fairness, to find that rights were, or might be affected. The old learning was that if rights were affected the function of the tribunal was quasi-judicial and

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 therefore subject to the rules of natural justice. It is sufficient now if interests only are affected. The duty of fairness applies to functions that would formerly have been classified as administrative. There is, by now, a wealth of authority to support that proposition. It has repeatedly been endorsed in the Courts of this province. In particular, see the decision of the Court of Appeal in Re Webb and Ont. Housing Corp. (1978), 22 O.R. (2d) 257, 93 D.L.R. (3d) 187 (Ont. C.A.), and the decisions on which it was based, notably Nicholson, supra, and Lord Denning's celebrated remarks, about a body that had merely investigatory powers, in R. v. Race Relations Bd.; Ex parte Selvarajan, [1975] 1 W.L.R. 1686, [1976] 1 All E.R. 12 at 19 (C.A.), to the effect that the dutyof fairness applied in favour of persons who might be adversely affected even by an investigation and report.

50 The result must be, in my opinion, that the Commission owes a duty of fairness to those whose interests may, or will, be affected by its decision. What that duty requires, in procedural terms, will depend on the circumstances, as Dickson J. points out. The appropriate procedure in any given case might run from a full and formal hearing, at one end of the spectrum, down to simple, even informal notice, and an opportunity to respond, as in Nicholson, supra. In my opinion, at the very least, the Commission should have required Dominion to give notice of its application to the members of the plan or their Union. It would have been simpler to notify the Union, but we were told by counsel that Dominion kept a mailing list of plan members, and there would thus have been no great difficulty in notifying them individually.

51 The object of requiring notice would be, of course, to give the Union or plan members an opportunity to defend their interest. They could not do this without knowing what the application was based on, so they would have to be furnished with the documents supporting the application. One critical document is the "actuarial report and cost certificate prepared as of a current date showing the funded status of the plan" required under the Commission's guidelines. That report contains, of course, an expression of opinion. The opinions of experts are known to vary; one opinion should not be treated as determinative. Surely the members or their Union should have been made aware of the basis on which the opinion rested so that they could place it before an expert, or experts, of their choosing. It may be that all the experts would agree on the amount that could have been removed from surplus, assuming any could legally be removed, but that eventuality cannot be assumed. Indeed, I think it unlikely. Some idea of how widely opinions might vary is afforded by the fact that Mr. Black believed that $60 to $75 million could be "recovered", as he put it, whereas consent was given for the withdrawal of only $37,951,000. The Commission has not revealed how it came to settle on that figure; it may be that it adopted an opinion of its own.

52 Further, plan members or the Union should have been given an opportunity to put their point that Dominion had no right, on the plan documents as they stood at the time, to remove any of the assets.

53 While s. 37 of the Act excludes the operation of the Statutory Powers Procedure Act, from the "determinations of the Commission" it cannot exclude the operation of the common law, and the duty of fairness it imposes. That is well-established: see Downing v. Graydon (1978), 21 O.R. (2d) 292, 78 C.L.L.C. 14,183, 92 D.L.R. (3d) 355 (Ont. C.A.).

54 In my opinion, the Commission failed in its duty of fairness and its decision should not be allowed to stand.

55 However, applicants rest their challenge on a further ground. It is that the Commission has no power to consent

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 to the withdrawal of funds from ongoing plans. Thus, s. 21(2) cannot be read widely enough to be a basis for a consent to such an application, or, if it is to be read so widely, it is ultra vires the Lieutenant Governor in Council.

56 This submission requires consideration of the Act. Section 10(1)(c) states that the Commission's function is "to administer and enforce this Act ...". Under s. 38(1)(b) the Lieutenant Governor in Council may make regulations governing defined benefit plans. Among the specified subjects for regulations is (in s. 38(1)(e)) "prescribing tests and standards for solvency of pension plans".

57 There are numerous references in the Act and the regulation to the discontinuance of pension plans and the consequent disposition of assets or determination of interests. Thus, s. 38(1)(b)(viii) contemplates regulations "spec- ifying the priorities in allocating assets of a defined benefit pension plan on its wind up"; cl. (x) of the same section refers to regulations "governing the procedures to be followed by the administrator of a pension plan in the distribution of assets of the plan on winding up", under cl. (xiii) regulations may be made "governing the termination or wind up of a defined benefit pension plan". Section 38(1)(k) refers to regulations "providing for, regulating and governing the disposition of the assets of a pension plan that is discontinued, terminated or wound up".

58 Section 38(1)(r) is an omnibus clause, providing for regulations "respecting any matter necessary or advisable to carry out effectively the intent and purpose of this Act".

59 These are references to discontinued plans, and the disposition of their assets, in Reg. 746. Sections 14 and 14(a) for instance, contain lengthy and detailed directions on that subject.

60 I have set out these provisions in order to deal fairly with applicants' submissions that while the Act provides for regulations dealing with the disposition of the assets of discontinued plans, there is nothing in the statute authorizing regulations on the disposition of the assets of on-going plans.

61 It is submitted that because the only provision for the disposition of assets of a plan is on discontinuance, ss. 14 and 14(a) of the regulation are a "code", carrying the implication that the Act does not contemplate the disposition of assets of an ongoing plan. Thus, the only legal effect s. 21(2) can have is in relation to discontinuance; otherwise it is ultra vires.

62 The argument contra is that the Act gives a broad mandate to the Lieutenant Governor in Council to make regulations, broad enough to include the disposition of assets of an ongoing plan. In particular, respondents point to s. 10(1)(c) and s. 38(1)(r) of the Act. It is said that while s. 38 makes specific reference to the disposition of assets on winding-up, it is not intended to be read as excluding all or any other matters, and that s. 38(1)(r) gives the Lieutenant Governor in Council some degree of discretion in deciding what is "necessary and advisable" in carrying out the intent and purpose of the Act.

63 In my opinion, this is a finely balanced question. There is impressive precedent for the broad reading of the power to make regulations given to so high a level of authority. For instance, in Baldwin v. Pouliot, [1969] S.C.R. 577, 7 D.L.R. (3d) 367 (S.C.C.), Abbott J. said, (at p. 582 [S.C.R.]), "... the enumeration of specified subjects ... does not have the effect, in my opinion, of limiting the general power to make by-laws ... which is conferred under the section."

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

He quoted Duff J. to the effect that unless there was a "qualifying context" general powers should be treated as comprehensive.

64 Applicants submit that the references to the disposition of assets on the winding-up of a plan constitute a context qualifying the general power given in s. 38(1)(r), because the implication of their inclusion is that the disposition of assets otherwise was intended to be excluded. Mr. Koskie has referred us to some of the many cases in which regulations have been held to be ultra vires, for dealing with matters beyond the scope of the statute from which the power to regulate is derived. These include Gach v. Director of Welfare (Brandon), [1973] 3 W.W.R. 558, 10 R.F.L. 333, (sub nom. Re Gach and Director of Welfare (Brandon) 35 D.L.R. (3d) 152 (Man. C.A.), where a regulation was held to be inconsistent with its authorizing statute. At p. 154 [D.L.R.] of the report Dickson J.A. (as he then was) observed:

It must be taken that the Legislature, in prescribing that the resources of a dependant form part of the resources of an applicant, effectively closed the door to inclusion by regulation of the resources of a parent as part of the resources of an applicant.

In seeking, by regulation, to make the resources of a parent part of the resources of an applicant, the Lieuten- ant-Governor in Council was not 'carrying out the provisions of the Act', it was enlarging those provisions in a material way. The Regulation sought to effect a substantial and inconsistent addition to the Act and in our view clearly exceeds the regulation-making powers accorded the Lieutenant-Governor in Council by the enabling legislation.

65 In other words, the inclusion of some things implied the exclusion of others.

66 In A.G. Can. v. Silk, [1983] 1 S.C.R. 334, 83 C.L.L.C. 14,025, 145 D.L.R. (3d) 121, 47 N.R. 57 (sub nom. Re Silk) (S.C.C.), the Governor in Council had power to make regulations on enumerated subjects but also for "... all such matters as are necessary to provide unemployment insurance for ... fishermen". The Supreme Court agreed with the Federal Court of Appeal that it was "... not necessary, for the purpose of extending unemployment insurance protection to fishermen to establish a different qualifying period for them" (p. 338) which both Courts held was the effect of the impugned regulation. This decision is of interest for it makes it clear that whether a regulation is "necessary", and therefore within the terms of a general power to make "necessary" regulations, is a question subject to the objective scrutiny of the Courts.

67 Another decision to which Mr. Koskie referred us is Re Steve Dart Co. and D.J. Duer & Co. (1974), 46 D.L.R. (3d) 745 (Fed. T.D.). It is strong support for applicants' position. At p. 749 Addy J. said:

That section grants the additional right to make Regulations to carry out the purposes and provisions of the Act, but such purposes and provisions must be clearly expressed in or contained within or flow by necessary implication from other sections of the Act. It would permit the making of ejusdem generis Regulations as those authorized in the other sections of the Act providing for the issuing of Regulations. It would also permit a Regulation required to carry out effectively a clearly-expressed provision of the Act not falling within one of the other sections authorizing the making of Regulations; it certainly does not provide the right to make Regulations covering

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

a matter which is not even remotely referred to in the Act. ...

68 Applicants submit that, since no reference to the disposition of the assets of an ongoing plan is "even remotely referred to" in the Act, there is no basis for inferring that it was contemplated as falling within the general power to make regulations necessary or desirable to carry out the purposes of the Act. Beyond that, since reference is made, repeatedly, to the disposition of assets of a discontinued plan, it would be contrary to the implication of the Act to include the disposition of assets of a plan that was not discontinued.

69 These are powerful arguments. Yet, I cannot read the Act so narrowly as to prohibit the Lieutenant Governor in Council from making a regulation dealing with withdrawals of surplus from an ongoing fund. The fact that surpluses might arise and the fact that some part might not be needed to fund an ongoing fund seem to be obvious. No explanation has been offered as to why the legislators did not intend that regulations be made to deal with that situation. It would, in my opinion, be strange indeed to assign to the legislators an intention to compel the continuance of funds in a plan which had no need for them.

70 The existence of surplus funds creates the necessity, or at least the desirability, of dealing with them. The Commission is there to ensure that plans are properly funded, not over-funded. I think, therefore, that the consideration of what to do with surplus funds of current plans is both desirable and necessary. If that is so, the absence of any reference to it in the Act is not of critical significance, nor, since there is reference to the disposition of surplus funds in the Act, can it be said that to regulate surplus funds would be contrary to the Act.

71 Thus, while I repeat that the question is a difficult one, I think on balance that s. 38(1)(r) of the Act is wide enough to authorize s. 21(2) of the regulation to cover withdrawals from ongoing plans. I thus agree with the Com- mission's interpretation of s. 21(2) as set out in its guidelines. I think that applicants' attack on that ground must fail.

72 I have said that applicants seek not only an order quashing the Commission's consent, but one requiring the return of the funds. I think they are entitled to the first; I turn to the question of the second. That requires consideration of whether it is appropriate for the Court to grant an order directing that the funds withdrawn be returned, and whether this Court has the authority to make such an order.

73 First I should deal with Dominion's proposal that certain letters of credit that have been lodged with the Court pending the final resolution of this case and the litigation that has been launched by Dominion against applicants Collins and Moore, ("on their own behalf and on behalf of all current and past members of the Retirement Income Plan for Union Employees of Dominion Stores" to determine entitlement to the withdrawn funds) continue to stand in place of any mandatory order this Court might make. In response to a direction we understand was made by Hollingworth J. that the funds be returned, when these applications were at first instance, Dominion filed the letters of credit with the Court as a temporary measure that satisfied Hollingworth J.'s concern "to protect the integrity of the fund".

74 The letters of credit are before us. Having read them, and heard argument on the point, I am uncertain of their enforceability and apprehensive that this is a stratagem likely only to produce further litigation. I find it unacceptable.

75 That forces consideration of the appropriateness of the order requested. It is trite law that a denial of natural

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274 justice amounts to an error of jurisdiction. I can see no reason why a denial of the duty of fairness should not have the same effect. Thus, the Commission's consent was given without jurisdiction, and Dominion's withdrawal of the funds was unauthorized. Dominion received the funds without authority. An order simply quashing the Commission's consent would be a purely academic exercise; it would slam the door on an empty stall. If these applications can lead to no more significant effect than that, then the right to bring them is a hollow one and success is no success at all. If I am right in the views I have expressed, Dominion is enjoying the benefit of funds to which it has no right at all. If I correctly understand the argument put to us by Dominion's counsel, Dominion seeks, even if it has no right to the funds, to continue to enjoy them on the ground that this Court can do nothing about it.

76 I do not construe the powers of this Court so narrowly. This is a case for a mandatory order if ever there was one. The criteria that commonly apply to the consideration of such an order indicate to me that one should be made. We have express authority to grant declarations and injunctions in proper cases in respect of the exercise of a statutory power: see s. 2 of the Judicial Review Procedure Act. It has been held by the Divisional Court that a declaration may be made on application: Re Doctors Hospital and Min. of Health (1976), 12 O.R. (2d) 164, (sub nom. Doctors Hos- pital v. Min. of Health) 1 C.P.C. 232, 68 D.L.R. (3d) 220 (Ont. Div. Ct.). I can see no reason why that decision should not apply equally to an injunction. As Morden J. (now J.A.) said, in reference to the Judicial Review Procedure Act, in Re Bedesky and Ont. Farm Products Marketing Bd. (1975), 8 O.R. (2d) 516 at 537, 58 D.L.R. (3d) 484 (Ont. Div. Ct.), affirmed (1975), 10 O.R. (2d) 105, 62 D.L.R. (3d) 265 (Ont. C.A.). Application for leave to appeal to the Supreme Court of Canada dismissed (1975), 10 O.R. (2d) 106n, 62 D.L.R. (3d) 266n, 8 N.R. 268 (S.C.C.):

On an application for judicial review the Court may grant that relief to which the applicant would be entitled in an action for a declaration in relation to the exercise of a statutory power. The purpose of the provision, where relevant, is to do away with the necessity of an action.

77 Is the act of giving consent the exercise of a statutory power? The definition of statutory power, in s. 1(g) of the Judicial Review Procedure Act, includes the power "to exercise a statutory power of decision" (1(g)(ii)). Statutory power of decision is defined in s. 1(f) as follows:

(f) 'statutory power of decision' means a power or right conferred by or under a statute to make a decision deciding or prescribing,

(i) the legal rights, powers, privileges, immunities, duties or liabilities of any person or party, or

(ii) the eligibility of any person or party to receive, or to the continuation of, a benefit or licence, whether he is legally entitled thereto or not,

and includes the powers of an inferior court.

78 Dominion had no right to remove funds without the Commission's consent. That is the effect of s. 21(2). In determining the issue of consent the Commission was determining a right, in this case, granting one. While we heard much from respondents to the effect that the giving of consent did not involve a decision, I confess that I have difficulty understanding how anyone can give a consent without deciding to do so.

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

79 At the same time, the Commission was determining a valuable right of plan members. That was to have the Commission ensure that the removal of funds would not imperil the solvency of the plan. No one could have a greater interest in the continued solvency of the plan than the plan members. The Commission had a clear duty to protect their interests and the members had an equivalent right to have them protected. We asked respondent's counsel, "Whose interests was the Commission established to protect?" The answer could only be: the members of the plan. In my respectful opinion, to accept, as respondents apparently do, that the members had a vital interest in the continued solvency of the plan, but not a right to it, is a sophistry intended to distract this Court from its essential function, which is to ensure, to the best of its ability, that justice prevails.

80 It is worth remembering, in this connection, the words of Dickson J. in Martineau, supra, warning against too technical an interpretation of "rights". It is also worth noting that, in a case involving the partial winding-up of a plan, the Divisional Court (per Craig J.) observed that "the making of a partial winding-up order under s. 25(1) would or might affect the legal rights of the employer ... ". See Re Grant Bus Lines Ltd. and Pension Comm. of Ont. (1980), 30 O.R. (2d) 180 at 189, 116 D.L.R. (3d) 336 (Ont. Div. Ct.), affirmed (1981), 33 O.R. (2d) 652, 125 D.L.R. (3d) 325 (Ont. C.A.), leave to appeal to the Supreme Court of Canada refused (1981), 41 N.R. 374 (S.C.C.). It is difficult to see any difference in substance between that order as it affected the employer and the consent herein as it affects the members. Both would appear to affect rights.

81 As to the jurisdiction of the Court to make an order, counsel for Dominion were unable to point to any authority to support their contention that it could not. If the jurisdiction to grant injunctive relief in relation to the exercise of a statutory power is not in this Court, I wonder where it is. In light of the plain words of the Judicial Review Procedure Act it is certainly not in the High Court.

82 Dominion has been a party throughout. It has had an opportunity to defend its position. It holds the funds, or, at least, received the funds without authority. This, in my opinion, is an appropriate case for a mandatory order, in the exercise of the Court's power to grant an injunction, requiring the return of the funds.

83 I would be somewhat reluctant to make such an order, however, for even though Dominion is a substantial company compared to most others, an order directing the return of so large an amount might be difficult of immediate compliance. I think it would be preferable to make a declaration that Dominion received the funds and holds them without authority and calling on Dominion for a proposal for their expeditious return. If no such proposal is forthcoming within 7 days of the release of our judgment, in my opinion an order should go in the exercise of our injunctive power requiring that the $37,951,000 withdrawn from the pension plan be returned forthwith, with interest. A proposal may be submitted to the Registrar of this Court, with copies to other parties, who should be given 7 days after they receive the proposal to respond.

84 I would therefore grant the applications with costs payable by Dominion, including the costs of the proceedings before Hollingworth J. I would not order costs for or against the Commission.

Application allowed.

1986 CarswellOnt 155, 33 B.L.R. 265, C.E.B. & P.G.R. 8019, 16 O.A.C. 24, 21 Admin. L.R. 186, (sub nom. Batchelor v. Ontario (Pension Commission)) 31 D.L.R. (4th) 86, 56 O.R. (2d) 274

END OF DOCUMENT

CRA Views, Ruling, 2012-0463471R3 -- Single reclamation trust PRINCIPAL ISSUES: 1. Whether the proposed Single Reclamation Trust meets the definition of a “qualifying environmental trust” in section 211.6 of the Act. 2. Whether contributions made by the Corporation to the Single Reclamation Trust will be deductible in computing the Corporation’s income pursuant to paragraph 20(1)(ss) of the Act. approximately 4 pages.

2012-0463471R3-- Single reclamation trust

Date: 2013

Reference: 20(1)(ss), 211.6(1)“qualifying environmental trust”,211.6(1)“qualifying site”;

Référence :20(1)(ss), 211.6(1)«fiducie pour l'environnement admissible», 211.6(1)«site admissible»

SUMMARY: Single reclamation trust—ITA-20(1)(ss), 211.6(1)“qualifying environmental trust”, 211.6(1)“qualifying site”—Advance income tax ruling—Whether a proposed Single Reclamation Trust meets the definition of a “qualifying environmental trust” in s. 211.6. Whether contributions made by a corporation to the Single Reclamation Trust will be deductible in computing the corporation's income pursuant to para. 20(1)(ss).

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

PRINCIPAL ISSUES: 1. Whether the proposed Single Reclamation Trust meets the definition of a “qualifying environmental trust” in section 211.6 of the Act.

2. Whether contributions made by the Corporation to the Single Reclamation Trust will be deductible in computing the Corporation's income pursuant to paragraph 20(1)(ss) of the Act.

POSITION: 1. Yes. 2. Yes. Favourable rulings provided.

REASONS: Areas required to be remediated in accordance with provincial legislation meet the definition of a “qualifying site” for the purposes of the QET rules in section 211.6 of the Act.

XXXXXXXXXX

2012-046347

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the additional information you provided in your subsequent email correspondences, the last of which was received on XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayer named above, none of the issues involved in the ruling request is:

(i) involved in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) “Act” means the Income Tax Act (Canada), RSC 1985, c.1 (5th Supp.), as amended to the date of this letter;

(b) “Corporation” means the XXXXXXXXXX;

(d) “Facility” means the mine, mill, brine ponds, tailing management areas and any other fixtures, chattels or improvements located on a particular mine site;

(e) “Mine XXXXXXXXXX” means the property described throughout the approved “Decommissioning and Reclamation Plan for XXXXXXXXXX” of XXXXXXXXXX and specifically referenced in Section XXXXXXXXXX of the Plan, located at XXXXXXXXXX, including the Facility and any land, water or watercourse used or disturbed by the construction or operation of the site;

(f) “Mine XXXXXXXXXX” means the property described throughout the approved “Decommissioning and Reclamation Plan for XXXXXXXXXX” of XXXXXXXXXX and specifically referenced in Section XXXXXXXXXX of the Plan, located at XXXXXXXXXX, including the Facility and any land, water or watercourse used or disturbed by the construction or operation of the site;

(g) “Mine XXXXXXXXXX” means the property described throughout the approved “Decommissioning and Reclamation Plan for XXXXXXXXXX” of XXXXXXXXXX and specifically referenced in Section XXXXXXXXXX of the Plan, located at XXXXXXXXXX, including the Facility and any land, water or watercourse used or disturbed by the construction or operation of the site;

(h) “Mine XXXXXXXXXX” means the property described throughout the approved “Decommissioning and Reclamation Plan for XXXXXXXXXX” of XXXXXXXXXX and specifically referenced in Section XXXXXXXXXX of the Plan, located on XXXXXXXXXX, including the Facility and any land, water or watercourse used or disturbed by the construction or operation of the site;

(i) “Mine XXXXXXXXXX” means the property described throughout the approved “Decommissioning and Reclamation Plan for XXXXXXXXXX” of XXXXXXXXXX and specifically referenced in Section XXXXXXXXXX of the Plan, located at XXXXXXXXXX, including the Facility and any land, water or watercourse used or disturbed by the construction or operation of the site;

(j) “Paragraph” refers to a numbered paragraph in this letter;

(k) “proposed transactions” means the transactions described in Paragraphs 4 through 6 below;

(l) “public corporation” has the meaning assigned to that term by subsection 89(1) of the Act;

(m) “qualifying environmental trust” has the meaning assigned to that term by subsection 211.6(1) of the Act;

(n) “qualifying site” has the meaning assigned to that term by subsection 211.6(1) of the Act; and

(o) “taxable Canadian corporation” has the meaning assigned to that term by subsection 89(1) of the Act.

Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. The Corporation is a public corporation and a taxable Canadian corporation that, together with its subsidiaries, forms XXXXXXXXXX. The Corporation owns and operates XXXXXXXXXX mining facilities at XXXXXXXXXX mines sites in XXXXXXXXXX. The Corporation's fiscal year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The head office is located at XXXXXXXXXX. The Corporation files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. The Corporation entered into XXXXXXXXXX reclamation trust arrangements with the Province of XXXXXXXXXX (the “Province”) in XXXXXXXXXX. The Corporation made payments totalling $XXXXXXXXXX in XXXXXXXXXX, $XXXXXXXXXX in XXXXXXXXXX, and $XXXXXXXXXX in XXXXXXXXXX pursuant to those trust arrangements. The Corporation deducted the XXXXXXXXXX and XXXXXXXXXX payments in computing its income pursuant to paragraph 20(1)(ss) of the Act, which allows a deduction for a contribution made to a qualifying environmental trust as defined in subsection 211.6(1). The Corporation will also deduct the XXXXXXXXXX payment on its XXXXXXXXXX

corporation tax return pursuant to paragraph 20(1)(ss). The Corporation does not intend to make any additional contributions to these reclamation trust arrangements.

3. The Corporation's separate mine sites in the Province are described as Mine XXXXXXXXXX, Mine XXXXXXXXXX, Mine XXXXXXXXXX, Mine XXXXXXXXXX and Mine XXXXXXXXXX (collectively referred to hereafter as the “XXXXXXXXXX Mining Sites”).

PROPOSED TRANSACTIONS

4. The Corporation intends to enter into a new trust agreement (hereafter referred to as the “Single Reclamation Trust”) with the Province for the sole purpose of funding the reclamation of the XXXXXXXXXX Mining Sites in XXXXXXXXXX. This funding is required pursuant to the XXXXXXXXXX (hereafter referred to as the “Environmental Laws”).

It is intended that the XXXXXXXXXX existing reclamation trusts will be dissolved and the funds distributed to the Corporation as beneficiary of the trusts.

5. The new Single Reclamation Trust will have the following attributes:

a. The Single Reclamation Trust, established pursuant to and governed by the Environmental Laws, will be maintained for the sole purpose of funding the reclamation of the XXXXXXXXXX Mining Sites.

b. The beneficiaries of the Single Reclamation Trust will be the Corporation and the Province. The trustee will be a corporation resident in Canada that is licensed to carry on in Canada the business of offering to the public its services as trustee.

c. The Single Reclamation Trust cannot borrow money and may only acquire property which is described in paragraphs (a), (b), (c), (c.1), (d) and (f) of the definition “qualified investments” in section 204 of the Act, and which are not “prohibited investments” as defined in subsection 211.6(1) of the Act.

d. If the Corporation defaults on its obligations under any of the XXXXXXXXXX Mining Site's plan of reclamation and decommissioning, and does not correct such default after being given a XXXXXXXXXX-day notice period, the Minister of the Environment for the Province of XXXXXXXXXX (the “Minister) will be entitled to retain a third party to carry out this work.

e. The Minister will be authorized to direct the trustee to disburse amounts with respect to work completed in the reclamation or decommissioning of any of the XXXXXXXXXX Mining Sites to the Minister, the Corporation or any third party as specified by the Minister.

f. If during the time that the Corporation continues to operate a Facility, the Corporation undertakes significant decommissioning, restoration and rehabilitation of any part of the site on which that Facility is located, the Minister may direct the trustee to pay all or a portion of such costs, as the Minister determines, provided such payment will not unduly deplete the Single Reclamation Trust.

g. The Single Reclamation Trust will remain in existence until all reclamation obligations in respect of the XXXXXXXXXX Mining Sites have been fulfilled, or otherwise been discharged in whole or in part, in accordance with the trust agreement.

6. The Corporation intends to make payments to the Single Reclamation Trust of approximately $XXXXXXXXXX in the XXXXXXXXXX calendar year.

PURPOSE OF THE PROPOSED TRANSACTIONS

The proposed transactions are being undertaken for the purpose of setting up a Single Reclamation Trust to provide, in the most economic manner, the funding for the reclamation of the XXXXXXXXXX Mining Sites in XXXXXXXXXX, which is required to satisfy the Corporation's obligations under the Province's Environmental Laws.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm the following:

A. Provided that the Single Reclamation Trust is established and operated in accordance with the proposed terms as set out in Paragraph 5 above for each taxation year, the Single Reclamation Trust will be a “qualifying environmental trust” as defined in subsection 211.6(1) of the Act.

B. Contributions made in the year by the Corporation to the Single Reclamation Trust will be deductible in computing the Corporation's income for the particular taxation year pursuant to paragraph 20(1)(ss) of the Act.

C. Upon the dissolution of the XXXXXXXXXX existing reclamation trusts as described in Paragraph 4 above, the amounts received in the year by the Corporation will be included in computing the Corporation's income for the particular taxation year pursuant to paragraph 12(1)(z.1) of the Act.

COMMENTS

Except as expressly stated, the rulings provided do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming either expressly or implicitly:

(i) the reasonableness of any expenditure referred to in this letter;

(ii) whether the arrangement being entered into with the Province creates a valid trust at law; and

(iii) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Corporation has commenced implementing the proposed transactions by XXXXXXXXXX.

These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

XXXXXXXXXX

Manager

Resources Section

Reorganizations Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

END OF DOCUMENT

CRA Views, Ruling, 2012-0463871R3 -- Qualifying site PRINCIPAL ISSUES: 1. Whether the proposed Single Reclamation Trust meets the definition of a "qualifying environmental trust" in section 211.6 of the Act. 2. Whether contributions made to the Single Reclamation Trust will be deductible under paragraph 20(1)(ss) of the Act. approximately 4 pages.

2012-0463871R3-- Qualifying site

Date: 2013

Reference: 20(1)(ss), 211.6(1)“qualifying environmental trust”,211.6(1)“qualifying site”;

Référence :20(1)(ss), 211.6(1)«fiducie pour l'environnement admissible», 211.6(1)«site admissible»

SUMMARY: Qualifying site—ITA-20(1)(ss), 211.6(1)“qualifying environmental trust”, 211.6(1)“qualifying site”—Advance income tax ruling—Whether a proposed single reclamation trust meets the definition of a “qualifying environmental trust” in s. 211.6. Whether contributions made to the single reclamation trust are deductible under para. 20(1)(ss).

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

PRINCIPAL ISSUES: 1. Whether the proposed Single Reclamation Trust meets the definition of a “qualifying environmental trust” in section 211.6 of the Act. 2. Whether contributions made to the Single Reclamation Trust will be deductible under paragraph 20(1)(ss) of the Act.

POSITION: 1. Yes. 2. Yes. Favourable rulings provided.

REASONS: Areas required to be remediated in accordance with provincial legislation meet the definition of a “qualifying site” for the purposes of the QET rules in section 211.6 of the Act.

XXXXXXXXXX 2012-046387

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling

XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayers. We also acknowledge the additional information you provided in your subsequent email correspondences, the last of which was received on XXXXXXXXXX.

We understand that, to the best of your knowledge and that of the taxpayers named above, none of the issues involved in the ruling request is:

(i) involved in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts; or

(v) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving the taxpayer or a related person.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) “Act” means the Income Tax Act (Canada), RSC 1985, c.1 (5th Supp.), as amended to the date of this letter;

(b) “Corporation A” means XXXXXXXXXX;

(d) “Corporation C” means XXXXXXXXXX;

(e) “Corporation D” means XXXXXXXXXX;

(f) “CRA” means the Canada Revenue Agency;

(g) “Decommissioning and Reclamation Plans” means draft plans, including any approved amendments to such plans, to decommission and reclaim all or part of the Sites;

(h) “Entities” means Corporation A, Corporation B and the Partnership;

(i) “Facilities” means the mines, mills, brine ponds, tailing management areas and any other fixtures, chattels or improvements located on the Sites;

(j) “Mine XXXXXXXXXX” means the XXXXXXXXXX mine described throughout the draft “XXXXXXXXXX Decommissioning and Reclamation Plan” of XXXXXXXXXX, the locations of which are specified in Section XXXXXXXXXX of the above-noted plan, in the XXXXXXXXXX, and includes the Facilities and any land, water or watercourse used or disturbed by the construction or operation of the mine site;

(k) “Mine XXXXXXXXXX” means the XXXXXXXXXX mine described throughout the draft “XXXXXXXXXX Decommissioning and Reclamation Plan” of XXXXXXXXXX, the location of which is specified in Section XXXXXXXXXX of the above-noted plan, XXXXXXXXXX, and includes the Facilities and any land, water or watercourse used or disturbed by the construction or operation of the mine site;

(l) “Mine XXXXXXXXXX” means the XXXXXXXXXX, described throughout the draft “XXXXXXXXXX Decommissioning and Reclamation Plan” of XXXXXXXXXX, the location of which are specifically referenced in Section XXXXXXXXXX of the above-noted plan, and located within the XXXXXXXXXX, and includes the Facilities and any land, water or watercourse used or disturbed by the construction or operation of the site;

(m) “Paragraph” refers to a numbered paragraph in this letter, unless otherwise indicated;

(n) “Partners” means Corporation C and Corporation D;

(o) “Partnership” means the XXXXXXXXXX, made up of Corporation C, as general partner, holding a XXXXXXXXXX% capital interest in the Partnership, and Corporation D, as limited partner, holding a XXXXXXXXXX% capital interest in the Partnership;

(p) “qualifying environmental trust” has the meaning assigned to that term by subsection 211.6(1) of the Act;

(q) “qualifying site” has the meaning assigned to that term by subsection 211.6(1) of the Act; and

(r) “Sites” means the properties described throughout the approved Decommissioning and Reclamation Plans of XXXXXXXXXX for Mine XXXXXXXXXX, Mine XXXXXXXXXX and Mine XXXXXXXXXX, including the Facilities, and any land, water or watercourse used or disturbed by the construction or operation of such properties.

Unless otherwise specified, all section references contained herein are to sections of the Act, and all references to monetary amounts are in Canadian dollars.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. Corporation A is incorporated pursuant to the laws of the Province of XXXXXXXXXX and is primarily engaged in the operation of Mine XXXXXXXXXX. Corporation A's fiscal year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The head office is located at XXXXXXXXXX. Corporation A files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

2. Corporation B is incorporated pursuant to the laws of the Province of XXXXXXXXXX and is primarily engaged in the operation of Mine XXXXXXXXXX. Corporation B's fiscal year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. The head office is located at XXXXXXXXXX. Corporation B files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

3. The Partnership is a limited partnership formed under the laws of the Province of XXXXXXXXXX and is primarily engaged in the operation of Mine XXXXXXXXXX. The Partnership's fiscal year end is XXXXXXXXXX. Corporation C's business number is XXXXXXXXXX and Corporation D's business number is XXXXXXXXXX. The Partnership's head office is located at XXXXXXXXXX. Each Partner files its corporate income tax returns at the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

4. Corporation A, Corporation B, Corporation C and Corporation D are affiliated persons and related persons for the purposes of the Act.

5. Each of the Entities holds a permit issued by the Government of XXXXXXXXXX to operate a XXXXXXXXXX mine in XXXXXXXXXX.

6. The Entities are subject to the terms of XXXXXXXXXX (the “ Environmental Act ”). XXXXXXXXXX.

7. Regulations have been enacted under the Environmental Act including, in particular, XXXXXXXXXX (the “ Environmental Regulations ”). XXXXXXXXXX.

8. Each of the Entities currently has a $XXXXXXXXXX letter of credit in place to address any temporary, short term liabilities at the Sites as well as an approximate $XXXXXXXXXX existing reclamation trust arrangement for each mine site, with the Province of XXXXXXXXXX as beneficiary. Each of the Entities deducted the amounts contributed to the existing reclamation trusts in computing their respective income pursuant to paragraph 20(1)(ss) of the Act, which allows a deduction for a contribution made to a qualifying environmental trust as defined in subsection 211.6(1). No additional contributions will be made to these reclamation arrangements.

PROPOSED TRANSACTIONS

9. The Entities intend to enter into a new, irrevocable trust agreement (hereafter referred to as the “Single Reclamation Trust”) with the Government of XXXXXXXXXX for the establishment of an assurance fund in respect of the decommissioning and reclamation obligations of the Entities under the Environmental Regulations .

10. The reclamation trusts described in Paragraph 8 above, will be dissolved in favour of the Single Reclamation Trust and the funds distributed to each of the Entities as beneficiaries of the trusts.

11. The Single Reclamation Trust will include the following attributes:

a) The Single Reclamation Trust, established pursuant to and governed by the Environmental Laws, will be maintained for the sole purpose of funding the reclamation of the Sites;

b) The beneficiaries of the Single Reclamation Trust will be the Entities and the Province of XXXXXXXXXX. The trustee will be a corporation resident in Canada that is licensed to carry on in Canada the business of offering to the public its services as independent trustee;

c) The Single Reclamation Trust cannot borrow money and may only acquire property which is described in paragraphs (a), (b), (c), (c.1), (d) and (f) of the definition “qualified investments” in section 204 of the Act, and which are not “prohibited investments” as defined in subsection 211.6(1) of the Act;

d) If any of the Entities default on any obligation under any of the Sites plan of reclamation and decommissioning, and does not correct such default after being given a XXXXXXXXXX-day notice period, the Minister of the Environment for the Province of XXXXXXXXXX (the “Minister”) will be entitled to retain a third party to carry out this work;

e) The Minister will be authorized to direct the trustee to disburse amounts with respect to work completed in the reclamation or decommissioning of any of the Sites to the Minister, the Entities or any third party as specified by the Minister;

f) If during the time that the Entities continue to operate the Facilities, the Entities undertake significant decommissioning and reclamation of one or more of the Sites, including any part of the site on which those Facilities are located, the Minister may direct the trustee to pay all or a portion of such costs, as the Minister determines, provided such payment will not unduly deplete the Single Reclamation Trust;

g) The Single Reclamation Trust will remain in existence until all reclamation obligations of the Entities in respect of the Sites have been fulfilled, or otherwise been discharged in whole or in part; and

h) Any and all distributions of the fund will be made in accordance with the terms and conditions of the Single Reclamation Trust agreement.

12. The Entities intend to contribute approximately $XXXXXXXXXX to the Single Reclamation Trust by XXXXXXXXXX.

PURPOSE OF THE PROPOSED TRANSACTIONS

The proposed transactions are being undertaken for the purpose of setting up the Single Reclamation Trust for the funding of the decommissioning and reclamation of the Sites in XXXXXXXXXX, which is required to satisfy the Entities' obligations under the Environmental Regulations .

RULINGS GIVEN

A. Provided that the Single Reclamation Trust is established and operated in accordance with the proposed terms as set out in Paragraph 11 above for each taxation year, the Single Reclamation Trust will be a “qualifying environmental trust” as defined in subsection 211.6(1) of the Act.

B. Upon the dissolution of the existing reclamation trusts as described in Paragraph 8 above, the amounts received in the year by a particular entity will be included in computing that entity's income for the particular taxation year pursuant to paragraph 12(1)(z.1) of the Act.

C. Contributions made in the year by a particular entity to the Single Reclamation Trust will be deductible in computing that entity's income for the particular taxation year pursuant to paragraph 20(1)(ss) of the Act.

COMMENTS

(i) the reasonableness of any expenditure referred to in this letter;

(ii) whether the arrangement being entered into with the Province creates a valid trust at law; and

(iii) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Entities have commenced implementing the proposed transactions by XXXXXXXXXX.

This ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

XXXXXXXXXX

Manager

Resources Section

Reorganizations Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

END OF DOCUMENT

Page 1

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

Garron Family Trust (Trustee of) v. R.

St. Michael Trust Corp., as Trustee of the Fundy Settlement (Appellant) and Her Majesty the Queen (Respondent)

St. Michael Trust Corp., as Trustee of the Summersby Settlement (Appellant) and Her Majesty the Queen (Re- spondent)

Federal Court of Appeal

M. Nadon, K. Sharlow, David Stratas JJ.A.

Heard: September 30, 2010 Judgment: November 17, 2010[FN*] Docket: A-419-09, A-420-09

Proceedings: affirming Garron Family Trust (Trustee of) v. R. (2009), 2009 TCC 450, 2009 CarswellNat 2600, 2009 CCI 450, 2009 CarswellNat 5415, [2010] 2 C.T.C. 2346, 50 E.T.R. (3d) 241, (sub nom. Garron Family Trust v. R.) 2009 D.T.C. 1568 (Eng.) (T.C.C. [General Procedure])

Counsel: Douglas H. Mathew, Matthew G. Williams, Mark A. Barbour for Appellant

Elizabeth Chasson, Erin Strashin, Margaret Nott for Respondent

Subject: Income Tax (Federal); Estates and Trusts

Tax --- Income tax — Residence in Canada — Trusts

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 assessed trusts and other taxpayers, who each had interest in PMPL, imputing income from disposition as capital gains — Trusts and other taxpayers appealed — Appeal was dismissed with respect to trusts alone, and allowed regarding other taxpayers — Trial judge found exemption in tax treaty between Canada and Barbados was not applicable, as trust was resident in Canada — Trial judge found test for determining residence of trust is same as corporations, being central management and control — Trustee appealed — Appeal dismissed — Central management and control test was proper test — Open to trial judge to conclude that trusts were resident in Canada in 2000 — Location of trustee was not test for determining residence, and lack of legal personality did not prevent application of proper test — Trial judge acted reasonably by taking into account normally neutral facts, and combining them with other evidence to form decision on residency of trust.

Tax --- Income tax — Capital gains and losses — General principles

PMPL was holding company for Canadian business which manufactured automotive parts — Reorganization occurred, whereby owners of common shares of PMPL converted shares to fixed value preference shares — Newly issued common shares of PMPL were issued for nominal consideration to new Canadian holding companies — Trusts at issue subscribed to shares in holding companies for nominal consideration, with holding companies becoming owners of trusts — PMPL was sold at arm's length and trusts disposed of shares of holding companies — Minister assessed trusts and other taxpayers, who each had interest in PMPL, imputing income from disposition as capital gains — Trusts and other taxpayers appealed — Appeal was dismissed with respect to trusts alone, and allowed regarding other taxpayers — Trial judge found exemption in tax treaty between Canada and Barbados was not applicable, as trust was resident in Canada — Trial judge found test for determining residence of trust is same as corporations, being central management and control — Trustee appealed — Appeal dismissed — Central management and control test was proper test — Open to trial judge to conclude that trusts were resident in Canada in 2000 — Location of trustee was not test for determining residence, and lack of legal personality did not prevent application of proper test — Trial judge acted reasonably by taking into account normally neutral facts, and combining them with other evidence to form decision on residency of trust. Cases considered by K. Sharlow J.A.:

Crown Forest Industries Ltd. v. R. (1995), (sub nom. R. v. Crown Forest Industries Ltd.) 95 D.T.C. 5389, (sub nom. Crown Forest Industries Ltd. v. Canada) [1995] 2 C.T.C. 64, (sub nom. Crown Forest Industries Ltd. v. Canada) 125 D.L.R. (4th) 485, (sub nom. Crown Forest Industries Ltd. v. Minister of National Revenue) 183 N.R. 124, (sub nom. Crown Forest Industries Ltd. v. Minister of National Revenue) 97 F.T.R. 159, 1995 CarswellNat 707, [1995] 2 S.C.R. 802, 1995 CarswellNat 384 (S.C.C.) — considered

De Beers Consolidated Mines Ltd. v. Howe (1906), 5 T.C. 198, [1906] A.C. 455 (U.K. H.L.) — considered

Dill v. R. (1978), [1978] C.T.C. 539, 78 D.T.C. 6376, 1978 CarswellNat 223, 3 E.T.R. 168 (Fed. T.D.) — considered

Kieboom v. Minister of National Revenue (1992), [1992] 2 C.T.C. 59, 46 E.T.R. 229, (sub nom. R. v. Kieboom) 92 D.T.C. 6382, (sub nom. Canada v. Kieboom) [1992] 3 F.C. 488, (sub nom. Minister of National Revenue v. Kieboom) 145 N.R. 360, (sub nom. Minister of National Revenue v. Kieboom) 57 F.T.R. 11 (note), 1992 Car-

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 swellNat 607, 1992 CarswellNat 308 (Fed. C.A.) — considered

United Construction Co. v. Bullock (Inspector of Taxes) (1959), [1960] A.C. 351, [1959] 3 All E.R. 831, [1959] 3 W.L.R. 1022 (Eng. C.A.) — considered

Statutes considered:

Financial Institutions Act, L.R.O. 1997, c. 324A

Generally — referred to

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)

Generally — referred to

Pt. I — referred to

Pt. XIV — referred to

s. 2 — referred to

s. 2(1) — considered

s. 2(3) — considered

s. 3 — considered

s. 85(1) — considered

s. 94 — considered

s. 94(1) — considered

s. 94(1)(a) — considered

s. 94(1)(a)(i) — considered

s. 94(1)(b) — considered

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 s. 94(1)(b)(i)(A)(I) — considered

s. 94(1)(c) — considered

s. 94(1)(c)(i) — considered

s. 104 — considered

s. 104(1) — considered

s. 104(2) — considered

s. 110(1)(f)(i) — considered

s. 115(1) — considered

s. 116 — considered

s. 233.3 [en. 1997, c. 25, s. 69] — referred to

s. 233.4 [en. 1997, c. 25, s. 69] — referred to

s. 245 — considered

s. 245(2) — considered

s. 245(3) — considered

s. 245(4) — considered

s. 248(1) "taxable Canadian property" — considered

s. 248(1) "treaty-protected property" — considered

Trustee Act, L.R.O. 1985, c. 250

Generally — referred to

Treaties considered:

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

Canada-Barbados Income Tax Agreement, 1980

Generally — referred to

Article III ¶ 1(c) "person" — considered

Article III ¶ 1(c) "personne" — considered

Article III ¶ 2 — considered

Article IV ¶ 1 "résident d'un État contractant" — considered

Article IV ¶ 1 "resident of a Contracting State" — considered

Article IV ¶ 1 "resident of Barbados" — considered

Article IV ¶ 1 "resident of Canada" — considered

Article IV ¶ 3 — considered

Article XIV ¶ 1 — considered

Article XIV ¶ 2 — considered

Article XIV ¶ 3(a) — considered

Article XIV ¶ 4 — considered

Canada-United States Income Tax Convention, 1980

Generally — referred to

APPEAL by trustee from judgment reported at Garron Family Trust (Trustee of) v. R. (2009), 2009 TCC 450, 2009 CarswellNat 2600, 2009 CCI 450, 2009 CarswellNat 5415, [2010] 2 C.T.C. 2346, 50 E.T.R. (3d) 241, (sub nom. Garron Family Trust v. R.) 2009 D.T.C. 1568 (Eng.) (T.C.C. [General Procedure]), dismissing appeal by taxpayers from assessment by Minister of National Revenue, regarding location of trust.

K. Sharlow J.A.:

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

1 St. Michael Trust Corp., in its capacity as the trustee of the Fundy Settlement and the Summersby Settlement (the "Trusts"), has been assessed under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) for the 2000 taxation year. The assessed tax arises from capital gains realized by the Trusts on the disposition of the shares of two Canadian corporations at a time when, according to the Crown, the Trusts were resident in Canada. St. Michael Trust Corp. appealed the assessments to the Tax Court of Canada. The appeals were dismissed by Justice Woods (2009 TCC 450 (T.C.C. [General Procedure])). St. Michael Trust Corp. now appeals to this Court. For the reasons that follow, I have concluded that these appeals should be dismissed with costs.

Relevant provisions of the Income Tax Act

2 Subsection 2(1) of the Income Tax Act imposes tax on the taxable income for a year of every person who is resident in Canada at any time in the year. By virtue of the formula in section 3 of the Income Tax Act, taxable income includes the taxable portion of any capital gain realized in the year. In 2000, the taxable portion of a capital gain was 2/3.

3 By the combined operation of subsections 2(3) and 115(1) of the Income Tax Act, a person who is not resident in Canada is outside the scope of subsection 2(1) but nevertheless is subject to tax on certain Canadian source income, including the taxable portion of a capital gain realized by the person on the disposition of property that meets the definition of "taxable Canadian property", unless the property also meets the definition of "treaty-protected property" in subsection 248(1).

4 Generally, property is treaty-protected if a capital gain realized on its disposition is exempt from Canadian income tax because of an international tax treaty to which Canada is a party. The exemption operates through subparagraph 110(1)(f)(i) of the Income Tax Act which provides that, in computing taxable income, a person is entitled to a deduction equal to any amount that is included in taxable income but exempt from Canadian tax because of an international tax treaty.

5 For purposes of the Income Tax Act, a taxpayer may be an individual, a corporation or a trust. Although a trust is not a person as a matter of law, the Income Tax Act treats the trust for income tax purposes as though it were an individual. Conceptually, the trust is embodied in the trustee as the person who generally has legal title to the trust property, and who has the powers and discretions granted by the trust documents and the law, concerning the trust property. It is the trustee who is required on behalf of the trust to comply with all filing and reporting requirements under the Income Tax Act, to whom all assessments and other official notifications are sent, who has the legal status to object to assessments and to appeal, and who is responsible for paying the tax debts of the trust. That is the result of subsections 104(1) and (2) of the Income Tax Act, which read in relevant part as follows:

104. (1) In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property ...

. . .

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

(2) A trust shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for that person's own income tax, be deemed to be in respect of the trust property an individual ...

104. (1) Dans la présente loi, la mention d'une fiducie ou d'une succession (appelées « fiducie » à la présente sous-section) vaut également mention, sauf indication contraire du contexte, du fiduciaire, de l'exécuteur testa- mentaire, de l'administrateur successoral, du liquidateur de succession, de l'héritier ou d'un autre représentant légal ayant la propriété ou le contrôle des biens de la fiducie.

[...]

(2) Pour l'application de la présente loi, et sans que l'assujettissement du fiduciaire ou des représentants légaux à leur propre impôt sur le revenu en soit atteint, une fiducie est réputée être un particulier relativement aux biens de la fiducie ...

6 Subsection 94(1) of the Income Tax Act is a special provision relating to trusts that are not resident in Canada. Broadly speaking, it applies when certain conditions are met as to the identity of the beneficiaries of the trust (the "beneficiary test", paragraph 94(1)(a)) and the manner in which the trust has acquired property (the "contribution test", paragraph 94(1)(b)). Those two provisions read in relevant part as follows:

94. (1) Where,

(a) at any time in a taxation year of a trust that is not resident in Canada or that, but for paragraph 94(1)(c), would not be so resident, a person beneficially interested in the trust (in this section referred to as a "beneficiary") was

(i) a person resident in Canada, ... and

(b) at any time in or before the taxation year of the trust,

(i) the trust ... has ... acquired property, directly or indirectly in any manner whatever, from

(A) a particular person who

(I) was the beneficiary referred to in paragraph 94(1)(a), was related to that beneficiary or was the uncle, aunt, nephew or niece of that beneficiary, ...

the following rules apply for that taxation year of the trust: ...

94. (1) Lorsque:

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

a) d'une part, à un moment donné d'une année d'imposition d'une fiducie qui ne réside pas au Canada, ou qui, sans l'alinéa c), n'y résiderait pas, une personne ayant un droit de bénéficiaire sur la fiducie (appelé un « bénéficiaire » au présent article) était:

(i) une personne résidant au Canada,

. . .

b) d'autre part, à un moment donné avant la fin de l'année d'imposition de la fiducie:

(i) soit la fiducie ... a acquis des biens, directement ou indirectement, de quelque manière que ce soit ... auprès:

(A) ou bien d'une personne donnée qui remplit les conditions suivantes:

(I) elle était le bénéficiaire visé à l'alinéa a), elle était liée à ce bénéficiaire ou elle était l'oncle, la tante, le neveu ou la nièce de ce bénéficiaire, ...

les règles suivantes s'appliquent pour cette année d'imposition de la fiducie: ...

7 It is undisputed in this case that the beneficiary test is met for both Trusts because they both have beneficiaries who are resident in Canada.

8 There is a dispute as to whether the contribution test is met in this case. The contribution test may be satisfied in a number of ways. For the purposes of this case it is enough to say that it would be met if the Trusts acquired property, directly or indirectly in any manner whatever, from a Canadian resident person who is either a beneficiary or a person related to a beneficiary.

9 If the beneficiary and contribution tests are met, and the trust is a discretionary trust (as the Trusts are), then paragraph 94(1)(c) deems the trust to be a person resident in Canada for the purposes of Part I of the Income Tax Act and certain provisions in Part XIV imposing reporting requirements (sections 233.3 and 233.4). Part I of the Income Tax Act contains the main charging provisions of the Income Tax Act, including section 2, the provision that imposes on every person resident in Canada a tax on income from any source in the world. Paragraph 94(1)(c) reads in relevant part as follows:

(c) where the amount of the income or capital of the trust to be distributed at any time to any beneficiary of the trust depends on the exercise by any person of, or the failure by any person to exercise, any discretionary power,

(i) the trust is deemed for the purposes of this Part and sections 233.3 and 233.4 to be a person resident in Canada no part of whose taxable income is exempt because of section 149 from tax under this Part and whose

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

taxable income for the year is the amount, if any, by which the total of [rules for computing taxable income omitted]

. . .

c) lorsque le montant du revenu ou du capital de la fiducie à attribuer à un moment donné à un bénéficiaire de la fiducie est fonction de l'exercice ou de l'absence d'exercice, par une personne, d'un pouvoir discrétionnaire:

(i) la fiducie est réputée, pour l'application de la présente partie et des articles 233.3 et 233.4, être une personne résidant au Canada dont aucune partie du revenu imposable n'est exonérée, par l'effet de l'article 149, de l'impôt prévu à la présente partie et dont le revenu imposable pour l'année correspond à l'excédent éventuel de la somme des montants suivants [règles applicables au calcul du revenu imposable omises] ...

10 The remainder of paragraph 94(1)(c) sets out special rules for the computation of the taxable income of a trust to which section 94 applies. The rules are complex, but for the purposes of this case the parties agree that under paragraph 94(1)(c), the taxable income of a discretionary trust includes all income of the trust except income from an active business outside Canada.

11 The assessments under appeal in this case are based in the alternative on the general anti- avoidance rule in section 245 of the Income Tax Act. Broadly speaking, subsection 245(2) may apply to justify an assessment, regardless of any other statutory provision, where a transaction is undertaken to avoid tax and the transaction is abusive within the meaning of subsection 245(4). Section 245 reads in relevant part as follows:

(2) Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

(3) An avoidance transaction means any transaction

(a) that, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit; or

(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction

(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

(i) this Act,

(ii) the Income Tax Regulations,

(iii) the Income Tax Application Rules,

(iv) a tax treaty, or

(v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or

(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.

(2) En cas d'opération d'évitement, les attributs fiscaux d'une personne doivent être déterminés de façon raisonnable dans les circonstances de façon à supprimer un avantage fiscal qui, sans le présent article, découlerait, directement ou indirectement, de cette opération ou d'une série d'opérations dont cette opération fait partie.

(3) L'opération d'évitement s'entend:

a) soit de l'opération dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s'il est raisonnable de considérer que l'opération est principalement effectuée pour des objets véritables — l'obtention de l'avantage fiscal n'étant pas considérée comme un objet véritable;

b) soit de l'opération qui fait partie d'une série d'opérations dont, sans le présent article, découlerait, directement ou indirectement, un avantage fiscal, sauf s'il est raisonnable de considérer que l'opération est principalement effectuée pour des objets véritables — l'obtention de l'avantage fiscal n'étant pas considérée comme un objet véritable.

(4) Le paragraphe (2) ne s'applique qu'à l'opération dont il est raisonnable de considérer, selon le cas:

a) qu'elle entraînerait, directement ou indirectement, s'il n'était pas tenu compte du présent article, un abus dans l'application des dispositions d'un ou de plusieurs des textes suivants:

(i) la présente loi,

(ii) le Règlement de l'impôt sur le revenu,

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 (iii) les Règles concernant l'application de l'impôt sur le revenu,

(iv) un traité fiscal,

(v) tout autre texte législatif qui est utile soit pour le calcul d'un impôt ou de toute autre somme exigible ou remboursable sous le régime de la présente loi, soit pour la détermination de toute somme à prendre en compte dans ce calcul;

b) qu'elle entraînerait, directement ou indirectement, un abus dans l'application de ces dispositions compte non tenu du présent article lues dans leur ensemble.

Relevant provisions of the Barbados Tax Treaty

12 The Canada-Barbados Income Tax Agreement (1980) (the Barbados Tax Treaty), formally titled "Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital", was enacted as a federal law by S.C. 1980-81-82-83, c. 44, Part IX. For the purposes of these appeals, the following interpretive provisions in Article III (General Definitions) of the Barbados Tax Treaty are relevant:

1. In this Agreement, unless the context otherwise requires: ...

(c) the term "person" includes an individual, an estate, a trust, a company, a partnership and any other body of persons; ...

2. As regards the application of this Agreement by a Contracting State any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Agreement.

1. Au sens du présent Accord, à moins que le contexte n'exige une interprétation différente: ...

c) le terme « personne » comprend les personnes physiques, les successions (estates), les fiducies (trusts), les sociétés, les sociétés de personnes (partnerships) et tous autres groupements de personnes; ...

2. Pour l'application du présent Accord par un État contractant, toute expression qui n'est pas autrement définie a le sens qui lui est attribué par la législation dudit État régissant les impôts qui font l'objet du présent Accord, à moins que le contexte n'exige une interprétation différente.

13 Broadly speaking, the Barbados Tax Treaty exempts the residents of one of the contracting states from income taxes imposed by the other on specified income and gains, subject to numerous conditions. For purposes of the Bar- bados Tax Treaty, residence is determined under Article IV (Fiscal Domicile), which reads in relevant part as follows:

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

. . .

3. Where, by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Con- tracting States, then the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Agreement to such person.

1. Au sens du présent Accord, l'expression « résident d'un État contractant » désigne toute personne qui, en vertu de la législation dudit État, est assujettie à l'impôt dans cet État en raison de son domicile, de sa résidence, de son siège de direction ou de tout autre critère de nature analogue, et les expressions « résident du Canada » et « ré- sident de la Barbade » ont le sens correspondant.

. . .

3. Lorsque, selon la disposition du paragraphe 1, une personne autre qu'une personne physique est considérée comme résident de chacun des États contractants, les autorités compétentes des États contractants s'efforceront d'un commun accord de trancher la question et de déterminer les modalités d'application du présent Accord à ladite personne.

14 By virtue of paragraph 4 of Article XIV of the Barbados Tax Treaty a person (including a trust) that meets the treaty definition of "resident of Barbados" but not the treaty definition of "resident of Canada" is entitled to an exemption from Canadian income tax on any capital gain realized on the disposition of shares of a corporation (subject to exceptions that are not relevant to this case). Article XIV (Gains from the Alienation of Property) reads in relevant part as follows:

1. Gains from the alienation of movable property may be taxed in the Contracting State in which such property is situated.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State ... may be taxed in the other State. ...

3. (a) Gains from the alienation of shares of a company, the property of which consists principally of im- movable property situated in a Contracting State, may be taxed in that State. ...

4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

1. Les gains provenant de l'aliénation de biens immobiliers sont imposables dans l'État contractant où ces biens sont situés.

2. Les gains provenant de l'aliénation de biens mobiliers faisant partie de l'actif d'un établissement stable qu'une entreprise d'un État contractant a dans l'autre État contractant...sont imposables dans cet autre État. ...

3. a) Les gains provenant de l'aliénation d'actions d'une société dont les biens sont constitués principalement de biens immobiliers situés dans un État contractant sont imposables dans cet État. ...

4. Les gains provenant de l'aliénation de tous biens autres que ceux qui sont mentionnés aux paragraphes 1, 2 et 3 ne sont imposables que dans l'État contractant dont le cédant est un résident.

Facts

15 I summarize as follows the facts relating to the transactions underlying the assessments under appeal.

16 PMPL Holdings Inc. ("PMPL") was incorporated in Canada in 1992 to hold the shares of two Canadian operating corporations, Progressive Moulded Products Inc. and Progressive Tools Limited. The PMPL corporate group was originally owned and controlled by Myron Garron and members of his family. In 1990, Mr. Andrew Dunin, who is not related to the Garron family, became involved with Progressive Moulded Products. He was promised the right to earn equity shares of PMPL, and in fact he contributed substantially to its financial success.

17 By 1996, the common shares of PMPL were owned as to 50% by Mr. Dunin and as to 50% by a Canadian corporation, Garron Holdings Ltd. ("Garron Holdings"). The shares of Garron Holdings were owned by Myron Garron and his spouse Berna Garron, and a trust of which Mr. and Mrs. Garron were the trustees and their children and grandchildren were the beneficiaries. At all material times, Mr. Garron and his spouse and Mr. Dunin were resident in Canada.

18 At some point early in 1998, a decision was made to change the ownership structure of PMPL. One objective of that change was to increase Mr. Dunin's share of PMPL in continued recognition of his contribution to its financial success. Another objective was to ensure that no Canadian tax would be payable on any capital gain that could result from an increase in the value of PMPL after the 1998 reorganization.

19 The tax objective was intended to be achieved by attributing any post-reorganization increase in the value of PMPL to the common shares of a newly created corporation held by trusts that would not be resident in Canada but would, as residents of Barbados, be entitled to the benefit of the exemption from Canadian tax in paragraph 4 of Article XIV of the Barbados Tax Treaty.

20 The plan to restructure the ownership of PMPL required that the existing common shares of PMPL be can- celled and replaced with three new classes of shares, as follows:

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 1000 Class A preference shares — the "Freeze Shares".

a. The Freeze Shares would be issued in exchange for the existing common shares. They would carry voting rights and be redeemable for an amount equal to the fair market value of the existing common shares immediately before the reorganization took effect, which at the time the parties agreed was $50 million. The Freeze Shares would not participate in dividends except on redemption, when dividends would be cumulative between the date of the request for redemption and the date of redemption.

100 Class B shares — the "Special Value Shares"

b. These shares would carry no voting rights or dividend entitlement. They would be retractable (that is, redeemable at the call of the holder) at an amount equal to 10% of the amount by which the fair market value of all shares of PMPL and Progressive Marketing, Inc. at the time of retraction exceeded $50 million. They would be issued to Mr. Dunin or a corporation controlled by him, so that the economic benefit of the retraction amount of the Special Value Shares would accrue to Mr. Dunin.

An unlimited number of Class C shares — the "New Common Shares"

c. These were ordinary common shares. The economic benefit of the value of PMPL would accrue to the holders of the New Common Shares, except for the amount attributable to the retraction value of the Freeze Shares and the Special Value Shares. The New Common Shares would be issued to corporations controlled by two trusts resident in Barbados, one established for the benefit of Mr. Garron and his family, the other for the benefit of Mr. Dunin and his family.

21 In March of 1998, Mr. Dunin caused Dunin Holdings Ltd. ("Dunin Holdings") to be incorporated as an Ontario corporation. Mr. Dunin subscribed for the sole issued common share. On April 1, 1998, Mr. Dunin transferred his common shares of PMPL to Dunin Holdings in exchange for 499 common shares of Dunin Holdings. An election was made under subsection 85(1) of the Income Tax Act so that no capital gain arose on Mr. Dunin's disposition of the PMPL shares. At that point, the common shares of PMPL were owned as to 50% by Dunin Holdings and as to 50% by Garron Holdings.

22 On April 2, 1998, Mr. Paul Ambrose, a resident of Kingstown, St. Vincent and a long time friend of Mr. Garron, settled two trusts at the request of Mr. Garron and to accommodate him. One of the trusts was settled for the benefit of Mr. Garron and his family (the Fundy Settlement, which for ease of reference I will refer to as the "Garron Trust"). The other trust was settled for the benefit of Mr. Dunin and his family (the Summersby Settlement, which I will refer to as the "Dunin Trust"). The Crown has conceded that the Garron Trust and the Dunin Trust were validly constituted trusts in the sense that the "three certainties" required for a trust were present.

23 The Garron Trust and the Dunin Trust were each settled with US$100 of Mr. Ambrose's own funds, and he signed the trust indentures. Mr. Ambrose provided no input or instructions as to the content or terms of the trust indentures, but he reviewed them with a lawyer from St. Vincent and the Grenadines, Agnes E. Cato, who also witnessed his signature.

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

24 It was planned that the Garron Trust would acquire the shares of a newly incorporated Ontario corporation, 1287333 Ontario Ltd. ("New Garron Co") which in turn would acquire 800 of the New Common Shares of PMPL. The Dunin Trust would acquire the shares of another newly incorporated Ontario corporation, 1287325 Ontario Ltd. ("New Dunin Co"), which in turn would acquire 800 of the New Common Shares of PMPL as well as the 100 Special Value Shares of PMPL. As a result, the Dunin Trust (and thus Mr. Dunin and his family) would obtain the benefit of 10% of the increase in the value of PMPL in excess of the redemption value of the Freeze Shares, while any further increase in the value of PMPL would be shared equally by the Dunin Trust (benefiting Mr. Dunin and his family) and the Garron Trust (benefiting Mr. Garron and his family).

25 The terms of the trust indentures that are relevant to these appeals are substantially the same except for the name of the trust and the identification of the beneficiaries. It is not necessary to recite all of the terms. A sufficiently accurate picture of the trust indentures emerges from the following summary:

a. The trustee was required to keep the trust property invested until the "Division Date" (any date chosen by the trustee or 80 years from the date of settlement, whichever occurred first), subject to the absolute discretion of the trustee to distribute some or all of the income to one or more beneficiaries, with any undistributed or unallocated income to be added to the capital.

b. The trustee had the absolute discretion to encroach on capital to or for the benefit of one or more of the beneficiaries, even to the extent of using all of the trust property.

c. On the division date, the property was to be divided and distributed as follows:

(i) in the case of the Garron Trust, equally among the children of Myron and Berna Garron or their children (subject to certain conditions relating to the age of the child at the division date); and

(ii) in the case of the Dunin Trust, to Mr. Dunin or, if he was not then living, equally to his children or their children (subject to certain conditions relating to the age of the child at the division date).

d. The trustee was precluded from distributing in specie the Class A shares of New Garron Co (in the case of the Garron Trust) or New Dunin Co (in the case of the Dunin Trust), but had the power at any time to convert those shares to cash or other property which could then be distributed in accordance with the general power of distribution.

e. Except for the specific prohibition relating to distribution in specie of the Class A shares of New Garron Co and New Dunin Co, the trustee was given broad powers to invest and to make payments and distributions in money or other property of the trust, and the power to retain or sell any property in any manner and on any terms.

f. The protector had the absolute discretion to remove a trustee and appoint a new trustee.

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

g. The protector could be removed and a new protector appointed by the majority of beneficiaries who had attained a specified age.

26 As mentioned above, St. Michael Trust Corp. was the trustee of the Dunin Trust and the Garron Trust. St. Michael Trust Corp. was incorporated in Barbados and began its operations in 1987. At that time its shares were owned by the Barbados partners of the accounting firm Price Waterhouse, which later merged with Coopers & Lybrand. After the merger, the Barbados partners of the merged firm, PricewaterhouseCoopers, became the shareholders of St. Michael Trust Corp. Justice Woods referred to the Barbados partners of both the merged firm and its Price Waterhouse predecessor as "PwC-Barbados", and I will do the same. The shares of St. Michael Trust Corp. were sold in 2002 and again in 2008, but those transactions are not relevant to any of the issues raised in this appeal.

27 At all times relevant to this appeal, St. Michael Trust Corp. was licensed as a trustee under the Financial Institutions Act of Barbados and regulated by the Central Bank of Barbados. It was subject to the Trustees Act of Barbados. Its sole business activity was the administration of trusts and acting as a trustee, which it carried on only in Barbados. It had only one office, which was in Barbados. Its business records and the records of all of the trusts under its administration were in Barbados. Its board of directors met in Barbados.

28 St. Michael Trust Corp. contends that at all relevant times, it was a resident of Barbados for purposes of the Barbados Tax Treaty. Justice Woods considered it unnecessary to reach a conclusion on that point and she declined to do so. However, there can be no doubt that, for the purposes of the Barbados Tax Treaty, St. Michael Trust Corp., in its own right and in relation to its own tax affairs, would be considered a resident of Barbados and not a resident of Canada. One of the issues raised in this appeal is whether, as a matter of law, the residence of St. Michael Trust Corp. is necessarily the same as the residence of the Garron Trust and the Dunin Trust. That point is addressed later in these reasons.

29 At the time of the transactions in issue in this case, the acts of St. Michael Trust Corp. in its capacity as trustee of the Garron Trust and the Dunin Trust were fulfilled by Mr. Peter Jesson, a tax partner of PwC-Barbados and a director of St. Michael Trust Corp., and Mr. Jim Knott, the general manager of St. Michael Trust Corp. They had both retired by the time of the Tax Court hearing, and neither of them gave evidence.

30 From 2003 until the time of the Tax Court hearing, the acts of St. Michael Trust Corp. in its capacity as trustee of the Garron Trust and the Dunin Trust were performed by Mr. Ian Hutchinson, the president and a director of St. Michael Trust Corp. Mr. Hutchinson's background was as an accountant with Coopers & Lybrand in Barbados. He moved to the trust division of PwC - Barbados in 1999 but until 2003, his involvement with the Trusts was limited to "investment recording." He gave evidence at the Tax Court hearing.

31 Mr. Jesson signed a memorandum dated April 9, 1998 with respect to the Garron Trust (the Fundy Settlement) that reads as follows:

It is the Trustee's intention, with respect to the Fundy Settlement (Trust) [the Garron Trust] as follows:

1. Investment Policy

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

a. that the shares of 1287333 Ontario Limited [New Garron Co] be held until such time as the other shareholders of PMPL Holdings Inc., decide to sell their shares. At that time we will facilitate the sale of the shares of [New Garron Co];

b. any sale proceeds which arise from the sale of the shares of [New Garron Co] (and any other amounts received by the [Garron Trust] as a consequence of the realisation of any assets of [New Garron Co] or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the [Garron Trust]; and

c. we will seek the investment advice of Myron Garron from time to time.

2. Distribution Policy

a. that during the lifetime of Myron Garron the primary consideration in making distributions of income and capital should be the best interests of Myron Garron subject only to his wishes with respect to distributions to other beneficiaries;

b. if Myron Garron should die at a time we continue to hold assets under the terms of the [Garron Trust], distribution shall be made in view of the best interests of Myron Garron's widow during her lifetime, and thereafter the best interests of his issue, as defined in the [Garron Trust] deed.

32 Mr. Jesson also signed a memorandum dated April 29, 1998 with respect to the Dunin Trust (the Summersby Settlement) which reads as follows:

1. Investment Policy

a. the shares of 1287325 Ontario Limited [New Dunin Co] should be held until such time as the other shareholders of PMPL Holdings Inc. decide to sell their shares. At that time, we, as the trustee, will facilitate the sale of our shares of [New Dunin Co];

b. any sale proceeds which arise from the sale of our shares of [New Dunin Co] (and any other amounts received by the [Dunin Trust] as a consequence of the realisation of any assets of [New Dunin Co] or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the [Dunin Trust]; and

c. we, as trustee, may seek the investment advice of Andrew Dunin, from time to time.

2. Distribution Policy

During the lifetime of Andrew Dunin, the primary consideration in making distributions of income and capital

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

should be the best interests of Andrew Dunin, subject only to his wishes with respect to distributions to other beneficiaries. If Andrew Dunin should die at a time when we, as trustee, continue to hold assets under the terms of the [Dunin Trust], distributions shall be made in view of the best interests of Andrew Dunin's widow during her lifetime, and thereafter

the best interests of his issue (as defined in the Settlement Deed).

3. Power to Amend Trust

We, as trustee, will consult with Andrew Dunin each April (*) to determine whether the provision of clauses 3.1(e)(iv) or 3.1(f) of the Settlement Deed should be amended to reflect any amendments which might have been made to the will of Andrew Dunin.

33 On April 2, 1998, Mr. Julian Gill, another friend of Mr. Garron and the person named as the protector for the Trusts, lent each Trust US$7,190. The terms of the loans stipulated a 10% rate of interest. The loan to the Dunin Trust was repayable upon the sale of its shares of New Dunin Co or the receipt of a dividend from New Dunin Co. The loan to the Garron Trust was repayable upon the sale of its shares of New Garron Co or the receipt of a dividend from New Garron Co. The events triggering the Trusts' obligations to repay the loans (described below) occurred in August, 2000, and the loans were repaid with interest at that time.

34 On April 3, 1998, the Garron Trust acquired 1,000 Class A and 1,000 Class B shares of New Garron Co, and the Dunin Trust acquired 1000 Class A and 1000 Class B shares of New Dunin Co.

35 On April 6, 1998, the following transactions occurred. The reorganization of the share capital of PMPL was completed as described above. 1000 Freeze Shares of PMPL were issued to replace the original common shares owned by Garron Holdings and Dunin Holdings, so that Garron Holdings and Dunin Holdings each became the owner of 500 Freeze Shares of PMPL. New Garron Co subscribed for 800 New Common Shares of PMPL for $80. New Dunin Co subscribed for 100 Special Value Shares of PMPL for $10 and 800 New Common Shares of PMPL for $80.

36 The value of the common shares of PMPL immediately before the April 6, 1998 reorganization was the subject of conflicting expert opinion in the Tax Court. For purposes of the reorganization the parties had valued them at $50 million, based on a valuation opinion they obtained early in 1998. The Minister assumed, when reassessing the appellants, that the fair market value immediately before the reorganization was substantially more than $50 million. The Crown's expert valued them at $102 million.

37 Justice Woods concluded, for reasons that are well explained, that the Minister's assumption had not been rebutted, but she did not consider it necessary to determine the value. Therefore, for purposes of this appeal, it must be taken as a fact that the pre-reorganization value was substantially more than $50 million.

38 As a practical matter, that means that the redemption value of the Freeze Shares was fixed at an amount, $50 million, that was less than their actual value, resulting in a shift in the value of PMPL from the holders of the Freeze

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

Shares (Garron Holdings and Dunin Holdings) to the holders of the New Common Shares (the Trusts). The articles of incorporation of PMPL contain a provision that would have adjusted the redemption value of the Freeze Shares upon a determination by a taxing authority or a court that the fair market value of the Freeze Shares was some amount other than $50 million, but that clause was never in play because no such determination was made.

39 After the reorganization, the companies owned by PMPL continued to operate, apparently with substantial success. During the first half of 1999, negotiations occurred in an attempt to sell PMPL to a Swiss company at Mr. Dunin's then estimated value of $400 million, but those negotiations did not succeed. In approximately June of 1999, Mr. Dunin retained Mr. Timothy W. Carroll of the Chicago office of Arthur Anderson to find a buyer and manage the sale. An equity firm based in New York, Oak Hill Capital Partners, L.P., expressed an interest and, in August of 2000, acquired indirect interests in PMPL through a Canadian corporation, 1424666 Ontario Ltd. (the "Purchaser"). It is common ground that the Purchaser dealt at arm's length with St. Michael Trust Corp., Mr. Dunin and Mr. Garron.

40 It seems to have been accepted by all parties that in 2000, the value of PMPL was approximately $532 million. It was intended that the Purchaser would acquire indirect interests in PMPL for approximately $482 million, and Mr. Dunin and the Dunin Trust would retain indirect interests in PMPL valued in total at approximately $50 million.

41 This was achieved through the following transactions. The Garron Trust sold all of its shares of New Garron Co to the Purchaser for approximately $217 million. The Dunin Trust sold 907 of its 1000 Class A shares and 907 of its 1000 Class B shares of New Dunin Co (90.7% of the shares) to the Purchaser for approximately $240 million. The shareholders of Garron Holdings (which owned 500 Freeze Shares of PMPL) sold all of their shares of Garron Holdings to the Purchaser for $25 million. Dunin Holdings exchanged its 500 Freeze Shares of PMPL for shares of the Canadian parent corporation of the Purchaser valued at $25 million.

42 After these sales were completed, the Purchaser indirectly held substantially all of PMPL, for which it had paid approximately $482 million. Its indirect interests in PMPL were represented by all of the shares of Garron Holdings which owned 500 Freeze Shares of PMPL (valued at approximately $25 million), all of the shares of New Garron Co which owned 800 New Common Shares of PMPL (valued at approximately $217 million), and 907 Class A and 907 Class B shares of New Dunin Co which owned the 100 Special Value Shares and 800 New Common Shares of PMPL (valued at approximately $240 million).

43 Mr. Dunin's retained indirect interests in PMPL were represented by his continued ownership of the shares of Dunin Holdings, which owned newly issued shares of the Purchaser's parent corporation (valued at approximately $25 million). That parent corporation in turn owned 500 Freeze Shares of PMPL and a controlling interest in the Purchaser, which in turn owned or controlled the remaining shares of PMPL. Mr. Dunin was also a discretionary beneficiary of the Dunin Trust, which retained a 9.3% equity interest in New Dunin Co valued at approximately $25 million (represented by 93 Class A and 93 Class B shares of New Dunin Co, which owned the 100 Special Value Shares and 800 New Common Shares of PMPL).

44 The sales by the Garron Trust and the Dunin Trust of the shares of New Garron Co and New Dunin Co, respectively, gave rise to the capital gains that are the subject of the income tax assessments under appeal. Those gains were not subject to tax in Barbados. Because the shares of New Garron Co and New Dunin Co were acquired at a

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 nominal cost, the capital gains were determined for Canadian income tax purposes to be approximately $217 million for the Garron Trust and approximately $240 million for the Dunin Trust. The capital gain inclusion rate at the relevant time was 2/3, so that the taxable amounts were approximately $145 million for the Garron Trust and approximately $160 million for the Dunin Trust.

45 In addition to the facts summarized above relating to the transactions underlying the assessments under appeal, Justice Woods concluded that the role of St. Michael Trust Corp. was, by mutual agreement, more limited than the text of the trust indentures would suggest. Her findings in this respect are explained fully in paragraphs 189 to 262 of her reasons. The appellant argues that Justice Woods made a palpable and overriding error in concluding that the Trusts were controlled and managed by anyone other than St. Michael Trust Corp. Justice Woods's specific factual findings on this issue and her reasons are discussed in the analysis below.

46 The Purchaser, in compliance with section 116 of the Income Tax Act, withheld from the proceeds of sale approximately $72 million in respect of the purchase of the shares of New Garron Co from the Garron Trust and approximately $80 million in respect of the purchase of the shares of New Dunin Co from the Dunin Trust. The withheld amounts were remitted to the Minister to be credited to the Garron Trust and the Dunin Trust respectively.

47 St. Michael Trust Corp. took the position that, because the Garron Trust and the Dunin Trust were residents of Barbados for purposes of the Barbados Tax Treaty, their capital gains were exempt from income tax in Canada because of paragraph 4 of Article XIV. In order to claim refunds of the amounts withheld and remitted by the Purchaser, St. Michael Trust Corp. filed income tax returns for the Garron Trust and the Dunin Trust. The capital gains were disclosed in those returns and claims for a treaty exemption were asserted.

48 The Minister rejected the claims for exemption and assessed St. Michael Trust Corp. accordingly. St. Michael Trust Corp. objected to the assessments without success, and appealed to the Tax Court of Canada again without success. I summarize as follows the key conclusions reached by Justice Woods:

a. In determining residence for purposes of the Income Tax Act, the established test of residence applicable to corporations should be applied, so that a trust is resident in the country where its central management and control is exercised. In relation to the Trusts, the essential responsibility for decision making was intended from the outset to be exercised, and was in fact exercised, by Mr. Dunin and Mr. Garron, not St. Michael Trust Corp. Therefore, the central management and control of the Trusts was located in Canada, and the Trusts were resident in Canada.

b. As to the Crown's alternative arguments:

i. the Trusts were not deemed to be resident in Canada by virtue of section 94 of the Income Tax Act because the contribution test was not met;

ii. even if the Trusts were deemed to be resident in Canada by virtue of section 94, they could not be considered "residents of Canada" as defined in the Barbados Tax Treaty because section 94 does not impose tax liability on a deemed resident trust on the same comprehensive basis as a trust that is actually resident in Canada (Crown Forest Industries Ltd. v. Canada, [1995] 2 S.C.R. 802); and

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

iii. the assessments under appeal cannot be justified by the general anti-avoidance rule. It is not an abuse of the Barbados Tax Treaty to vest property in a trust with its residence in Barbados in a manner that avoids the operation of section 94. Generally, a tax treaty is intended to override the Income Tax Act, and there is nothing in the statutory context to indicate that the Bahamas Tax Treaty was not intended to override the Income Tax Act in the circumstances of this case.

49 St. Michael Trust Corp. now appeals to this Court on the first issue summarized above. The Crown argues that Justice Woods was correct on the first issue, but if she was wrong on that issue, she was also wrong in rejecting the Crown's alternative arguments.

Issues

50 I summarize as follows the issues raised in these appeals:

a. Residence under general legal principles: Did Justice Woods err in law or fact in concluding that, for the purposes of the Income Tax Act, the Trusts were resident in Canada in 2000? If not, then the appeals cannot succeed. Otherwise, it will be necessary to consider question (b).

b. Deemed residence under subsection 94(1):

i. Did Justice Woods err in law in concluding that the deemed residence rule in subsection 94(1) of the In- come Tax Act did not apply to the Trusts in 2000? If so, then it will be necessary to consider question (b)(ii). If Justice Woods made no error on this point, then it will be necessary to consider question (c).

ii. If the Trusts were deemed to be resident in Canada by virtue of subparagraph 94(1), were they nevertheless "residents of Barbados" and not "residents of Canada" for the purposes of the Barbados Tax Treaty, and thus entitled to the benefit of the exemption in paragraph 4 of Article XIV of the Barbados Tax Treaty? If not, the appeals cannot succeed. If so, it will be necessary to consider question (c).

c. The general anti-avoidance rule: If the Trusts were not resident in Canada and were residents of Barbados for purposes of the Barbados Tax Treaty, does GAAR nevertheless justify the assessments under appeal? If so, the appeals cannot succeed.

51 For the reasons that follow, I have concluded that these appeals should be dismissed. I agree with Justice Woods that a central management and control test, as described below, should be applied in determining the residence of the Trusts. In my view, it was reasonably open to her to conclude on the basis of the record that for the purposes of the Income Tax Act, the Trusts were resident in Canada in 2000.

Analysis

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 Residence of the Trusts under general legal principles

52 Canada, like many countries, has chosen residence as the principal basis for imposing income tax. The policy reason for that choice, as explained by Professor Vern Krishna (The Fundamentals of Canadian Income Tax (10th ed., Toronto: Carswell, 2009), at page 85), is that a person who enjoys the legal, political and economic benefits of association with Canada should bear the appropriate share of the costs of association.

53 Generally, the residence of a person is a question of fact, the determination of which requires consideration of any number of factors that point to or away from an economic or social link between the person and a particular country. For example, in the case of an individual, the relevant factors could include nationality, physical presence, location of the family home, location of business and social interests, mode of family life, and social connections through birth or marriage (a more detailed list of specific factors can be found in Krishna, at pages 88-91). Some specific legal principles for determining residence may come into play in certain circumstances, but none that elim- inate the need for full consideration of all of the relevant facts.

54 As to the residence of a corporation, it was determined over 100 years ago that in considering that question, the jurisprudence relating to the residence of an individual was instructive. In the leading case of De Beers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455 (U.K. H.L.), Lord Loreburn said this (at page 458):

In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly C.B. and Huddleston B. in the Calcutta Jute Mills v. Nicholson and the Cesena Sulphur Co. v. Nicholson [(1876) 1 Ex D. 428], now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.

It remains to be considered whether the present case falls within that rule. This is a pure question of fact to be determined, not according to the construction of this or that regulation or bye-law, but upon a scrutiny of the course of business and trading.

55 It remains the case to this day that, for income tax purposes, the residence of a corporation is determined primarily by finding the location of the corporation's central management and control, which is a question of fact. The relevant factors include the legal indicia of the place where the corporation's management and control should be exercised (as disclosed, for example, by the corporation's governing law and constating documents). Where a cor-

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 poration is actually managed and controlled by its directors in the manner contemplated by its governing law, the residence of a corporation usually will be determined as the place where the corporate directors exercise their management and control responsibilities.

56 However, that may not be the result if the facts disclose that the corporation is not in fact managed and controlled as its governing law requires. In that regard it is relevant to consider the nature of the decision making authority actually exercised by the directors. If significant management decisions are in fact taken by a person who is not a director, the place where that person resides or operates may be determined to be the residence of the corporation. Thus, for example, if it is established that management and control is exercised in fact by a shareholder operating out of another country, the corporation may be found to be resident where the shareholder resides: see United Construc- tion Co. v. Bullock (Inspector of Taxes) (1959), [1960] A.C. 351 (Eng. C.A.).

57 There is very little jurisprudence relating to the determination of the residence of a trust for tax purposes. Justice Woods reviewed the jurisprudence and concluded, correctly in my view, that there is no case law establishing a single test for determining the residence of a trust. She also concluded that "the judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate" (reasons, paragraph 162). I agree with her, substantially for the reasons she gave.

58 Some learned writers on tax matters have expressed the opinion that the residence of a trust is determined solely by the residence of the trustee, citing cases where the residence of a trust has been found to be the place where the trustee resides (or, in one case, in the place where the majority of the trustees reside, the trust indenture having permitted the majority to act for the trust: see Dill v. R., [1978] F.C.J. No. 607, 78 D.T.C. 6376 (Fed. T.D.)).

59 However, no case has established that the residence of the trustee is an invariable legal test for the residence of the trust. Nor has any case rejected conclusively the central management and control test as an appropriate legal test for the residence of a trust in a situation where it was found, for example, that someone other than the trustee exercised management and control of the trust property, or that the trustee resided in one place but exercised the management and control of the trust property in another place.

60 Certain comments in Thibodeau have sometimes been taken as a rejection of the corporate test of residence for a trust. In fact the Crown had submitted in that case that the central management and control test should be applied, and that submission was rejected. However, the comments that are most often cited in support of a blanket rejection of the central management and control test for a trust were made in the context of a narrower submission to the effect that the trust could have been resident in two places because one trustee lived in Canada and two lived in Bermuda. What the judge said (at paragraph 22; DTC page 6385) is this:

As to the submission that the Court in this case, even it if also finds that the Trust has a residence in Bermuda, it should find that it has a residence in Canada in that part of the paramount or supreme authority in relation to the management of this Trust was carried on in Canada applying by analogy the principles in the cited cases of determining residence for income tax purposes of corporations, in my view, such submission is also not valid. The judicial formula for this respecting a corporation, in my view, cannot apply to trustees because trustees cannot delegate any of their authority to co-trustees. A trustee cannot adopt a "policy of masterly inactivity" as com-

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

mented upon in Underhill on the Law of Trusts and Trustees, 12th Edition, page 284; and on the evidence, none of the trustees did adopt such a policy. Therefore, it is not possible for a trust to have a dual residence for income tax purposes, and therefore it is not possible to find that part of the paramount of "superior and directing authority" of a Trust is and was in two places. In any event, a finding of dual residence of this Trust is not made in this case.

61 I do not read this paragraph as rejecting the proposition that the residence of a trust can never be determined on the basis of the place where its central management and control is exercised and must always be determined exclusively on the basis of the residence of the trustee. However, if that is what the judge in Thibodeau was saying, then I respectfully disagree.

62 By analogy from DeBeers, supra, the task is to determine where a trust "keeps house and does business", i.e. where the powers and discretions of the trustee are really being exercised. It may well be that in most cases, the residence of the appointed trustee is a sufficient basis in fact for determining the residence of the trust. This is the case where the trustee is given and actually exercises the powers and discretions regarding the management and control of the trust property, and does so where he resides. However, a rigid legal test that necessarily ties the residence of a trust to the residence of the trustee regardless of the facts is, in my view, not sound in principle because it denies the central theme of the jurisprudence on the determination of residence for tax purposes, which is that residence fundamentally is a question of fact. I conclude therefore that where a question arises as to the residence of a trust for tax purposes, it is appropriate to undertake a fact driven analysis with a view to determining the place where the central management and control of the trust is actually exercised.

63 St. Michael Trust Corp. argues that a test of central management and control cannot be applied to a trust because a trust is a "legal relationship" without a separate legal personality. I do not accept this argument. It is true that as a matter of law a trust is not a person, but it is also true that for income tax purposes, a trust is treated as though it were a person. In my view, it is consistent with that implicit statutory fiction to recognize that the residence of a trust may not always be determined by the residence of its trustee.

64 St. Michael Trust Corp. also argues that the residence of the trust must be determined as the residence of the trustee because section 104 of the Income Tax Act embodies the trust, as taxpayer, in the person of the trustee. In my view, that gives section 104 a meaning beyond its words and purpose. Section 104 was enacted to solve the practical problems of tax administration that would necessarily arise when it was determined that trusts were to be taxed despite the absence of legal personality. I do not read section 104 as a signal that Parliament intended that in all cases, the residence of the trust must be the residence of the trustee.

65 Finally, St. Michael Trust Corp. argues that, even if the residence of the Garron Trust and the Dunin Trust in 2000 was the place where their central management and control was exercised at that time, Justice Woods made a palpable and overriding error in applying that test to the facts. To assess the validity of that argument, it is necessary to consider the factors that Justice Woods took into account in locating the central management and control of the Trusts in Canada, where Mr. Garron and Mr. Dunin resided.

66 Justice Woods concluded that St. Michael Trust Corp. was not exercising the main powers and discretions of the trustees under the trust indentures. Rather its true role was "to execute documents as required, and to provide

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 incidental administrative services", and it was not expected to "have responsibility for decision-making beyond that" (at paragraph 189). Rather than exercising its powers and discretions under the trust indentures, St. Michael Trust Corp. would default automatically to the recommendation of Mr. Dunin and Mr. Garron. This was "understood to be the arrangement from the outset" (at paragraph 194). She found that it was Mr. Dunin and Mr. Garron "who made the substantive decisions respecting the Trusts", not St. Michael Trust Corp. (at paragraph 252). In reaching these conclusions, Justice Wood relied on a number of facts which are fully stated in her reasons. I summarize as follows a number of these facts:

a. Under the terms of the trust indentures, Mr. Garron and Mr. Dunin and their respective spouses alone could replace the protector, who in turn could replace the trustee, if the trustee acted against their wishes.

b. The limited role of St. Michael Trust Corp. was understood by all parties at the outset. In particular, it was understood that St. Michael Trust Corp. would have no decision making role in relation to the sale of the Trusts' interests in PMPL, the investment of the cash proceeds received on the sale, the making of distributions to the beneficiaries, and the taking of appropriate action to minimize the tax burden of the Trusts. It was further understood from the outset that decisions of that nature would be made by Mr. Garron and Mr. Dunin and implemented by St. Michael Trust Corp. under their direction.

c. The Trusts used the same investment advisers as the beneficiaries. This allowed the beneficiaries to deal directly with the Trusts' financial advisers and directly control the Trusts' investment activity without the involvement of St. Michael Trust Corp.

d. The tax advisers to Mr. Garron and Mr. Dunin were also used for the Trusts and when acting for the Trusts were directed by Mr. Garron and Mr. Dunin.

e. There is no documentary evidence that St. Michael Trust Corp. took an active role in managing the Trusts, and the correspondence and other documents introduced by the Crown indicated that St. Michael Trust Corp. had no involvement in the affairs of the Trusts except the execution of documents and in administrative, accounting and tax matters.

f. St. Michael Trust Corp. was an arm of an accounting firm and thus had significant expertise in tax and accounting matters, but there is no evidence that it had any expertise in the management of trust assets.

g. The oral evidence of Mr. Garron and Mr. Dunin did not provide a clear picture of how the Trusts operated, and was less than full and complete.

h. Mr. Dunin in particular was disingenuous when he testified that St. Michael Trust Corp. controlled the Trusts.

i. Mr. Dunin attempted to give the impression that he had little interest in what St. Michael Trust Corp. was actually doing vis-à-vis the Dunin Trust which, given his economic interest in the Dunin Trust, supports the conclusion that it was Mr. Dunin himself who was in effective control. The same can be said about the evidence of

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 Mr. Garron that he had little interest in what St. Michael Trust Corp. was doing.

j. Other individuals who could have shed light on the relevant facts as to the operation of the Trusts were not called to give evidence. That included the various advisers who were involved in planning and implementing the relevant transactions, Mr. Gill who was the protector of both Trusts, Mr. Jesson who was in charge of St. Michael Trust Corp. when the Trusts were created and the person who prepared the memoranda of "trustee intentions" quoted above, Mr. Knott who had the day to day responsibility for the Trusts, Mr. Carroll who was the lead adviser on the sale of PMPL, and various other individuals who acted as investment advisers to the Trusts or who were involved in the selection of investment advisers.

k. The evidence of Mr. Hutchinson, an officer of St. Michael Trust Corp. who dealt with the Trusts, was not particularly helpful because of his lack of personal knowledge of events that occurred before his involvement in 2003. In particular, Mr. Hutchinson could provide no useful information about the degree of due diligence undertaken by St. Michael Trust Corp. in relation to any of the relevant transactions.

l. Mr. Hutchinson testified that the directors of St. Michael Trust Corp. were required to ratify actions proposed to be taken or taken by the Trusts, but there is no evidence that they had much substantive information about the transactions, which tends to support the proposition that they knew that the role of St. Michael Trust Corp. was intended to be limited to administrative matters.

67 Some of the factors listed above are common characteristics of ordinary trusts and, considered in isolation, would not be sufficient to locate the management and control of the Trusts anywhere but the residence of the St. Michael Trust Corp. For example, the fact that the beneficiaries have the right to appoint a protector who has the power to replace the St. Michael Trust Corp. as trustee is a common safeguard in a trust indenture and would not by itself be enough to find the beneficiaries to be in control of the property of the Trusts. The same could be said of the fact that St. Michael Trust Corp. and the beneficiaries employ common advisers, or the fact that the beneficiaries took it on themselves to advise the St. Michael Trust Corp. and even urged St. Michael Trust Corp., however strongly, to undertake a particular transaction. Indeed, the appointment of a trustee with little investment experience in a trust that requires the property to be invested might not be significant, provided that the trustee has the power to retain others for advice and, in the end, is the one making the decisions.

68 However, there is a line to be drawn. On one side of the line are recommendations, even strong ones, by the beneficiaries to the trustee, leaving the trustee free to decide how to exercise the powers and discretions under the trust. In that case, the trustee is still managing and controlling the trust. On the other side of the line the beneficiaries are really exercising the powers and discretions under the trusts, managing and controlling the trusts, and displacing the appointed trustee. As mentioned above, on which side of the line a case falls is a factual question, requiring consideration of the evidence in its totality.

69 Justice Woods took into account some normally neutral facts, such as the existence of a protector and reliance on common advisers, and combined them with a considerable body of evidence of the surrounding circumstances to conclude that on the facts of this case, the line was crossed. In my view, it was reasonably open to her to reach that conclusion.

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

70 Indeed, what else is to be made of the common understanding of the parties, as found by Justice Woods, that decisions in relation to the sale of the Trusts' interests in PMPL, the investment of the cash proceeds received on the sale, the making of distributions to the beneficiaries, and the taking of appropriate action to minimize the tax burden of the Trusts would be made by Mr. Garron and Mr. Dunin and implemented by St. Michael Trust Corp.? What else explains the lack of documentary or other evidence that St. Michael Trust Corp. took an active role in assessing any of the important decisions relation to the disposition of the property of the Trust? What is the explanation for the pro- fessed lack of interest on the part of Mr. Garron and Mr. Dunin of the capabilities of St. Michael Trust Corp. to manage trust assets, except in relation to the work ordinarily done by someone with accounting and tax expertise? What is the explanation for the paucity of evidence as to the formation and operation of the Trusts and the failure to call key witnesses?

71 I conclude that Justice Woods made no error warranting the intervention of this Court in concluding that, at the relevant time in 2000, and in particular at the time of the sale of the shares of New Garron Co and New Dunin Co to the Purchaser, the management and control of the Garron Trust and the Dunin Trust resided in Canada with Mr. Garron and Mr. Dunin. It follows that she was correct to find that the Trusts were resident in Canada when they realized capital gains on the sale of the shares of New Garron Co and New Dunin Co.

72 This is a sufficient basis upon which to dismiss these appeals. However, as the alternative arguments were fully argued, I will express an opinion on those as well.

Deemed residence of the Trusts under subsection 94(1)

73 If, contrary to the opinion expressed above, the residence of a trust is to be determined only on the basis of the residence of the trustee, then there can be no real doubt that the Trusts were resident in Barbados in fact and for the purposes of the Barbados Tax Treaty. The question then becomes whether section 94 applied to the Trusts in 2000, and if so whether the capital gains in issue are subject to tax in Canada. That turns on two issues: (1) whether the contribution test in paragraph 94(1)(b) was met, and (2) whether the Trusts were entitled to the exemption in paragraph 4 of Article XIV of the Barbados Tax Treaty.

74 The contribution test was met if the Garron Trust and the Dunin Trust acquired property, "directly or indirectly in any manner whatever" from a Canadian resident beneficiary or a person related to that beneficiary. Each of the Trusts had a Canadian resident beneficiary, Mr. Garron in the case of the Garron Trust, and Mr. Dunin in the case of the Dunin Trust, and among the players in this case were two corporations, Garron Holdings and Dunin Holdings, that for income tax purposes are related to Mr. Garron and Mr. Dunin respectively. Therefore, the specific questions are whether the Garron Trust acquired property, directly or indirectly in any manner whatever from Mr. Garron or Garron Holdings, and whether the Dunin Trust acquired property directly or indirectly in any manner whatever from Mr. Dunin or Dunin Holdings.

75 There are undoubtedly many ways in which a transfer of property may occur directly or indirectly in any manner whatever, and there is very little guiding jurisprudence. However, it is now well established that if the existing common shares of a corporation worth, say, $100, are exchanged for preference shares with a value that is fixed at

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 some lesser amount, say, $80, and new common shares are issued to a new shareholder for nominal consideration, the holders of the preference shares have indirectly transferred property worth $20 to the new subscriber (see Kieboom v. Minister of National Revenue, [1992] 3 F.C. 488 (Fed. C.A.), at paragraph 21).

76 Kieboom recognizes that the entire value of any corporation is represented by its shares, which are property. The allocation of the value of a corporation between shares of different classes is determined by their terms and conditions. Therefore it is possible to change the value of a class of shares, and to shift value from one class of shares to another, by changing their terms and conditions. The hypothetical reorganization described above results in an indirect transfer of property worth $20 from the holders of the fixed value preference shares to the new subscriber.

77 The same kind of indirect transfer of property occurred in this case upon the reorganization of the shares of PMPL. The pre-reorganization value of the common shares of PMPL was substantially more than $50 million, the redemption value of the Freeze Shares for which they were exchanged upon the reorganization. For that reason, the reorganization shifted value from the holders of the Freeze Shares (Dunin Holdings and Garron Holdings) to the subscribers for New Common Shares of PMPL, New Dunin Co and New Garron Co. Kieboom teaches that Dunin Holdings and Garron Holdings transferred property indirectly to New Dunin Co and New Garron Co respectively.

78 However, the question asked by paragraph 94(1)(b) is whether property was transferred "directly or indirectly in any manner whatever" to the Dunin Trust and the Garron Trust, as the sole shareholders of New Dunin Co and New Garron Co respectively. Justice Woods said no, because this would require "looking through" New Dunin Co and New Garron Co to find that the Trusts were the recipients of the transferred property, which would give the phrase "directly or indirectly in any manner whatever" a meaning that would be unreasonably broad with unforeseeable and uncertain consequences in other situations.

79 I do not share Justice Woods' concerns, and I respectfully disagree with her interpretation of paragraph 94(1)(b). Once it is accepted that an indirect transfer of the shares of a corporation from Shareholder A to Shareholder B can be achieved by a corporate reorganization that shifts part of the value of the corporation from the class of shares owned by Shareholder A to the class of shares owned by Shareholder B, I see no principled basis for concluding that the same transaction cannot also be an indirect transfer of property "in any manner whatever" to the person that owns Shareholder B. This does not imply any change to the legal principle that the property of a corporation is not the property of its shareholders. It merely recognizes the fact that any increase in the wealth of Shareholder B will necessarily increase the wealth of whoever owns Shareholder B. In the hypothetical corporate reorganization described above, it does no violence to the language of paragraph 94(1)(b) to conclude that there has been an indirect transfer of property "in any manner whatever" from Shareholder A to the owner of Shareholder B.

80 In my view, Parliament chose the words "directly or indirectly in any manner whatever" in paragraph 94(1)(b) deliberately to capture every possible means by which the wealth and income earning potential represented by the shares of a Canadian corporation can move to a non-resident trust from a Canadian resident beneficiary of the trust or a person related to that beneficiary. On any realistic and practical view of the facts of this case, the New Common Shares of PMPL (bearing with them the value shifted from the old common shares upon the reorganization of PMPL) were intended to enrich the Trusts. That was achieved by a series of interrelated and preordained transactions in which New Garron Co and New Dunin Co were the instruments by which the Trusts obtained the economic benefit of the

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881

New Common Shares of PMPL, including the portion of the value of those shares that was shifted from the pre-reorganization common shares. On that basis, I conclude that the contribution test was met, and therefore subsection 94(1) applied to the Trusts. It follows that paragraph 94(1)(c) applies to deem the Trusts to be resident in Canada for the purposes of Part I.

81 The next question is whether the reasoning in Crown Forest compels the conclusion that the Trusts were entitled to the benefit of the exemption from Canadian tax in paragraph 4 of Article XIV of the Barbados Tax Treaty. Justice Woods concluded that the treaty exemption in this case trumps section 94. In my view, she was correct in so concluding.

82 The treaty definition of residence follows the most common model. I repeat the definition here for ease of reference:

83 Crown Forest teaches that the common element of the enumerated criteria in the treaty definition of residence is that each constitutes a basis on which states generally impose full tax liability on world-wide income. It follows that a person who is liable to tax in Canada only on income from a source or sources (source liability), as opposed to its world-wide income from all sources, would not be considered a resident of that state for treaty purposes. Justice Iacobucci, writing for the Court in Crown Forest, explained this point as follows at paragraph 40 (citations omitted):

I agree with the appellant that the most similar element among the enumerated criteria is that, standing alone, they would each constitute a basis on which states generally impose full tax liability on world-wide income [...]. In this respect, the criteria for determining residence in Article IV, paragraph 1 involve more than simply being liable to taxation on some portion of income (source liability); they entail being subject to as comprehensive a tax liability as is imposed by a state. In the United States and Canada, such comprehensive taxation is taxation on world-wide income. However, tax liability for the income effectively connected to a business engaged in the U.S., pursuant to s. 882 of the Internal Revenue Code, amounts simply to source liability. Consequently, the "engaged in a business in the U.S." criterion is not of a similar nature to the enumerated grounds since it is but a basis for source taxation.

84 Substantially the same point is made more succinctly in the following statement from paragraph 68 of Crown Forest, in which Justice Iacobucci summarized his conclusions. His third conclusion is as follows:

3. The parties to the Convention intended only that persons who were resident in one of the contracting states and liable to tax in one of the contracting states on their "world-wide income" be considered "residents" for purposes

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 of the Convention.

85 These comments were made in the context of a case in which a Bahamian corporation was attempting to claim the benefit of an exemption from Canadian tax in the Canada-United States Income Tax Convention (1980) on the basis that its United States tax liability arose because its "place of management" was in the United States. (The definition of residence in that treaty is substantially the same as the definition of residence in the Barbados Tax Treaty.) The Bahamian corporation had the status of a foreign corporation for United States income tax purposes, and was liable to taxation in the United States only on income effectively connected with the business conducted from its office in the United States (that is, business income earned in the United States).

86 Justice Iacobucci concluded that the fact that the place of management of the Bahamian corporation was in the United States was not the basis of its United States tax liability, but only one of the factors in determining whether its business income was effectively connected with its United States based business. The Bahamian corporation was taxed in the United States only as a foreign corporation, on a source basis, and not on its world wide income as it would have been if it were an American corporation. For that reason, it was not a resident of the United States for treaty purposes.

87 The deemed residence rule in section 94 does not simply deem a foreign trust to be a person resident in Canada. It is substantially limited; it deems a foreign trust to be a person resident in Canada whose taxable income for the year is the total of its taxable income earned in Canada for the year, plus "foreign accrual property income" (or FAPI, which essentially consists of certain investment and other passive income, including capital gains, of a foreign corporation that are attributed to a Canadian resident shareholder in certain circumstances). These limitations result in a foreign trust being deemed to be a person resident in Canada, not for all purposes of Part I (which would make it liable to tax on all of its income, wherever earned), but only for the purposes of Part I that are relevant to the determination of its Canadian source income and its FAPI. As a practical matter, as the parties agree, that excludes only foreign active business income, but it nevertheless falls short of displacing the treaty definition of residence.

88 It follows that, if the central management and control test discussed above does not apply, then the Trusts would be entitled to the benefit of paragraph 4 of Article XIV of the Barbados Tax Treaty, and would be exempt from Canadian tax on the capital gain they realized in 2000 on the sale of the shares of New Garron Co and New Dunin Co.

The general anti-avoidance rule

89 If, contrary to the opinions expressed above, the residence of a trust is to be determined only on the basis of the residence of the trustee and therefore the Trusts are resident in Barbados, but are entitled to the exemption in paragraph 4 of Article XIV of the Barbados Tax Treaty, it would be necessary to consider whether the assessments under appeal are nevertheless justified by the general anti-avoidance rule in section 245 of the Income Tax Act. In this Court as in the Tax Court, that issue turns on whether the series of transactions that resulted in the Trusts becoming entitled to the treaty exemption in the face of section 94 is a misuse or abuse of the Barbados Tax Treaty. Justice Woods said no. I agree.

90 If the residence of the Trusts is to be determined on the basis of the residence of St. Michael Trust Corp. (which

2010 CarswellNat 4259, 2010 FCA 309, 61 E.T.R. (3d) 168, 2010 D.T.C. 5189 (Eng.), [2011] 2 C.T.C. 7, 411 N.R. 125, [2012] 2 F.C.R. 374, 195 A.C.W.S. (3d) 881 is the premise for the Crown's argument based on the general anti-avoidance rule), then the Trusts have not avoided section 94. On the contrary, they have fallen squarely into it. The fact that the Trusts would also be entitled to a treaty exemption flows from the fact that in the Barbados Tax Treaty, Canada has agreed not to tax certain capital gains realized by a person who is a resident of Barbados. If the residence of the Trusts is Barbados for treaty purposes, the Trusts cannot misuse or abuse the Barbados Tax Treaty by claiming the exemption.

Conclusion

91 I would dismiss the appeals on the basis that the Trusts are resident in Canada. I would award the Crown one set of costs.

M. Nadon J.A.:

I agree

David Stratas J.A.:

I agree

Appeal dismissed.

FN* A corrigendum issued by the Court on December 9, 2010 has been incorporated herein.

END OF DOCUMENT

Page 1

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Garron Family Trust (Trustee of) v. R.

Myron A. Garron and Berna V. Garron, as Trustees of the Garron Family Trust (Appellants) and Her Majesty the Queen (Respondent)

Berna V. Garron (Appellant) and Her Majesty the Queen (Respondent)

Myron A. Garron (Appellant) and Her Majesty the Queen (Respondent)

St. Michael Trust Corp., as Trustee of the Fundy Settlement (Appellant) and Her Majesty the Queen (Respondent)

Andrew T. Dunin (Appellant) and Her Majesty the Queen (Respondent)

St. Michael Trust Corp., as Trustee of the Summersby Settlement (Appellant) and Her Majesty the Queen (Re- spondent)

Tax Court of Canada [General Procedure]

Judith Woods J.

Heard: July 21 - August 6, 2008 Judgment: September 10, 2009 Docket: 2006-1405(IT)G, 2006-1407(IT)G, 2006-1408(IT)G, 2006-1409(IT)G, 2006-1410(IT)G, 2006-1411(IT)G

Counsel: Douglas H. Mathew, Matthew G. Williams for Appellants

Elizabeth Chasson, Margaret Nott, Martin Beaudry for Respondent

Subject: Income Tax (Federal); Estates and Trusts

Tax --- Income tax — Residence in Canada — Trusts

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819

PMPL was holding company for Canadian business, which manufactured automotive parts — Reorganization occurred whereby owners of common shares of PMPL converted shares to fixed value preference shares — Newly issued common shares of PMPL were issued for nominal consideration to new Canadian holding companies — Trusts at issue subscribed to shares in holding companies for nominal consideration, with holding companies becoming owners of trusts — PMPL was sold at arm's length and trusts disposed of shares of holding companies — Minister assessed trusts and other taxpayers, who each had interest in PMPL, imputing income from disposition as capital gains — Trusts and other taxpayers appealed — Appeal dismissed with respect to trusts alone, and allowed regarding other taxpayers — Exemption in tax treaty between Canada and Barbados was not applicable, as trust was resident in Canada — Test for determining residence of trust is same as corporations, being central management and control — Trustee, which was located in Barbados, was involved only to small extent and trusts were run in reality by certain beneficiaries — Legal duties imposed on trustee did not affect outcome of case at bar — Trustee did not have expertise or experience in managing trusts — Other taxpayers were assessed regarding disposition of property only as protective measure — Minister had no intent to tax gains more than once, with trusts having priority over other taxpayers.

Tax --- Income tax — Capital gains and losses — General principles

Birmount Holdings Ltd. v. R. (1978), 21 N.R. 451, 78 D.T.C. 6254, 1978 CarswellNat 198, [1978] C.T.C. 358 (Fed. C.A.) — referred to

Canada Trustco Mortgage Co. v. R. (2005), (sub nom. Canada Trustco Mortgage Co. v. Canada) 2005 D.T.C. 5523 (Eng.), (sub nom. Hypothèques Trustco Canada v. Canada) 2005 D.T.C. 5547 (Fr.), [2005] 5 C.T.C. 215, 2005 SCC 54, (sub nom. Minister of National Revenue v. Canada Trustco Mortgage Co.) 340 N.R. 1, 2005 CarswellNat 3212, 2005 CarswellNat 3213, 259 D.L.R. (4th) 193, [2005] 2 S.C.R. 601 (S.C.C.) — considered

Commissioner of Taxation v. Lamesa Holdings BV (1997), 36 A.T.R. 589, 97 A.T.C. 4752, 157 A.L.R. 291 (Australia Fed. Ct.) — considered

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819

De Beers Consolidated Mines Ltd. v. Howe (1906), 5 T.C. 198, [1906] A.C. 455 (U.K. H.L.) — considered

Evans v. R. (2005), 2005 TCC 684, 2005 CarswellNat 3887, 2005 D.T.C. 1762 (Eng.), 2005 CCI 684, 2005 CarswellNat 6512, [2005] T.C. 581, [2006] 2 C.T.C. 2009 (T.C.C. [General Procedure]) — considered

Gehres v. R. (2003), 2003 D.T.C. 913, 2003 CCI 471, [2003] 4 C.T.C. 2752, 2003 CarswellNat 5415, 2003 TCC 471, 2003 CarswellNat 2016 (T.C.C. [General Procedure]) — considered

Holden v. Minister of National Revenue (1932), 1932 CarswellNat 46, [1932] 4 D.L.R. 60, 1 D.T.C. 234, [1932] S.C.R. 655, [1928-34] C.T.C. 127 (S.C.C.) — referred to

Holden v. Minister of National Revenue (1933), [1933] 2 W.W.R. 321, [1928-34] C.T.C. 129, 1933 CarswellNat 6, [1933] 3 D.L.R. 81, 1 D.T.C. 243, [1933] A.C. 526 (Canada P.C.) — referred to

MacKay v. R. (2008), 2008 CarswellNat 677, 2008 FCA 105, [2008] 4 C.T.C. 161, (sub nom. MacKay v. Canada) [2008] 4 F.C.R. 616, 2008 CAF 105, (sub nom. R. v. MacKay) 2008 D.T.C. 6238 (Eng.), (sub nom. MacKay v. Canada) 291 D.L.R. (4th) 706, 2008 CarswellNat 2145, (sub nom. Minister of National Revenue v. MacKay) 377 N.R. 34 (F.C.A.) — referred to

McLeod v. Canada (Minister of Customs & Excise) (1926), [1926] S.C.R. 457, 1 D.T.C. 85, [1917-27] C.T.C. 290, [1926] 3 D.L.R. 531, 1926 CarswellNat 5 (S.C.C.) — referred to

MIL (Investments) S.A. v. R. (2007), 2007 FCA 236, 2007 CarswellNat 1719, 2007 D.T.C. 5437 (Eng.), [2007] 4 C.T.C. 235, 2007 CarswellNat 4139, 2007 CAF 236 (F.C.A.) — considered

RCI Trust (Trustees of) v. Minister of National Revenue (2009), 2009 FC 434, 2009 CarswellNat 1945, [2009] 5 C.T.C. 85, (sub nom. Morris v. Minister of National Revenue) 2009 D.T.C. 6066 (Eng.) (F.C.) — referred to

RMM Canadian Enterprises Inc. v. R. (1997), [1998] 1 C.T.C. 2300, 97 D.T.C. 302, 1997 CarswellNat 400

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819 (T.C.C.) — distinguished

Robert Glegg Investment Inc. v. R. (2008), 2008 CarswellNat 62, 2008 D.T.C. 2466 (Eng.), [2008] 3 C.T.C. 2315, 2008 TCC 20, 2008 CarswellNat 3148, 2008 CCI 20 (T.C.C. [General Procedure]) — referred to

Robert Glegg Investment Inc. v. R. (2008), 2008 FCA 332, 2008 CarswellNat 4148, 2008 CarswellNat 5005, 2008 CAF 332, 2009 D.T.C. 5515 (Eng.) (F.C.A.) — referred to

Robson Leather Co. v. Minister of National Revenue (1977), 1977 CarswellNat 220, [1977] C.T.C. 132, 77 D.T.C. 5106, 14 N.R. 598, 32 C.P.R. (2d) 126 (Fed. C.A.) — followed

Romkey v. R. (1999), 1999 CarswellNat 2598, (sub nom. Romkey v. Minister of National Revenue) 251 N.R. 303, 2000 D.T.C. 6047, [2000] 1 C.T.C. 390, 31 E.T.R. (2d) 245 (Fed. C.A.) — considered

Smallwood v. Commissioners for Revenue & Customs (2009), [2009] B.T.C. 135, [2009] W.T.L.R. 669, [2009] S.T.I. 1092, [2009] S.T.C. 1222 (Eng. Ch. Div.) — referred to

Thibodeau Family Trust v. R. (1978), 78 D.T.C. 6376 (Fed. T.D.) — followed

Trevor Smallwood Trust v. Revenue & Customs (2008), [2008] UKSPC SPC00669 (U.K. Special Commission- ers) — considered

Wensleydale's Settlement Trustees v. Inland Revenue Commissioners (1996), [1996] S.T.C. (S.C.D.) 241 (U.K. Special Commissioners) — considered

Wood v. Holden (2006), [2006] 1 W.L.R. 1393, [2006] 2 B.C.L.C. 210, [2006] S.T.C. 443, [2006] S.T.I. 236, [2006] B.T.C. 208 (Eng. C.A.) — considered

Statutes considered:

Business Corporations Act, R.S.O. 1990, c. B.16

Generally — referred to

Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.)

Generally — referred to

s. 39 — considered

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s. 75(2) — considered

s. 75(2)(a)(i) — considered

s. 85 — referred to

s. 91 — referred to

s. 94 — considered

s. 94(1)(a) — considered

s. 94(1)(b) — considered

s. 94(1)(c) — considered

s. 94(1)(c)(i)(A) — considered

s. 94(1)(c)(i)(B — considered

s. 94(6) — referred to

s. 104 — referred to

s. 104(1) — considered

s. 104(2) — referred to

s. 110(1)(f)(i) — referred to

s. 115(1)(b)(i) — referred to

s. 116 — referred to

s. 245 — referred to

s. 245(1) "tax benefit" — referred to

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s. 245(2) — referred to

s. 245(4) — referred to

Income Tax Conventions Interpretation Act, R.S.C. 1985, c. I-4

Generally — referred to

s. 4.1 [en. 2005, c. 19, s. 60] — referred to

Treaties considered:

Agreement between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Eva- sion with Respect to Taxes on Income and on Capital, C.T.S. 1980/29

Generally — referred to

Article I — referred to

Article III ¶ 1(c) "person" — referred to

Article IV ¶ 1 "resident of a Contracting State" — considered

Article XIV ¶ 4 — considered

Article XXX ¶ 2 — considered

APPEAL by taxpayer from assessment by Minister of National Revenue, regarding tax treatment of trusts.

Judith Woods J.:

1 These appeals concern assessments made under the Income Tax Act (the "Act") in respect of dispositions of shares of Canadian corporations by Barbados trusts. All assessments relate to the 2000 taxation year.

I. Background

2 In 1998, in the course of a reorganization of the share structure of PMPL Holdings Inc. ("PMPL"), two trusts ("Trusts") with Canadian beneficiaries were settled by an individual resident in the Caribbean island of St. Vincent. The sole trustee of each Trust was a corporation resident in Barbados.

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819

3 As part of the reorganization, the Trusts subscribed for shares of newly-incorporated Canadian corporations and the corporations in turn subscribed for shares of PMPL. These transactions were effected at nominal consideration.

4 In 2000, as part of an arm's length sale of PMPL, the Trusts disposed of the majority of the shares that they held in the holding companies. Capital gains of over $450,000,000 were realized.

5 Amounts on account of potential tax on the capital gains had been remitted to the government pursuant to the withholding procedures in section 116 of the Act. In income tax returns filed for the 2000 taxation year, the Trusts sought a return of the amounts withheld, claiming an exemption from tax pursuant to the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the "Treaty").

6 The exemption relied on, Article XIV(4) of the Treaty, provides:

4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.

7 The Minister has taken the position that this exemption does not apply, and has issued assessments to each of the Trusts in respect of the gains.

8 In addition to assessing the Trusts, the Minister also assessed four Canadian residents with respect to the same gains. These persons all had interests in PMPL, either directly or through a holding company, prior to the 1998 reorganization. In these reasons, this group will be referred to collectively as the "Other Appellants."

9 The assessments issued to the Other Appellants were made as a protective measure only, there being no intent to tax the same gains more than once. In oral argument, counsel for the Minister clarified that the assessments issued to the Trusts should take priority over these assessments.

10 All of the assessments have been appealed, and the appeals were heard together on common evidence over a three-week period.

II. Summary of issues

11 The appeals involve several relatively complex legislative provisions and many arguments have been raised.

12 I would mention that the arguments made by counsel for the Minister following the presentation of evidence varied slightly from the arguments that were in the Minister's replies. I have limited the discussion below to those issues that were made in argument, either orally or in writing.

13 There is one exception to this, which relates to the interplay between subsection 75(2) of the Act and Article

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XIV(4) of the Treaty. This was an issue that I raised during oral argument, and for which written submissions were subsequently received.

14 Below is a brief summary of the issues that will be discussed. The relevant legislative provisions have been reproduced in an appendix.

15 First, the Minister submits that the exemption in Article XIV(4) of the Treaty does not apply because the Trusts are resident in Canada. Although the corporate trustee of each Trust is acknowledged to be a resident of Barbados, the Minister submits that the management and control of each Trust is in Canada.

16 Alternatively, the Minister submits that the Trusts are deemed residents of Canada by virtue of having received property from beneficiaries resident in Canada. The relevant provision is paragraph 94(1)(c) of the Act.

17 The Minister also submits that the gains are taxable to the Other Appellants pursuant to an attribution rule in subsection 75(2) of the Act.

18 Further, the Minister seeks to invoke the general anti-avoidance rule (the "GAAR") in section 245 of the Act in support of all of the assessments.

19 Finally, the Minister submits that the allocation of the sale proceeds in the arm's length sale was not reasonable and that the proceeds should be partially reallocated from the Trusts to the Other Appellants. The legislative provision relied on is section 68 of the Act.

20 For completeness, I would mention two other arguments that were raised by the Minister in the replies but were not pursued in argument. The first is an argument that the Trusts were not validly constituted. The second is that the result sought by the appellants was an abuse of the Treaty without resort to the GAAR.

III. Facts

A. Introduction

21 In 1992, PMPL was incorporated as a holding company for a Canadian corporation that was in the business of manufacturing and assembling parts for the automotive industry. PMPL also held shares in a small corporation that manufactured tools for the main operating company. The specialty of the business was interior automotive systems, such as consoles.

22 The main subsidiary was Progressive Moulded Products Inc. ("Progressive"). The other was called Progressive Tools Limited ("Tools").

23 The Other Appellants are Andrew Dunin, Myron Garron, Berna Garron, and a trust called the Garron Family Trust.

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24 Immediately prior to the 1998 reorganization, the shares of PMPL were owned equally by Mr. Dunin and a holding company that was wholly-owned by the remaining Other Appellants.

25 The 1998 reorganization was similar to a typical estate freeze in which (1) an existing shareholder converts common shares to fixed value redeemable and retractable preference shares, and (2) new common shares are issued for nominal consideration to, or for the benefit of, children and other issue of the former common shareholder.

26 Counsel for the Minister emphasized that the 1998 reorganization was not really an estate freeze, as that term is commonly used, because the new common shares were not held exclusively for children and other issue. The parents also had an interest. Counsel suggests that the term "non-freeze" would be more accurate.

27 The main steps in the reorganization were these. The owners of common shares of PMPL converted these shares to fixed value preference shares. Newly-issued common shares of PMPL were then issued for nominal consideration to newly-incorporated Canadian holding companies. The Trusts each subscribed for shares in the holding companies for nominal consideration. As a result, the holding companies were wholly-owned by the Trusts.

28 In 2000, PMPL was sold in an arm's length transaction in which PMPL was valued at approximately $532,000,000. As part of the sale, the Trusts disposed of the majority of the shares of the holding companies.

29 The parties filed an agreed statement of facts ("ASF") which includes many of the detailed steps in the 1998 reorganization. The ASF is part of my factual findings and is reproduced in an appendix.

30 Attached to the ASF are schematic diagrams that depict the relevant corporate structure both before and after the 1998 reorganization. The ASF also includes a schedule which summarizes the amounts that have been assessed. This schedule has not been reproduced.

B. List of witnesses

31 Testimony for the appellants was provided by:

• Andrew Dunin, one of the two principals of PMPL;

• Myron Garron, the other principal of PMPL;

• Ian Hutchinson, a resident of Barbados who is currently president of St. Michael Trust Corp. ("St. Michael"), the trustee of the Trusts;

• Mary Mahabir, a solicitor with Lex Caribbean Law Offices in Barbados. Ms. Mahabir provided expert testimony as to whether the Trusts were resident in Barbados;

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• Peter Hatges, president of KPMG Corporate Finance Inc. in Toronto. Mr. Hatges provided expert testimony as to the value of PMPL at the time of the reorganization.

32 The only witness for the Minister was Howard E. Johnson, of Campbell Valuation Partners Limited. Mr. Johnson provided expert testimony as to the value of PMPL at the time of the reorganization.

33 Mr. Johnson also testified as to the value of a hypothetical option to acquire all the shares of PMPL immediately after the 1998 reorganization. This evidence was presented to support the position of the Minister that the shares held by the Trusts had significant value at the time of the 1998 reorganization. Mr. Johnson's opinion was limited to the hypothetical option. He did not provide an opinion as to the value of the shares held by the Trusts.

C. The principal transactions

34 By 1990, the plastic moulding business carried on by Progressive was struggling. The principal of the corporation, Myron Garron, approached Andrew Dunin with a view to convincing him to join the company as its general manager.

35 Mr. Dunin, who had a business background and experience in the automotive industry, took up the challenge. Over time, he converted Progressive's business from one that manufactured a variety of plastic moulded products into one that specialized in producing automotive interior systems.

36 Over the course of a decade, the business had grown exponentially and Progressive had become a significant supplier to major automotive companies, especially General Motors.

37 When Mr. Dunin joined Progressive in 1990, Mr. Garron promised him an equity interest in the company. The terms of this were settled in 1992 and were reflected in a shareholders' agreement. Under that agreement, Mr. Dunin could earn up to 50 percent of the equity, depending on the earnings of the business.

38 To facilitate this agreement, PMPL was incorporated in 1992 to hold the shares of the two operating companies, Progressive and Tools.

39 Shortly after the 1992 shareholders' agreement was entered into, Mr. Dunin became unhappy with its terms and he attempted to renegotiate it. Mr. Garron agreed, but only after Mr. Dunin had earned the maximum 50 percent equity interest. This was achieved in 1996.

40 By 1996, 50 percent of the shares of PMPL were held by Mr. Dunin and the remaining 50 percent were held by Garron Holdings Limited (GHL). The shareholders of GHL were Mr. Garron, his spouse Berna Garron, and a family trust known as the Garron Family Trust. Mr. and Mrs. Garron were the trustees of the trust.

41 Following protracted and difficult negotiations between Mr. Garron and Mr. Dunin, a new arrangement was

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42 The new arrangement was quite comprehensive. It included a reorganization of the share structure of PMPL, an increased equity ownership and salary for Mr. Dunin, an amendment to the buy/sell provisions in the shareholders' agreement, and terms under which Mr. Dunin could manage the business, including its disposition.

43 The revised shareholders' agreement contains a number of provisions that purport to affect the shares held by the Trusts (sections 6.2, 6.4, 6.6), but the Trusts are not parties to the agreement.

44 The steps undertaken as part of the reorganization, in brief, are:

• Mr. Dunin transferred his common shares[FN1] of PMPL to a newly-incorporated holding company, Dunin Holdings Inc. (DHI). Mr. Dunin was the sole shareholder of DHI;

• the common shares of PMPL, which were then equally owned by DHI and GHL, were converted into voting, redeemable preference shares. The redemption amount was equal to the fair market value of the common shares immediately prior to the conversion. The amount was to be determined by PMPL, and was set at $50,000,000. The redemption amount was subject to adjustment in the event that the valuation was determined to be incorrect by a taxing authority or by a court;

• non-voting common shares of PMPL were issued for nominal consideration to two newly-incorporated Cana- dian corporations, 1287325 Ontario Ltd. ("325") and 1287333 Ontario Ltd. ("333"). The shares issued to 325 had slightly greater rights of participation than the shares issued to 333; and

• shares of 325 were issued to Summersby Settlement (a Dunin family trust) and shares of 333 were issued to Fundy Settlement (a Garron family trust), both for nominal consideration.

45 On or about December 1998, an unsolicited expression of interest in buying PMPL was made to Mr. Dunin. The prospective buyer was owned by a Swiss company, Sarna Knuststoff Holding AG ("Sarna").

46 Mr. Dunin informed the representative for Sarna that he was interested in pursuing sale negotiations. Upon being asked what the business was worth, Mr. Dunin suggested $400,000,000.

47 Negotiations with Sarna were conducted over the next several months. They did not lead to a sale, however, because Sarna walked away shortly before the intended closing. As a result, Mr. Dunin had some concern that Sarna never truly was interested in buying the company.

48 Immediately after the Sarna deal fell through around June 1999, Mr. Dunin instituted a process to facilitate the sale of PMPL. He thought that this made sense because PMPL was doing well and the work necessary for a due diligence process had just been completed for the Sarna negotiations.

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49 Mr. Dunin selected Timothy W. Carroll of the Chicago office of Arthur Anderson to manage the sale process. Arthur Anderson estimated a value for PMPL of approximately $500,000,000.

50 Mr. Carroll attempted to find potential buyers for PMPL from its competitors and from equity firms. An equity firm based in New York, Oak Hill Capital Partners, L.P. ("Oak Hill"), expressed an interest and eventually bought the business.

51 The sale to Oak Hill was completed in August 2000 at a value for PMPL of approximately $532,000,000. The consideration was paid in the form of equity shares of the buyer, as to the amount of $50,000,000, and the balance was paid in cash.[FN2]

52 As part of the negotiations, Mr. Dunin agreed to continue to work for PMPL for a period of time.

D. Summersby and Fundy

(1) General trust terms

53 Summersby and Fundy were each established as irrevocable trusts on April 2, 1998. The terms of the trusts are similar.

54 The beneficiaries of Summersby are Mr. Dunin, his spouse, children and other issue, and any trust established for the benefit of any of them. When Summersby was established, Mr. Dunin had two children, aged 2 and 4.

55 The beneficiaries of Fundy are Mr. Garron, his spouse, his children and other issue, and any trust established for the benefit of any of them. Mr. Garron has two children, who were 31 and 35 years of age when Fundy was established.

56 In accordance with the trust indentures, distributions of income or capital could be made at any time in the trustee's discretion to one or more beneficiaries.

57 At a "division date," defined as 80 years from the date of the trust indentures or such date prior to that as selected by the trustee, the trust property is to be distributed as follows:

(a) for Summersby, if Mr. Dunin is living the trust property is to be distributed to him, and if he is deceased the property is to be distributed to his issue; and

(b) for Fundy, the trust property is to be distributed to the issue of Mr. Garron and his spouse.

58 Each of the trust indentures provides for the appointment of a protector, who has the ability to remove and

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59 Further, under each of the trust indentures the protector may be replaced at any time by a majority of the beneficiaries who have attained a certain age. That age is 35 in the case of Summersby, and 40 in the case of Fundy.

60 The trust indentures each specify that the protector has full discretion with respect to his powers. The relevant provision is reproduced below:

8.4 Protector not Agent. The Protector shall not be subject to any fiduciary duty in favour of any person in the exercise of his powers hereunder and shall not be regarded as a trustee of the Trust nor as the agent or nominee of any person. The exercise of any discretion by the Protector hereunder shall be absolute and uncontrolled. No provision of this Trust Indenture shall impose on the Protector a duty of any kind to act in accordance with any provision in this Trust Indenture. The Protector shall not be liable for any loss to the Trust Property arising out of decisions made or actions taken (or not taken) by the Trustee.

(2) The trustee, settlor and protector

61 The sole trustee of each Trust is St. Michael Trust Corp. ("St. Michael"). St. Michael is incorporated and licensed in Barbados and is regulated by the central bank of Barbados.

62 St. Michael began operations around 1987. At that time, its shares were owned by the partners of a Barbados accounting firm called Price Waterhouse. Subsequently, this firm merged with another Barbados accounting firm, Coopers & Lybrand, and thereafter St. Michael became owned by the partners of the merged Barbados firm which operated under the name PricewaterhouseCoopers. It is not exactly clear from the evidence when the merger took place but nothing turns on this. For convenience, I will refer to the firm both before and after the merger as PwC-Barbados.

63 In 2002, PwC-Barbados sold the shares of St. Michael to Oceanic Bank & Trust, a bank located in The Ba- hamas. In January 2008, it was sold again to Premier Bank International NV, a bank located in Curacao.

64 During the period of ownership by PwC-Barbados (1987 — 2002), the accounting firm operated St. Michael through its trust division. St. Michael had no employees of its own.

65 The persons at PwC-Barbados who in 1998 were in charge of Summersby and Fundy for St. Michael were Peter Jesson, a tax partner of PwC-Barbados and a director of St. Michael, and Jim Knott, who was the general manager of St. Michael.

66 Mr. Jesson left PwC-Barbados some time ago. He practiced with PricewaterhouseCoopers in Canada for a time, and then retired. It is not clear from the evidence when Mr. Jesson ceased to be involved with the Trusts.

67 Mr. Knott was involved with Summersby and Fundy until his retirement on June 30, 2003. His role was then

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68 Mr. Hutchinson is currently the president of St. Michael and a director. He also remains the person primarily responsible for Summersby and Fundy on behalf of St. Michael.

69 Mr. Hutchinson's background is as an accountant with Coopers & Lybrand in Barbados. In 1999, he moved into the trust division of PwC-Barbados and had only minor involvement with Summersby and Fundy before assuming Mr. Knott's role in 2003.[FN3] Mr. Hutchinson described his pre-2003 activity as "investment recording."

70 The settlor of each Trust was Paul Ambrose, a friend of Mr. Garron's who lives on St. Vincent, an island relatively close to Barbados.

71 The protector of each Trust is Julian Gill, another friend of Mr. Garron's who also lives on St. Vincent.

(3) Memoranda re intentions of trustee

72 Shortly after the Trusts were established, Mr. Jesson prepared an internal memorandum for each Trust that sets out the trustee's intentions. The memoranda are reproduced in full in Appendix III.

(4) Transactions undertaken by the Trusts

73 The appellants did not provide detailed evidence regarding all the transactions undertaken by the Trusts. The following is a general summary of the main transactions as far as I could determine.

Transactions by Summersby:

• April 1998 — acquisition of shares of 325 for nominal consideration;

• August 2000 — sale of majority of shares of 325 to Oak Hill for cash proceeds of $240,366,978. Sum- mersby retained an equity interest valued at $25,000,000;

• August 2000 — cash proceeds received from sale were deposited in a bank account at UBS (Bahamas) Ltd.;

• August 2000 — retained shares in 325 were distributed to a new trust with the same beneficiaries as Summersby. St. Michael was the trustee of that trust;

• Late in 2000 — approximately 90 percent of cash proceeds received by Summersby and income earned thereon was distributed to a new trust, Sandfield Settlement, with the same or similar beneficiaries as Summersby. The trustee of Sandfield was Abacus Bank and Trust Ltd., which was also owned by the partners of PwC-Barbados. Sandfield qualified as an international trust in Barbados with the result that it was exempt

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• 2000 — 2003 - the cash held by Summersby was invested in government bonds and similar instruments based on advice from Graham Carter of CAP Advisers Inc. in Toronto;

• Around 2004 — Cranston, Gaskin, O'Reilly & Vernon (CGOV) in Toronto became the investment manager for Summersby. The investment policy that CGOV followed was developed by Mr. Dunin and Colin Car- leton, a consultant based in Toronto.

Transactions by Fundy:

• April 1998 — acquisition of shares of 333 for nominal consideration;

• August 2000 — sale of shares of 333 for cash proceeds of $217,118,436;

• August 2000 — cash proceeds received from sale were deposited with Barclays Bank PLC (Barbados);

• Late in 2000 — approximately 90 percent of cash received by Fundy and income earned thereon was distributed to a new trust, Tidal 2000 Trust, with the same or similar beneficiaries as Fundy. The structure of Tidal 2000 was similar to Sandfield;

• Around 2001 — the property of Fundy became managed by a team of investment managers overseen by Doug Farley of Guardian Capital Advisers Inc. in Toronto.

74 The investments were not always made by Summersby and Fundy directly. At some point, the investments were made by corporations incorporated in the British Virgin Islands (BVI). Summersby and Fundy owned common and preference shares in those corporations.

75 Very few details about the BVI corporations were provided. According to one of the exhibits, the corporation that invested Fundy's property was incorporated on April 12, 2001, and Mr. Knott and Mr. Hutchinson were directors of this corporation at the time of Mr. Knott's retirement (Ex. R-1, Tab 135).

76 In addition to the above investments, part of the cash proceeds received by Summersby was transferred to other trusts for the benefit of Mr. Dunin and his family at Mr. Dunin's request. The funds were used for:

• a $20,000,000 real estate investment consisting of land adjacent to the Dunin family home near Toronto; and

• two real estate investments consisting of islands in the Bahamas, which were purchased for a total of $5,000,000. These properties are being held for the personal use of the Dunin family and for investment purposes.

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77 The appellants and the respondent each led evidence as to the fair market value of all the shares of PMPL on April 6, 1998, the date at which the common shares of PMPL were converted to fixed value preference shares.

78 In making the assessments, the Minister assumed that the fair market value of the preference shares of PMPL on April 6, 1998 was substantially greater than $50,000,000.

79 The valuations expert for the Minister, Howard E. Johnson of Campbell Valuation Partners Ltd., determined a value for all the shares of PMPL at $102,000,000. He did not value the different classes of shares.

80 I would mention that this valuation was subject to several restrictions, qualifications and assumptions. In particular, Mr. Johnson's report noted that certain information was provided to him by management and was not independently verified (Campbell Valuation Report, Appendix F).

81 The valuation expert for the appellants was Peter Hatges, president of KPMG Corporate Finance Inc. in To- ronto. He was of the opinion that the fair market value of all the shares of PMPL as at April 6, 1998 was $50,000,000.

82 Mr. Hatges' opinion was based largely on a valuation that he had prepared in 1998 for the purpose of assisting PMPL in setting the redemption amount of the preference shares as required by the share terms in the Articles of Amendment.

83 The valuations of both experts are far lower than the valuations used for purposes of subsequent arm's length negotiations. In December 1998, Mr. Dunin suggested a value of $400,000,000 to Sarna. In August 1999, a report by Arthur Anderson stated the following (Ex. R-1, Tab 69 — 2):

Based on our due diligence and further analysis, we continue to believe that Progressive could achieve an equity value of greater than $500 million.

84 Notwithstanding this difference, counsel for the Minister did not suggest that the value of PMPL was in excess of $102,000,000 as at April 6, 1998. I would note that the expert for the Minister provided a detailed explanation as to the reason for the large discrepancy. At the relevant time PMPL was a corporation in transition, and as it turned out PMPL was on the cusp of a meteoric rise that was not entirely foreseeable at April 6, 1998.

85 I would note in particular that the 1998 reorganization took place at a time that PMPL was in the process of launching two significant business lines for General Motors. The products were consoles referred to as the GMT800 and the GMT425. At the time of the 1998 reorganization, there were business risks associated with these new lines.

86 I now turn to the opinion of Mr. Hatges, whose factual assumptions were in part supported by the testimony of Mr. Dunin.

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87 I did not find Mr. Hatges' opinion to be convincing. Overall, his report and testimony appeared to significantly over-emphasize PMPL's business challenges and under-emphasize the business opportunities.

88 Mr. Hatges' view of the GMT800 and GMT425 new business lines is an example of this. It was Mr. Hatges' opinion that a potential purchaser would not put a positive value on the profit potential for either business line. I am not satisfied based on the evidence as a whole that this was a reasonable view to take.

89 The GMT800 contract had been awarded by General Motors approximately three years earlier, and at the time of the valuation the business line was a few months away from an expected launch. I accept that there were business risks associated with this business line at the relevant time, but I am not satisfied that Mr. Hatges gave sufficient weight to its profit potential.

90 As for the other new business line, the GMT425, this console was already in production but at the relevant time there was a pricing dispute between General Motors and PMPL. I accept that the pricing dispute would depress value, but I would conclude from the evidence as a whole that Mr. Hatges over-estimated the risk on this business line.

91 I would also mention that I have concerns about the independence of Mr. Hatges in relation to his opinion. Mr. Hatges was with KPMG and/or KPMG Corporate Finance Inc. at all relevant times. KPMG had a significant business relationship with PMPL as PMPL's auditors in 1998, and the firm had also provided tax advice to Mr. Dunin and Mr. Garron.

92 A further concern is that in providing an opinion for purposes of these appeals, Mr. Hatges was essentially defending the valuation that he had previously prepared for PMPL to assist with the 1998 reorganization.

93 I now turn to Mr. Johnson's opinion. Mr. Johnson's report and testimony impressed me as being unbiased and thorough.

94 The appellants criticized Mr. Johnson's opinion for taking into account information that was not available at the April 6, 1998 valuation date. One example is financial forecasts that were not available at the relevant time.

95 Although I accept that the use of subsequent information is a weakness in Mr. Johnson's methodology, it was appropriate for Mr. Johnson to take expected future profitability into account in some fashion. There is no reason for me to conclude that Mr. Johnson's use of this information led to an unreasonably high valuation.

96 Where does that leave us? The conclusion that I have reached is that the fair market value of all the shares of PMPL as at April 6, 1998 was substantially greater than $50,000,000. Since it is not necessary for this decision to determine an actual value, I will refrain from doing so.

F. Other facts

97 The gains realized by the Trusts on the sale to Oak Hill were not subject to income tax in Barbados.

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98 Summersby and Fundy were subject to income tax in Barbados on income earned in a year (not capital gains) unless the income was distributed in the year. As mentioned earlier, in 2000 the Trusts distributed all but a small portion of their investment income.

99 The preference shares of PMPL that were created in the 1998 reorganization were redeemable at the option of PMPL and their holders (DHI and GHL). If, however, one of the holders opposed a redemption of shares requested by the other, the preference shares would not be redeemed at that time. Instead all preference shares would begin to accrue a fixed dividend.

100 As mentioned earlier, the Minister introduced evidence from Mr. Johnson regarding the value of a hypothetical option to acquire all the shares of PMPL. The option was valued in the range of $2,400,000 to $21,600,000.

101 This evidence was provided to support the argument of the Minister that the common shares acquired by the Trusts had considerable value at the time that they were issued.

102 I have some difficulty in making the leap suggested by the Minister that the value of an option is a proxy for the value of the shares acquired by the Trusts. I could understand the analogy better if the preference shares of PMPL were not immediately redeemable and retractable (or dividend-bearing). One of key assumptions that Mr. Johnson relied upon in valuing the option is the length of time that the option could be exercised.

IV. Issue 1 — Are the Trusts resident in Canada under general principles?

A. Overview of treaty exemption

103 The appellants submit that the Trusts are entitled to the exemption provided in Article XIV(4) of the Treaty. It is worthwhile reproducing it again:

4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.

104 The expression, "resident of a Contracting State," has a defined meaning for purposes of the Treaty. Article IV(1) of the Treaty provides:

1. For the purposes of this Agreement, the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. The terms "resident of Canada" and "resident of Barbados" shall be construed accordingly.

105 In light of the definition, each of the Trusts is a "resident of Canada" for purposes of the Treaty if it is liable to taxation in Canada by virtue of residence or by one of the other listed criteria.

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106 The test is the same in determining whether the Trusts are resident in Barbados.

B. Are the Trusts resident in Barbados?

107 The appellants submit that the Trusts are resident in Barbados for purposes of the Treaty.

108 The Minister has not taken a view one way or the other on the issue, noting that the residence tie-breaker provision in the Treaty has not been engaged by an agreement of the competent authorities.

109 Since this matter has not been put in issue by the Minister, I will not decide the appeals on the basis of whether or not the Trusts are resident in Barbados.

110 Nevertheless, it may be useful to set out a summary of the evidence presented regarding Barbados residence.

111 The appellants introduced expert evidence in the form of testimony from Mary Mahabir, a Barbadian solicitor. In her opinion, the Trusts are resident in Barbados for the purposes of the Treaty because they are resident in Barbados according to its domestic tax law and they are subject to the most comprehensive basis of taxation there. In effect, this opinion was only in respect of the relevant law, as it should be. The necessary facts to support the opinion were assumed.

112 Ms. Mahabir prefaced her opinion regarding Barbados domestic tax law by stating that there is no statutory or judicial authority in Barbados concerning the residence of a trust.

113 Notwithstanding the lack of Barbados' judicial precedent, Ms. Mahabir was of the view that, under the common law, the residence of a trust is determined by reference to the place of residence of the trustees, upon the assumption that the control and administration of the trust was exercised in that place by resident trustees.

114 I would make two comments concerning this opinion.

115 First, Ms. Mahabir stated in cross-examination that her opinion was based on the assumption that St. Michael exercised its duty as trustee in a manner consistent with its fiduciary obligations and on the basis that St. Michael had sole control of the management and administration of the Trusts in Barbados. She did not conduct an independent investigation of this, and acknowledged that her opinion could differ if this was not the case.

116 Second, as for Ms. Mahabir's opinion as to the common law test, she refers to two authors in support.

117 In one reference, the author suggests that Barbados would follow the principles stated in the Canadian Thibodeau decision, referred to below, and in Canadian administrative policy. In this regard, Ms. Mahabir comments:

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[The above common law test] is consistent with the approach taken by Professor Gilbert Kodilinye, in his text Commonwealth Caribbean Trusts Law, who stated that "... These principles of interpretation of the residence of a trust [stated in the leading Canadian case of Thibodeau Family Trust v. The Queen and in Interpretation Bulletin IT-447 Residence of a Trust or Estate May 30, 1980*] are given full weight and acceptability in the Common- wealth Caribbean jurisdictions [...]."

* Not edited.

118 The other supporting reference referred to by Ms. Mahabir is of questionable relevance. Ms. Mahabir refers to an excerpt from Stanley & Clarke, Offshore Tax Planning (London: Butterworths, 1986), at 75. This appears to be a reference to a legislative test of residence, not a common law test.

119 For this reason, I question the relevance of the reference to Offshore Tax Planning. We are left, then, with the Canadian authorities referred to by Ms. Mahabir, namely Thibodeau and Canadian administrative practice.

120 Based on Ms. Mahabir's opinion and my findings of fact below, there appears to be a serious question about the correctness of the appellants' position that the Trusts are resident in Barbados for purposes of the Treaty. In light of the fact that the issue has not been engaged, I do not propose to comment further.

C. Are the Trusts resident in Canada?

(1) Overview

121 In determining Canadian residence for purposes of Article IV(1) of the Treaty, it must be considered whether the Trusts are liable to taxation under the Act by reason of residence or one of the other listed criteria.

122 The Minister submits that the Trusts are liable to taxation under the Act by reason of residence. This is the question to be determined.

123 In reference to the Act, there is no legislative definition of the term "resident" that is relevant here. Residence must therefore be interpreted in accordance with general principles.

(2) Positions of the parties

124 The appellants submit that, for purposes of the Act, the Trusts are not resident in Canada under general principles.

125 They submit, first, that the residence of a trust is determined by the residence of the trustee and that the actual management and control of the trust is not a relevant consideration.

126 The applicable judicial authority, it is submitted, is the decision of the Federal Court — Trial Division in

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127 According to the appellants, Thibodeau establishes that a trust is resident in the jurisdiction where its trustee resides. In this case, there is no dispute that St. Michael, the trustee, is resident only in Barbados.

128 Further, it is submitted that the court in Thibodeau concluded that the central management and control test (which has historically been applied in determining the residence of corporations) is inapplicable to trusts.

129 In the alternative, the appellants submit that the evidence establishes that the management and control of the Trusts was in fact with St. Michael.

130 The Minister, on the other hand, submits that Summersby and Fundy were controlled by Mr. Dunin and Mr. Garron, respectively. St. Michael was a compliant trustee, it is submitted, that implemented decisions made by or on behalf of Mr. Dunin, in respect of Summersby, and by or on behalf of Mr. Garron, in respect of Fundy.

131 It is submitted that the Trusts should be viewed as resident in Canada on these facts, following the central management and control test that has been accepted for corporations.

132 Counsel for the Minister acknowledges that the court in Thibodeau rejected the central management and control test in obiter. However, counsel notes that the judge had actually taken this factor into account in coming to the conclusion that the Thibodeau Family Trust was not resident in Canada. She suggested that Thibodeau is an "odd" case that is not of much assistance in these appeals.

133 As for other judicial authorities, the Minister relied on two decisions of the Special Commissioners in the United Kingdom: Wensleydale's Settlement Trustees v. Inland Revenue Commissioners, [1996] S.T.C. (S.C.D.) 241 (U.K. Special Commissioners) ("Wensleydale"); and Trevor Smallwood Trust v. Revenue & Customs, [2008] UKSPC SPC00669 (U.K. Special Commissioners) ("Smallwood"). My understanding is that Smallwood is currently under appeal after the decision of the Special Commissioners was reversed by the High Court of Justice for reasons unrelated to the issue here ( (Eng. Ch. Div.)).

(3) What is appropriate test of trust residence?

134 An appropriate starting point for the analysis is a consideration of the decisions referred to by the parties: Thibodeau, Wensleydale, and Smallwood.

135 For the reasons below, I have concluded that none of these decisions are of much assistance.

136 First, I cannot agree with the appellants' submission that Thibodeau sets out a test of trust residence based solely on the residence of the trustee.

137 It is clear from the reasons in Thibodeau that the judge did not purport to state a general test of trust residence.

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819 The decision was intended to be limited to the particular facts of the case. At page 6386:

In this case, [...] a judicial formula applicable to the facts of this case alone must be employed, [...].

138 I would also comment that there was nothing on the particular facts in Thibodeau that would support a finding that the trust was resident in Canada. In that case, the Minister had argued that one trustee resident in Canada effectively controlled the Thibodeau Family Trust, notwithstanding that there were two other trustees resident in Bermuda. The judge rejected this and made a factual finding that the Canadian trustee did not control the trust.

139 It would be wrong in my view to conclude that Thibodeau stands for the proposition that the residence of a trustee is always the deciding factor in determining the residence of a trust.

140 The Thibodeau decision is more relevant in these appeals for Gibson J.'s comment in obiter that rejects the application of a central management and control test to trusts.

141 The basis for rejecting this test is stated in Thibodeau at p. 6385:

The judicial formula for this respecting a corporation, in my view, cannot apply to trustees because trustees cannot delegate any of their authority to co-trustees. A trustee cannot adopt a "policy of masterly inactivity" as commented upon in Underhill on the Law of Trusts and Trustees, 12th Edition, page 284; and on the evidence, none of the trustees did adopt such a policy.

142 If the above comment is intended to be applicable in all cases, regardless of the particular facts and circumstances, I respectfully cannot agree with it.

143 It may be correct that trustees would generally be in breach of fiduciary obligations if they adopted a policy of "masterly inactivity." The difficulty that I have with applying the obiter comment in all circumstances, though, is that it presumes that trustees always comply with their fiduciary obligations.

144 This may have been a reasonable conclusion for Gibson J. to make on the particular facts before him, but it is not always the case.

145 The facts in a decision of the Federal Court of Appeal rendered shortly before Thibodeau provide an example where trustees may not have complied with their fiduciary duties: Robson Leather Co. v. Minister of National Revenue (1977), 77 D.T.C. 5106 (Fed. C.A.) ("Robson Leather Co.").

146 I would mention in particular that the argument accepted in Thibodeau that trustees should be presumed to comply with their fiduciary obligations was rejected by the Federal Court of Appeal in Robson Leather Co.. The decision was not referred to in Thibodeau.

147 Robson Leather Co. is a case about arm's length dealing, not residence. The issue was whether one trustee had

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148 Although the context in Robson Leather Co. is quite different, the decision is instructive because the amount of control exercised by the trustees was examined by the Court.

149 The relevant excerpt from the decision of Urie J. in Robson Leather Co. is set out from p. 5112:

[...] It was argued that it could not be assumed that the trustees would not carry out their duties as trustees in accordance with the legal obligations imposed on trustees to formulate their own judgments in matters affecting the trusts, but rather would follow Robson's instructions merely because he had the power to cause the retirement of either or both of the other two trustees if they did not do so.

The learned Trial Judge refused to accept this submission for the reasons set out hereafter:

In my opinion, however, in deciding the larger issue before me. [sic] I must look at the practical and business reality of the operation of the trust. By demanding retirement of trustees, or even the threat of such demand, or the knowledge in the co-trustees that the ultimate power was always in Mr. Robson, I have no doubt that Mr. Robson, for practical and legal purposes, controlled the trust and, therefore, controlled Robson Leather. I add the caveat here, that share control alone, (or absence of it), is not necessarily conclusive; it is a factor to be considered in determining questions of "arm's length".

With this conclusion I agree [...]

150 With respect to the contrary view expressed by the judge in Thibodeau, it does not make sense in my view to assume that in every case trustees will comply with their fiduciary obligations. The particular facts and circumstances must be considered.

151 For these reasons, in my view the Thibodeau decision does not form a solid foundation for rejecting the Minister's position that residence should be determined by a central management and control test.

152 I now turn to Wensleydale and Smallwood.

153 The Minister's argument with respect to these decisions can be briefly dealt with. Although counsel acknowledged that the test of residence that was relevant in these decisions was a legislative rather than common law test, she suggests that the decisions are nevertheless relevant because the courts were influenced by the central management and control test.

154 I do not agree with this submission. I am unable to find any assistance in these decisions in determining an appropriate common law test of trust residence.

155 Having concluded that the judicial decisions referred to by both counsel do not provide much assistance, I

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156 In view of this lacuna, how should the issue of trust residence be approached?

157 As mentioned earlier, I have concluded that the Thibodeau decision is insufficient authority for me to reject a central management and control test to determine trust residence. In fact, as I will explain, in my view there are very good reasons why the judicial test for residence that has been developed in a corporate context should also apply to trusts.

158 First, the basis for applying this test to corporations is equally applicable in a trust context. In one of the most quoted passages in Canadian tax jurisprudence, the reasons for adopting this test were stated by Lord Loreburn in De Beers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455 (U.K. H.L.), at 458:

... In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly C.B. and Huddleston B. in the Calcutta Jute Mills v. Nicholson and the Cesena Sulphur Co. v. Nicholson ((1876) 1 Ex. D. 428), now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides.

It remains to be considered whether the present case falls within that rule. This is a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading.

[Emphasis added.]

159 Although there are significant differences between the legal nature of a trust and corporation, from the point of view of determining tax residence, the characteristics are quite similar. The function of each is, at a basic level, the management of property.

160 Second, adopting a similar test of residence for trusts and corporations promotes the important principles of consistency, predictability and fairness in the application of tax law.

161 The development of a test of trust residence in Canada has been left by Parliament to the courts. If courts decide to develop a totally different test of residence for trusts than they have for corporations, there should be good reasons for doing so. I am not satisfied that there are good reasons.

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162 I conclude, then, that the judge-made test of residence that has been established for corporations should also apply to trusts, with such modifications as are appropriate. That test is "where the central management and control actually abides."

163 Before leaving this issue, I would mention that there are a number of very early Canadian decisions that concluded that income from a trust was taxable in Canada if the trustee was resident in Canada. These decisions include: McLeod v. Canada (Minister of Customs & Excise) (1926), [1917-27] C.T.C. 290, 1 D.T.C. 85 (S.C.C.), Holden v. Minister of National Revenue (1933), [1928-34] C.T.C. 129, 1 D.T.C. 243 (Canada P.C.), and Holden v. Minister of National Revenue (1932), [1928-34] C.T.C. 127, 1 D.T.C. 234 (S.C.C.).

164 Neither counsel referred to these decisions and I think they were right in not doing so. These decisions have outlived their usefulness because the legislative scheme is much different today than it was when these cases were decided.

165 The reason that the courts focussed on the residence of the trustee in the earlier jurisprudence was that the tax legislation at the time did not purport to impose tax on trusts. Instead, either the trustee or the beneficiaries were subject to tax on the trust income.

166 The legislative scheme in respect of the taxation of trusts has evolved over time. Under the scheme that is applicable in these appeals, a trust is the object of the tax, albeit with the recognition that the involvement of the trustee is necessary for certain purposes. In essence it is a hybrid. This is reflected in subsections 104(1) and (2) of the Act, which are reproduced in an appendix.

167 I agree with Gibson J.'s comment in Thibodeau that section 104 does not assist in determining trust residence (at 6377).

168 I would also mention that the legislative scheme that was in effect when Thibodeau was decided was less clear on the point than it is now.

169 At the time of Thibodeau, section 104(1) provided that a reference in the Act to a trust "shall be read" as a reference to the trustee. Effective in 1998, this subsection was amended to provide that a reference in the Act to a trust "shall, unless the context otherwise requires, be read to include a reference to the trustee."

170 For these reasons, I conclude that the central management and control test should apply in determining the residence of trusts for purposes of the Act. It may be argued that a phrase such as "mind and management" may be more descriptive, but the term "central management and control" has the advantage of promoting consistency and certainty. It is desirable that the test for corporations and trusts be as similar as the circumstances allow.

(4) What does management and control mean?

171 Before applying a management and control test to the facts of this case, it is useful to consider how other

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172 To my knowledge, the management and control test has to date only been applied in a corporate context. A review of judicial decisions in this area suggests that management and control has usually been found to reside in a board of directors, even though the directors may be under significant influence from shareholders or others.

173 This is evident from the few Canadian decisions that are relevant. The most notable may be the decision of the Federal Court of Appeal in Birmount Holdings Ltd. v. R. (1978), 78 D.T.C. 6254 (Fed. C.A.), at para. 33.

174 In the United Kingdom, the issue was quite recently considered by the Court of Appeal in Wood v. Holden, [2006] S.T.C. 443 (Eng. C.A.).

175 The issue in Wood v. Holden was whether a Netherlands corporation, Eulalia, was a resident of the United Kingdom under the central management and control test. The Court of Appeal decided that Eulalia's residence was in the Netherlands, where its managing director, ABN AMRO, was located.

176 The threshold level of decision-making that the Court of Appeal accepted from the managing director appears to be low. In particular, the absence of information by ABN AMRO to make an informed decision does not appear to be a significant factor.

177 The conclusions of Lord Justice Chadwick are stated in paragraphs 40 and 41:

40. In my view the judge was correct to hold that the only conclusion open to the special commissioners, on the facts which they had found, was that Eulalia was resident in the Netherlands. The special commissioners made two findings of fact which, as it seems to me, lead necessarily to that conclusion. The first (at paragraph 119 of their decision) was that "the directors of Eulalia ... were not by-passed nor did they stand aside since their representatives signed or executed the documents". That finding takes this case outside the class exemplified by the facts in Unit Construction Co Ltd v Bullock. The second — implicit in the finding that "their representatives signed or executed the documents", but made explicit in the observation (at paragraph 134 of the special commissioners' decision) that "From the viewpoint of Eulalia we find nothing surprising in the fact that its directors accepted the agreement prepared by Price Waterhouse ..." — was that ABN AMRO (the managing director of Eulalia), through Mr Fricot and Mr Schmitz, did sign and execute the documents (including the purchase agreement); and so must, in fact, have decided to do so.

41. Those two facts make it impossible to treat this case as one in which ABN AMRO, as managing director of Eulalia, made no decision. There was no evidence that Price Waterhouse (or anyone else) dictated the decision which ABN AMRO was to make; although, as the special commissioners and the judge pointed out, Price Waterhouse intended and expected that ABN AMRO would make the decisions which it did make. There was no basis for an inference that Price Waterhouse (or anyone else) dictated to ABN AMRO what decision it should take; and it is inherently improbable that a major bank (or its trust company) would allow its actions to be dictated by a client's professional advisers (however eminent). On a true analysis the position was that there was no reason why ABN AMRO should not decide to accept (on behalf of Eulalia) the terms

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upon which the Holdings shares were offered for sale by CIL; and ample reason why it should do as it was expected it would.

178 If paragraph 40 above had stood alone, without paragraph 41, the management and control test would appear to be usually satisfied by the simple fact of signing documents.

179 The comments in paragraph 40 are tempered, however, by the comments that follow. In paragraph 41, the judge notes that the actions of ABN AMRO were reasonable, and that no one had dictated those actions.

180 It is difficult, and perhaps unwise, to express a definitive statement of principle based on judicial decisions on management and control, which are quite fact dependent. It is probably fair to conclude, however, that in order to find that management and control is located with shareholders, courts generally require something more than evidence of shareholder influence.

181 As far as judicial decisions in a trust context, it is relevant to consider Smallwood.

182 The Smallwood case involved a trust created by Mr. Smallwood, a U.K. resident, for the benefit of he and his family. In order to avoid U.K. tax on a sale of shares by the trust, the trustee was changed to a Mauritius corporation for a short period of time. The trust argued that it was entitled to an exemption in the relevant treaty that is similar to the exemption that is at issue here.

183 The decision of the Special Commissioners turned on the application of a treaty tie-breaker for determining residence. That test was the "place of effective management" (POEM).

184 Effective management was found to have remained in the United Kingdom, notwithstanding that low level decisions were made by the trustee in Mauritius. At para. 140, the Special Commissioners stated that the administration of the trust had moved to Mauritius but the "key" decisions were made in the United Kingdom.

185 The decision of the Special Commissioners is useful for its consideration of effective management of a trust where the choice of trustee was purely a tax-driven decision.

186 It should be noted that this decision was reversed by the High Court of Justice on unrelated grounds. I understand that a further appeal is pending.

(5) Application to these appeals

187 I turn now to the application of a management and control test to the particular facts in these appeals.

188 The relevant time at which residence should be determined is when the shares were disposed of by the Trusts. It is appropriate to consider the facts and circumstances at that time, but it also useful to look at them over a longer period. I have placed little weight, though, on facts and circumstances after the assessments were issued.

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189 Based on the evidence as a whole, I find that St. Michael was selected by Mr. Dunin and Mr. Garron, or advisers acting on their behalf, to provide administrative services with respect to the Trusts. Its role was to execute documents as required, and to provide incidental administrative services. It was generally not expected that St. Mi- chael would have responsibility for decision-making beyond that.

190 I would note that there is no explicit evidence that establishes the limited nature of St. Michael's role. In the context of this tax-motivated arrangement, which appears to have been carefully planned and implemented with considerable assistance from lawyers, one would not expect there to be such evidence. The conclusion is based on the evidence as a whole, including the failure of the appellants to provide satisfactory evidence establishing otherwise.

191 Although the arrangement with respect to St. Michael's role was likely unwritten, it was effectively enforceable through the ability of the protector to replace St. Michael as trustee through the protector mechanism. That mechanism included the ability of Mr. Dunin and Mr. Garron, with their spouses, to replace the protector.

192 The general nature of the decision-making that would be required to administer the Trusts would have been understood at the Trusts' inception. Such decisions included the purchase and sale of the Trusts' interests in PMPL, the investment of the cash proceeds received upon the sale, the making of distributions to the beneficiaries, and taking appropriate action to minimize the tax burden of the Trusts.

193 I mention taxes in particular because the overall structure seems to involve a large number of trusts and corporations.

194 What was the arrangement in regard to these decisions? I find that, more likely than not, St. Michael had agreed from the outset that it would defer to the recommendations of Mr. Dunin and Mr. Garron. Further, I find that Mr. Dunin and Mr. Garron had understood this to be the arrangement from the outset.

195 Below are some of the factors that I have taken into account in reaching the conclusion that St. Michael's role was limited.

196 First, shortly after the Trusts were formed, Mr. Jesson prepared internal memoranda setting out the intentions of the trustee. It seems clear from these documents, which are reproduced in an appendix, that there was an understanding that St. Michael's role would be more limited than that contemplated by the trust indentures.

197 In particular, the memoranda suggest that St. Michael would act in an administrative capacity only with respect to the sale of PMPL and that St. Michael would not make distributions to the family members of Mr. Dunin or Mr. Garron without their respective consents.

198 Second, there was very little evidence as to the how the investment of the cash proceeds was handled, but what evidence there was suggests that it was under the direction of Mr. Dunin and Mr. Garron for Summersby and Fundy, respectively.

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199 The evidence revealed that trusts managed by St. Michael often used the investment advisers that the beneficiaries used. It was suggested that this was desirable to coordinate the investment strategy.

200 The employment of this practice not only enabled a coordinated investment strategy, it also had the result that the beneficiaries could choose the investment advisers for the trusts, be kept informed by the advisers directly, and give directions to the advisers. Further, the advisers could follow these directions without trustee approval, within the investment parameters provided to them. In short, the beneficiaries could for all intents and purposes direct the investment activity.

201 It is likely that Summersby and Fundy operated in this manner while they invested the funds directly. There is also no reason for me to think that the investment of the funds by the BVI corporations was handled differently.

202 I would also comment that I was not satisfied from the evidence that Mr. Dunin or Mr. Garron had used the initial investment advisers (Mr. Carter and Mr. Farley, respectively) for their personal investments prior to the sale of PMPL. It may have been that Mr. Dunin and Mr. Garron selected them primarily for the Trusts' investments, rather than their own.

203 In respect of Mr. Carter, he had prior involvement with PMPL due to his insurance expertise, and I note that a proposal to manage investments was provided by him to Mr. Dunin and DHI in April, 2000 (Ex. R-1, Tab 85).

204 In respect of Mr. Farley, the following testimony in Mr. Garron's examination-in-chief is instructive (p. 391-392 of transcript):

Q. It is an agreed fact that you and Berna and the Garron Family Trust received $25 million from Oak Hill, correct?

A. Yes.

Q. What did you, Berna and the Garron Family Trust do with that $25 million?

A. We gave some to our two boys and then we established a foundation.

Q. What sort of foundation is that?

A. A charitable foundation, mostly medical.

Q. Did you keep any for yourself?

A. Yes.

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Q. What have you done with the funds you kept for yourself?

A. I invested them, mostly in equities.

Q. Do you use investment advisers for those personal investments?

A. No, not to pick the investments, no.

Q. You don't?

A. No.

Q. Do you any use any investment advisers at all, personally?

A. Yes. I gave some of the funds to Guardian Capital.

205 Third, as for the tax strategies implemented by Summersby and Fundy, Thorsteinssons likely took a lead role in coordinating the team of professional advisers. Thorsteinssons acted as tax advisers to the Trusts, Mr. Dunin and Mr. Garron. There is no doubt that the tax-minimization plans developed by the team of tax advisers, including PwC-Barbados, were under the direction, explicit or otherwise, of Mr. Dunin for Summersby and Mr. Garron for Fundy.

206 Fourth, the appellants introduced virtually no documentation that would support their view that St. Michael took an active role in managing the Trusts. Most of the documentation introduced by the appellants consisted of formal agreements, trustee accounts and tax returns.

207 Fifth, the documentary evidence introduced by the Minister, which includes four binders of correspondence and other documents, is generally consistent with the above conclusion. In particular, there is very little documentary evidence that St. Michael had any involvement in the affairs of the Trusts other than in the execution of agreements, and in administrative, accounting and tax matters.

208 Another relevant consideration is that St. Michael was, from 1998 to 2002, an arm of an accounting firm. It is likely that St. Michael was formed to provide services that were complementary to its core practice areas, and in particular tax services. It appears that PwC-Barbados provided significant tax advice regarding the overall offshore structure of the property held by the Trusts, and that PwC-Barbados assisted PwC in Toronto in attempting to provide further tax services.

209 Although PwC-Barbados had significant expertise in accounting and tax matters, whether they had expertise in managing trust assets is questionable from the evidence.

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210 I would note in particular an email sent in 1999 from Brandon Fahy of PwC-Barbados to Dean Levitt of PwC in Canada (Ex. R-1, Tab 70). It suggests that Mr. Garron may have been viewed internally as the "client" in respect of Fundy. The email is reproduced in full:

We have a Canadian resident client who will likely be receiving a large amount of money in their Barbados Trust as a result of an estate freeze (i.e.sale of Canco shares by the Barbados trust).

The client may contact you for information on investment managers as part of your role in the Investment Ad- visory Group. He basically needs some guidance for qualified offshore managers and what PwC Toronto might be able to do. However, the Trust will remain a non-resident of Canada and depending on the proposed Canadian Tax legislation on Trusts, will remain exempt from Canadian taxation. He currently has Thorsteinsson's as tax advisers to the corporate sale.

Let me know if he contacts you. His name is Myron Garron. Peter Jesson assisted with the estate freeze along with Jim Knott.

211 I turn now to a consideration of the oral testimony. For the reasons below, I find that it is not inconsistent with the conclusion about St. Michael's limited role.

212 The only witnesses that were called by the appellants in regards to management and control of the Trusts were Mr. Dunin, Mr. Garron and Mr. Hutchinson.

213 The main problem with this testimony is that it did not provide a very clear picture as to how the Trusts operated. The testimony of Mr. Dunin and Mr. Garron was self-interested and was understandably less than full and complete in my view.

214 As for Mr. Hutchinson, he had very little knowledge of the Trusts during the most relevant period when St. Michael was owned by PwC-Barbados. He was not intimately involved prior to his taking over from Mr. Knott in July 2003.

215 There are many other individuals who could have shed light on this issue. The list of possible witnesses includes:

• Paul Gibney, tax lawyer from Thorsteinssons in Toronto. Mr. Gibney likely would have been an important witness because he appeared to be a main point of contact for St. Michael and for Mr. Dunin and Mr. Garron with respect to all matters involving the Trusts;

• Stephen Bowman, tax lawyer formerly of Thorsteinssons in Toronto. It appears that Mr. Bowman played an important role in connection with the 1998 reorganization. In particular, Mr. Bowman travelled with Mr. Dunin to Barbados to interview potential trustees. One of the persons who they met with was Mr. Jesson;

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• Peter Jesson, a former tax partner of PwC-Barbados. Mr. Jesson was the PwC-Barbados partner in charge on behalf of St. Michael when the Trusts were created, and he prepared the memoranda of trustee intentions;

• Jim Knott, the former general manager of St. Michael who had the day to day responsibility for the Trusts on behalf of St. Michael;

• Tim Carroll, of Arthur Anderson in Chicago, who was the lead adviser on the sale of PMPL. He could have testified as to whether he had any discussions with St. Michael during the sale process;

• Doug Farley of Guardian Capital in Toronto, who was the lead manager of investments for Fundy;

• A representative of Mercers, who led the process to select the investment managers for Fundy;

• Graham Carter of CAP Advisers in Toronto, who provided investment advice regarding Summersby's investments from 2000 to 2003;

• Colin Carleton, a consultant to Summersby who worked with Mr. Dunin to develop an investment strategy around 2003;

• A representative of CGOV, who became the investment manager for Summersby in 2003; and

• Julian Gill, a friend of Mr. Garron's and the protector of the Trusts.

216 I was informed that Mr. Knott currently lives in Spain and that he did not want any involvement with St. Michael after his retirement in 2003. If Mr. Knott's testimony was expected to be helpful to the appellants, I question whether further steps might have been taken to obtain his evidence. Nevertheless, there were many other potential witnesses who also did not testify.

217 I am troubled that no further witnesses were called. It leaves me to infer that none of them would have provided evidence that was favourable to the appellants.

218 I now turn to the oral testimony that was presented, starting with Mr. Dunin.

219 Mr. Dunin is an impressive businessman, whose accomplishments with respect to PMPL speak for themselves.

220 It is very likely that Mr. Dunin had a good conceptual understanding of St. Michael's limited role.

221 Although Mr. Dunin testified that it was his understanding that St. Michael controlled the Trusts, I find the

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222 Mr. Dunin explained his involvement in the PMPL sale process by saying that he was negotiating a sale of PMPL and not the shares of the holding companies held by the Trusts.

223 This explanation does not make any sense given the large amount of Canadian tax that would have been payable if the assets of PMPL, or the shares of PMPL, were sold directly. Mr. Dunin would have known that he was negotiating a sale of shares by the Trusts.

224 As for the ability to replace St. Michael, this could be done by asking the protector to do it, or by replacing the protector if he was not compliant. There was no evidence to suggest that the protector believed his role to be other than assisting Mr. Dunin and Mr. Garron in their control of the Trusts.

225 In his testimony, Mr. Dunin gave the impression that he had little interest in what St. Michael was actually doing vis a vis Summersby and in knowing the persons at St. Michael who were involved with Summersby.

226 I do not find this apparent lack of interest to be helpful to the appellants. If St. Michael truly had a substantive role to play in managing Summersby, Mr. Dunin likely would have been very interested in what St. Michael was doing and in ensuring that the persons involved with Summersby were competent to manage it. As mentioned earlier, there is no evidence that PwC-Barbados' personnel were qualified to take on a trustee's duties.

227 Mr. Dunin testified that Mr. Garron dealt with St. Michael with respect to Sarna and that Mr. Carroll dealt with St. Michael with respect to Oak Hill. There is no evidence that these men, or anyone else, kept St. Michael informed of anything in connection with these transactions except when it was necessary for agreements to be signed.

228 I would comment specifically about the bank account used by Summersby, which was with UBS in the Ba- hamas. Mr. Dunin testified that he was not aware of this bank account. It is not clear to me whether Mr. Dunin meant that he was not aware of the name of the bank or the specific bank account number. In any event, the evidence suggests that the contact for UBS was made in Toronto (Ex. R-1, Tab 102).

229 In terms of Mr. Dunin's other testimony, the general impression that I had was that, in key areas, Mr. Dunin's words appeared to be so carefully chosen that his answers were often non-responsive. I had no confidence that the answers he gave provided a complete picture.

230 For example, in cross-examination the following exchange took place in reference to the Sarna negotiations which were undertaken by Mr. Dunin (Transcript, p. 219):

Q. [...] To achieve tax efficiency and avoid paying tax, '325 and '333 had to sell the shares of PMPL to the purchaser?

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A. I do not believe we avoided tax. This transaction did not go through but, on the next transaction, the tax was paid. I have a difficulty in saying that we would not pay tax if the structure took place, because it was a similar purchase that Oak Hill took place and the tax was paid.

231 The above answer responds to the suggestion that tax was avoided. It appears that the answer was referring to the remittance of withholding taxes pursuant to section 116. The answer, though, deflects from what was being asked, which was that the Sarna sale had to take place at the trust level in order to achieve tax efficiency.

232 Further, Mr. Dunin was asked the following in respect of the Sarna letter of intent:

Q. Was it Sarna's idea to purchase the four shareholders of PMPL?

A. I believe so, yes. This is their letter.

233 Mr. Dunin was in charge of the negotiations with Sarna. It makes no sense that Sarna would of its own voli- tion offer to purchase the shares of 325 and 333 rather than shares of PMPL. I find the answer to be disingenuous.

234 I now turn to the testimony of Mr. Garron.

235 Mr. Garron's testimony was quite brief and it did not shed much light on how Fundy was managed or controlled.

236 Like Mr. Dunin, Mr. Garron gave the impression that he had little interest in what St. Michael was doing. He stated that his occasional lunches with Mr. Knott when he was vacationing in Barbados were in essence social occasions. This is inconsistent with what one would expect if St. Michael was to have a greater role in the management of Fundy's assets.

237 I do not believe that Mr. Garron expected St. Michael to have control over Fundy's assets. I note, for example, that the correspondence from Mr. Fahy noted above suggested that Mr. Garron may follow up concerning "qualified offshore managers" for the sale proceeds to be received by Fundy (Ex. R-1, Tab 70).

238 It is perhaps worthwhile mentioning that Mr. Garron expressed surprise that PMPL was being valued at $400,000,000 for purposes of the Sarna negotiations. I accept this testimony because Mr. Garron was not actively involved in PMPL in 1998 and his relationship with Mr. Dunin was strained at the time.

239 I now turn to the testimony of Mr. Hutchinson.

240 In his testimony, Mr. Hutchinson purported to testify as a representative of St. Michael. I found this to be quite confusing because it was often difficult to determine whether Mr. Hutchinson was speaking from his own personal knowledge or from what he had read in one of St. Michael's files.

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241 Mr. Hutchinson would have had considerable direct knowledge as to how St. Michael operated from the time that he took over from Mr. Knott in July 2003. At this point, however, St. Michael was no longer owned by PwC-Barbados. In respect to the prior period, it is not clear how much direct knowledge he had. As for the Trusts, Mr. Hutchinson stated that he had reviewed the files that St. Michael had with respect to the Trusts and he stated that he had spoken to Mr. Knott in 2003 prior to taking over from him.

242 Mr. Hutchinson testified as to how St. Michael generally performs its duties and he stated that St. Michael was aware of its fiduciary obligations with respect to trusts and that it generally exercised due diligence.

243 Aside from the problem that Mr. Hutchinson may have had little personal knowledge during the most relevant period, I also found that Mr. Hutchinson's testimony lacked sufficient detail to be persuasive. For example, Mr. Hutchinson stated that St. Michael undertook due diligence but he provided very little detail as to what was actually done in the way of due diligence.

244 Based on the evidence as a whole (and the lack thereof), it is likely that the due diligence that St. Michael undertook was quite limited.

245 I would note in particular that Mr. Dunin testified that Summersby did not have an investment strategy prior to his development of one with Mr. Carleton in 2003. This suggests that proper due diligence, as one would expect from an experienced professional trustee, was not carried out after the sale proceeds were received from Oak Hill.

246 Mr. Hutchinson testified that the directors of St. Michael had to ratify actions proposed to be taken, or were taken, on behalf of trusts. Further, he testified that the directors were spoken to in advance of the meetings to give them the necessary information so that they could approve the transactions. The approval process took place either before or after the transactions were completed.

247 Approval by a board does not, by itself, establish due diligence. The fact that there is no evidence that St. Michael had much information about the transactions that they were implementing suggests that the directors were aware that St. Michael's role with respect to the Trusts was to be a limited one, essentially administrative in nature.

248 Mr. Hutchinson testified that he was uncomfortable with CAP advisers because its investments appeared to be ultra conservative. When the evidence is looked at as a whole, it is questionable whether Mr. Hutchinson formed this view on his own initiative, or only after he was advised by Mr. Gibney of Thorsteinssons that Mr. Dunin was working with Mr. Carleton on developing an investment strategy.

249 Mr. Hutchinson testified that he believed that no investment reports for Summersby or other Dunin trusts were given to Mr. Dunin. I find this testimony to be disingenuous. It defies common sense that Mr. Dunin would not be provided with the investment results of the Dunin trusts. Mr. Dunin confirmed that he did see the reports.

250 Further, some of Mr. Hutchinson's testimony calls into question how knowledgeable he was concerning trust

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251 Mr. Hutchinson's testimony concerning the memoranda of trustee's intentions that was prepared by Mr. Jesson is also of concern. According to his testimony, the memoranda are consistent with the trustee's duty to act in the best interest of the beneficiaries as a whole because the interests of Mr. Dunin and Mr. Garron are the same as the interests of the other beneficiaries of Summersby and Fundy, respectively. This makes no sense and I do not find the answer to be credible.

252 Based on the evidence as a whole, I conclude that the management and control of both Trusts was located in Canada, namely with Mr. Dunin for Summersby and with Mr. Garron for Fundy. These are the individuals who made the substantive decisions respecting the Trusts, either directly or indirectly through advisers that they directed.

253 Counsel for the appellants submitted that, as a result of fiduciary duties imposed on St. Michael by law, it should be presumed St. Michael did whatever was required to make sure the transactions undertaken by the Trusts were in the best interests of beneficiaries.

254 I do not accept this submission.

255 If the trustee of these Trusts had been a well-recognized trust corporation with significant experience and expertise in managing trusts, then such a presumption may make some sense. However, there is no evidence that PwC-Barbados, which operated St. Michael, possessed either expertise or significant experience.

256 I would also mention that, under the trust indentures, the liability of the trustee was generally limited to wilful neglect or default. There likely was no practical concern about legal liability.

257 Counsel also suggested that it was not reasonable to expect that the Trusts would participate in the process of selling PMPL because 325 and 333 only owned non-voting shares in PMPL.

258 I also disagree with this submission. 325 and 333 may only have owned nonvoting shares in PMPL but these shares represented the bulk of the value. From any common sense point of view, Mr. Dunin was conducting the negotiations on behalf of the Trusts.

259 Counsel for the appellants submits that the distinction made in Wood v. Holden between "influence" and "dictating" is applicable in these appeals.

260 I do not agree with this.

261 In Wood v. Holden, it was found as a fact that no one had dictated the decisions made by the managing di-

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819 rector. That conclusion, however, was based on a substantial amount of evidence as to how decisions were made. The following passage from the decision of the lower court was referred to by the Court of Appeal, at para. 31:

[...] They [Mr. and Mrs. Wood] showed that, from the time when Eulalia was acquired by CIL, its managing director was [ABN AMRO] Trust, a large Dutch company with offices in Amsterdam. They showed resolutions and consequential actions being taken in the offices in Amsterdam. They accepted that what Eulalia was doing was part of a tax scheme which was being superintended by Price Waterhouse in their Manchester offices. They called evidence from the Price Waterhouse partners who at the time were heads of the firm's departments for corporate finance and for tax in Manchester. They produced a witness statement from the head of the legal department at [ABN AMRO] Trust [Mr Wirix]. They were willing for the appeal to be adjourned in order that the witness could attend in person to be available for cross-examination. They produced all the documents which existed (so I assume, and no one has suggested that any documents were suppressed). The documents showed guidance and influence coming from Price Waterhouse, but no more than that. Mr and Mrs Wood were able to point out that the Netherlands Revenue had stated to the United Kingdom Revenue that the actual management of Eulalia was carried out by [ABN AMRO] Trust, 'meaning that the taxable domicile of Eulalia Holding BV is located in the Netherlands'. Surely at that point they can say: 'We have done enough to raise a case that Eulalia was not resident in the United Kingdom. What more can the Special Commissioners expect from us? The burden must now pass to the Revenue to produce some material to show that, despite what appears from everything which we have produced, Eulalia was actually resident in the United Kingdom.'

262 In contrast, in these appeals the appellants led very little evidence as to the formation and operation of the Trusts. In these circumstances, there is no basis for concluding that St. Michael did not agree to assume a limited role in the management of the Trusts.

263 In spite of the very able arguments of counsel, I am not able to agree with these submissions.

264 Before leaving this issue, I would comment briefly about the relevance of the Smallwood decision.

265 Smallwood was concerned with the place of effective management, which was a term used in the tie-break provision of the relevant treaty. The test appears to be very similar to management and control.

266 It is significant in my view that in Smallwood the Mauritius trustee was put in place for a short time and only to implement a single purchase and sale of shares. The facts in the present appeals are so different that the Smallwood decision is of little assistance.

267 For these reasons, I conclude that the central management and control of the Trusts was located in Canada and that the Trusts were resident in Canada for purposes of the Treaty.

268 This conclusion is sufficient to dispose of these appeals, but I will comment on some of the other issues raised.

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819 V. Issue 2 — Are the Trusts resident in Canada by virtue of section 94?

A. Overview

269 Section 94 of the Act applies to certain non-resident trusts and their beneficiaries. For this purpose, non-resident trusts include trusts that would be nonresident if the Act were read without reference to section 94.

270 The Minister submits that section 94 applies to Summersby and Fundy with the result that they are deemed to be persons resident in Canada.

271 The consequences, according to the Minister, are that: (1) the capital gains realized by the Trusts on the sale of shares of 325 and 333 are subject to tax in Canada under the Act, and (2) the Trusts are not eligible for the exemption in Article XIV(4) of the Treaty.

272 The appellants take issue with the Minister's position on the application of both section 94 and the Treaty exemption. The two issues will be discussed separately.

B. Does section 94 apply?

(1) Introduction

273 Section 94 is an unusual provision and it is useful to understand the background that led to its enactment.

274 In the 1966 Report of the Royal Commission on Taxation, the Commission commented on the difficulty that could arise in attempting to tax income earned by a non-resident trust. Below is an excerpt from page 536 of the Report:

Non-Resident Trusts. It is quite possible that some taxpayers would endeavour to avoid Canadian tax liabilities through the creation of non-resident trusts which would receive income and accumulate it for Canadian beneficiaries. This may present a particular challenge to the Canadian tax authorities in view of the possibilities for tax deferment under such an arrangement. If the interests of the Canadian beneficiaries were contingent or were subject to the exercise of discretion by trustees, it may be difficult to devise a method for taxing such income in Canada on an accrual basis. However, to the extent that income of a non-resident trust was payable to a Canadian beneficiary or was vested in a Canadian beneficiary, we would recommend that it should be treated as direct investment income and subjected to tax under the rules we have recommended for other foreign direct investment income.

275 The version of section 94 that is relevant in these appeals tackles the problem identified by the Commission by providing for a different scheme of taxation depending on whether the interest of the beneficiary is discretionary or not.

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276 Reproduced below is a general description of how the relevant version is intended to operate that was prepared by the Department of Finance:[FN4]

Section 94 uses two different methods to impose tax, depending on the terms of the non-resident trust.

If the amount to be distributed to a beneficiary of the trust depends upon a discretionary power, paragraph 94(1)(c) deems the trust to be resident in Canada for the purposes of Part I of the Act and deems its taxable income for tax purposes to be the total of its Canadian source income and its foreign accrual property income, if any. Each beneficiary is jointly and severally liable to pay the Canadian tax of the trust. However, the liability can be en- forced against a particular beneficiary only to the extent that the beneficiary has received a distribution from the trust or proceeds from the sale of an interest in the trust.

For other non-resident trusts to which section 94 applies, paragraph 94(1)(d) provides that it is to be treated in much the same manner that a non-resident corporation is treated. If a Canadian resident beneficiary holds an interest in the trust with a fair market value equal to 10% or more of the total fair market value of all beneficial interests in the trust, the trust is deemed to be a controlled foreign affiliate of the beneficiary. Consequently, the foreign accrual property income rules apply to the trust and the beneficiary, requiring the beneficiary to include a portion of the foreign accrual property income of the trust in income. [...]

277 The method described above in paragraph 94(1)(c) is the one that is engaged in these appeals. The interests of the beneficiaries of Summersby and Fundy depend on a discretionary power.

(2) Application to facts

278 The Minister submits that the Trusts are subject to section 94 because they each have acquired property, directly or indirectly in any manner whatever, from a person described in s. 94(1)(b). Summersby has acquired property from Mr. Dunin and Fundy has acquired property from Mr. Garron, it is suggested.

279 The appellants disagree that the Trusts have acquired property from Mr. Dunin and Mr. Garron. Further, they submit that the gains realized on the sale of shares of 325 and 333 are not a type of income that is within the scope of section 94.

280 The first question is whether "property" has been acquired. The Minister submits that the property acquired is "growth rights" in PMPL. Quite simply, the appellants submit that growth rights are not property.

281 The Federal Court of Appeal has considered this issue in two cases, Kieboom v. Minister of National Revenue (1992), 92 D.T.C. 6382 (Fed. C.A.) and Romkey v. R. (1999), 2000 D.T.C. 6047 (Fed. C.A.).

282 In Gehres v. R., 2003 D.T.C. 913 (T.C.C. [General Procedure]), Bowie J. describes the principle from these two cases, at para. 5:

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[...] Those cases [Kieboom and Romkey] stand for the proposition that an individual who, through a series of transactions, causes the value of his interest in a corporation to be reduced and the value of a beneficial interest held by his children to increase effects an indirect transfer of property to his children within the meaning of subsection 74.1(2).

283 Counsel for the Minister submits that Romkey goes farther than this by finding that there is transfer of property even if there is no reduction in the value of the transferor's shares.

284 In my view, Romkey leaves some questions unanswered in this regard. At paragraph 20 of the decision, Stone J.A. explicitly defers consideration of this issue:

[...] It was submitted that the appellants had no "equity" and, therefore, no "property" to transfer to the trusts for the benefit of the children. In view of what follows it is not necessary to decide whether the issuance of the shares to the trusts at the time that the Company may have been without any assets constituted, by itself, a transfer of property to the children.

285 On the particular facts in these appeals, it is not necessary to consider whether Romkey has extended the principle from Kieboom because there has been a movement of value in this case.

286 The common shares of PMPL immediately prior to the 1998 reorganization were worth substantially more than $50,000,000. These shares were then converted to preference shares that had less value, with the difference being shifted to the new common shares issued to 325 and 333.

287 Although the preference shares contained a price adjustment mechanism, the appellants themselves submitted that the sale of the preference shares to Oak Hill for $50,000,000 was reasonable because the price adjustment mechanism had not yet resulted in a change to the redemption amount.[FN5]

288 As a result, the 1998 reorganization resulted in a movement of share rights attributable to existing equity from the former holders of common shares of PMPL to new common shareholders. According to Kieboom, this is a transfer of property.

289 The next question is whether the property was acquired by the Trusts, directly or indirectly in any manner whatever, from Mr. Dunin and Mr. Garron.

290 On this issue, I would agree with the appellants.

291 The relevant facts are different for Fundy and Summersby. Fundy will be considered first.

292 The question is whether property was acquired by Fundy from Mr. Garron. I am unable to agree with the Minister that it was.

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293 In applying the principle from Kieboom, it was GHL that transferred property by converting its common shares of PMPL to preference shares. Mr. Garron's participation was simply as shareholder of GHL. He did not transfer anything, either directly or indirectly.

294 The facts are different for Summersby, however. In this case, Mr. Dunin directly owned shares of PMPL prior to the 1998 reorganization. One of first steps in the reorganization was a transfer by Mr. Dunin of shares of PMPL to DHI. In this manner, Mr. Dunin indirectly transferred a property interest in PMPL in the course of the reorganization.

295 A more difficult question in respect of Summersby is whether the property, consisting of rights in PMPL, was indirectly acquired by Summersby when such property was acquired by 325.

296 The appellants submit that an acquisition of property by 325 is not an acquisition of property by Summersby. The phrase "directly or indirectly in any manner whatever" is intended only to apply to the manner in which a transfer is effected, it is submitted.

297 The Minister submits that the language is broad enough to apply to indirect shareholdings through holding companies.

298 The phrase "directly or indirectly in any manner whatever" is highly ambiguous. It is not entirely clear which of these interpretations was intended by Parliament.

299 The preferred interpretation in my view is the more restrictive one.

300 I am particularly troubled by the uncertainty that is inherent in the Minister's position. Determining ownership of property through a chain of corporations is a murky exercise with unclear results. Should one look through more than a first tier subsidiary? Should one look through a corporation that is not wholly-owned? Should one look through if the shares are non-voting?

301 The question is an important one, as the phrase "directly or indirectly" is used in other provisions of the Act. I am loath to adopt an interpretation that is likely to lead to considerable uncertainty. The appellants' interpretation is the preferred one in my view.

302 In the result, I would conclude that there has been no acquisition of property by the Trusts from Mr. Dunin and Mr. Garron.

303 The Minister submits in the alternative that there has been a deemed acquisition of property by virtue of subsection 94(6) of the Act because the shares acquired by the Trusts represent financial assistance provided by Mr. Dunin and Mr. Garron.

304 I do not propose to discuss this argument in any detail. In my view, to apply the term "financial assistance" to common shares would stretch the ordinary meaning of that term beyond what was intended.

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305 I would also briefly comment on the argument of the appellants that section 94 does not apply to the type of income that was realized.

306 It is acknowledged by the appellants that the gains realized by the Trusts are a type of income that is included in s. 94(1)(c)(i)(B). It is submitted, however, that the operative provision is s. 94(1)(c)(i)(A) which specifically excludes this type of income. The appellants submit that the exclusion in (A) should take precedence over the inclusion in (B).

307 I disagree with the appellants' submission on this point. It is likely in my view that Parliament intended that all items of income described in clause (A) or (B) be included in the tax base. This interpretation is in accordance with the plain meaning of the provision, and I am not persuaded that a contextual and purposive interpretation would provide a different result.

C. Does s. 94 affect the Treaty exemption?

308 If paragraph 94(1)(c) applies to the Trusts, the Minister submits that they are not entitled to the Treaty exemption because the Trusts are deemed to be resident in Canada.

309 The issue turns on the meaning of the phrase "resident of Canada" for purposes of the exemption in Article XIV(4) of the Treaty.

310 Residence is defined in Article IV(1) of the Treaty. It provides:

311 The Minister submits that, for purposes of the above definition, trusts that are subject to taxation by virtue of s. 94(1)(c) are liable to taxation under the Act by reason of their "residence."

312 The appellants submit that a person is not a resident of Canada for purposes of the Treaty unless the person is liable to taxation in Canada on world-wide income. The argument is based on the appellants' interpretation of Crown Forest Industries Ltd. v. R. (1995), 95 D.T.C. 5389 (S.C.C.).

313 The interpretation suggested by the Minister is a possible interpretation of Article IV(1), but it is not in harmony with the scheme of the Treaty in my view.

314 The concept of residence is central to the Treaty because it defines who the Treaty applies to (Article I). In Article IV(1), the drafters of the Treaty contemplate that residence is generally determined by reference to the do-

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315 The essential difficulty that I have with the Minister's position is that Summersby and Fundy are not liable to taxation by virtue of s. 94(1)(c) in the same way as trusts resident in Canada under general principles.

316 The scope of taxation under s. 94(1)(c) is more limited. Basically, it is a scheme that is source-based. In essence, the deemed resident provision in s. 94(1)(c) is part of a formula used in determining the tax base. In only a limited sense could it be said that trusts that are liable to taxation under s. 94(1)(c) are taxed by reason of their residence. It would be more accurate to say that trusts are liable to tax under s. 94(1)(c) because they satisfy the requirements set out in s. 94(1)(a) and (b), namely a beneficiary and contribution test.

317 The appellants rely on Crown Forest. This decision is not dispositive of the issue, in my view, because Crown Forest dealt with a different question. Nevertheless, I would agree with the appellants that the Minister's interpretation is not consistent with the approach taken in Crown Forest.

318 The following excerpt from the decision suggests that provisions such as Article IV(1) of the Treaty are intended to extend the benefits of a treaty only where the relevant country "asserts an unlimited right to tax income." Iacobucci J. states:

64 The commentaries to the OECD Model Convention as well as academic sources indicate that generally the domestic laws of the contracting states employ residence to apply on "full-tax liability": paragraphs 3 and 8 to the commentary to Article IV; Nathan Boidman, L. Frank Chopin and Alan W. Granwell, "Tax Effects for Canadians of the New U.S. Code and Treaty Residency Rules (Part Two)" (1985), 14 Tax Mgmt. Intl. J. 183, at pages 184-85. So, too, does the American Law Institute, Federal Income Tax Project — International Aspects of U.S. Income Taxation II — Proposals on U.S. Income Tax Treaties, at pages 127-28:

Under prevailing practice, a country entering into an income tax treaty extends the benefits of the treaty to a person or entity that is a "resident of (the other) contracting state". "Residence", in turn, is defined in terms of taxing jurisdiction. A person or entity is considered resident in a country if that country asserts an unlimited right to tax his or its income — that is, a right based upon the taxpayer's personal connection with the country (as opposed to the source of the income or other income- or asset- related factors). The test of residence requires that the person or entity claiming treaty benefits be "fully taxable" in the residence country, in the sense of being fully subject to its plenary taxing jurisdiction.

65 Full tax liability is not satisfied in a case where an entity is liable to tax in a jurisdiction only on a part of its income.

[Emphasis added]

319 It is unlikely that the drafters of the Treaty had in mind including as "residents of a contracting state" persons that are subject to a more limited scope of taxation than persons who are resident under general principles. For this

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320 In light of this conclusion, it is not necessary that I consider whether the reference to "residence" in Article IV(1) can ever include residence determined by factors other than physical factors.

321 I mention this because Simpson J. of the Federal Court recently focussed on this issue in RCI Trust (Trustees of) v. Minister of National Revenue [2009 CarswellNat 1945 (F.C.)], which is currently under appeal. It was also discussed in obiter in the decision of the Special Commissioners in Smallwood, at para. 101.

VI. Issue 3 — Does s. 75(2) apply to the Other Appellants?

322 Subsection 75(2) of the Act is an attribution provision that is applicable to reversionary trusts.

323 The Minister has applied this provision in assessing the Other Appellants (Mr. Dunin, Mr. Garron, Mrs. Garron and the Garron Family Trust) in respect of the gains realized by the Trusts.

324 Subsection 75(2) includes an "acquisition of property" provision that is similar to the one in section 94. As a result, both counsel made the same arguments in respect of this provision that they made in respect of the acquisition of property requirement in section 94.

325 The relevant part of s. 75(2) provides:

75(2) Trusts — Where, by a trust created in any manner whatever since 1934, property is held on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person"), [...]

326 Although the relevant language above is slightly different from section 94, the differences are not significant, in my view. I conclude, therefore, that subsection 75(2) does not apply to the facts in these appeals.

327 Before leaving this issue, I would comment that the appellants did not rely on the Treaty exemption in reference to s. 75(2). It appears that both counsel had concluded that the Treaty did not apply to exempt a Canadian resident from taxation under the Act, even if the gains were realized by a resident of Barbados.

328 In light of the broad wording of Article XIV(4) of the Treaty, I requested submissions from the parties on whether the Other Appellants could rely on the exemption in Article XIV(4) in reference to gains realized by the Trusts. I appreciated these submissions, as well as others that I had requested.

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329 The submissions did not refer to any judicial authorities specifically on this issue. It appears that the matter has not previously been considered by a court in Canada.

330 It is useful to reproduce again the relevant Treaty provision. Article XIV(4) provides:

4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.

331 Under the plain language of this provision, gains realized from the alienation of property by trusts resident only in Barbados may not be taxed in Canada. The provision is not ambiguous, and it is clearly broad enough to apply to an attribution provision such as s. 75(2).

332 Accordingly, unless the plain meaning of Article XIV(4) does not reflect its object and spirit, the exemption applies.

333 The Minister submits that the Treaty was not intended to have this result because it would result in Canada ceding its right to tax its own residents.

334 The question could be rephrased in the following manner. Did the Treaty's contracting states intend to reserve to themselves under Article XIV(4) a residual right to tax gains arising in the other contracting state?

335 I would have thought that the answer to this is no.

336 The interpretation suggested by the Minister is not compatible with one of the primary objectives of the Treaty which is to minimize the potential for double taxation.

337 The position of the Minister potentially frustrates this objective, and contravenes the plain meaning of Article XIV(4).

338 I would also comment that the Treaty contains a specific override provision in reference to another attribution rule. Article XXX(2) provides an override in reference to the Canadian taxation of foreign accrual property income earned by nonresident corporations. If the drafters of the Treaty had intended an override for other attribution rules, they could have been specifically provided for it.

339 For these reasons, I conclude that the exemption in Article XIV(4) takes precedence over the application of subsection 75(2) to the Other Appellants.

340 Finally, I would comment that the issue of the interplay between attribution rules in foreign affiliate legislation and treaties was discussed by Robert Couzin, a respected Canadian tax lawyer, in Corporate Residence and International Taxation (Amsterdam: IBFD, 2002), at 235-238. In the discussion, judicial decisions in the United Kingdom and France are mentioned. It appears that the above conclusion is not inconsistent with that jurisprudence.

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VII. Issue 4 — Does the GAAR apply?

A. General

341 The Minister has invoked section 245 of the Act (the GAAR) as an alternative argument in support of all of the assessments. The section is reproduced in an appendix.

342 The GAAR requires a three-step analysis: (1) the identification of a "tax benefit," as defined, (2) the identification of an "avoidance transaction," as defined, and (3) a finding of a misuse or abuse of legislative provisions.

343 The appellants acknowledge that there is a tax benefit and an avoidance transaction.[FN6] Implicitly therefore, the appellants admit that a transaction or series of transactions was undertaken primarily to obtain a reduction, avoidance or deferral of tax under the Act or the Treaty. They submit, though, that the GAAR does not apply because there has been no misuse or abuse of the Treaty.

344 The Minister submits that the steps involved in the 1998 reorganization were each undertaken primarily to avoid Canadian tax on the gains realized by the Trusts. Tax benefits were obtained by the Trusts and the Other Ap- pellants, it is submitted.

345 More specifically, the following transactions were assumed by the Minister to be avoidance transactions: the settlement of the Trusts, the incorporation of 325 and 333, the reorganization of the share structure of PMPL, and the subscription by the Trusts for shares of 325 and 333.

346 As the appellants did not dispute these assumptions, I will focus the discussion on the misuse or abuse element of the GAAR in s. 245(4).

347 I would briefly mention as a preliminary matter that the appellants did not dispute that the GAAR could apply to the Treaty. It is useful in this respect to refer to section 4.1 of the Income Tax Conventions Interpretation Act which specifically provides for this result. This provision is also reproduced in the appendix.

B. Positions of parties on abuse or misuse

348 In terms of identifying legislative provisions that allegedly have been abused, the replies of the Minister for all the appellants are identical. The provisions identified are s. 39, 94, 110(1)(f)(i), 115(1)(b)(i) of the Act and Article XIV(4) of the Treaty. Also mentioned was an abuse of the provisions of the Act and the Treaty read as a whole.

349 The Minister's position was more selective in argument. For one thing, separate arguments were made in reference to the Trusts and the Other Appellants.

350 As for the Trusts, counsel for the Minister repeated in argument the reference to the legislative provisions

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351 I would first comment regarding section 39 of the Act. This is a provision of general application that provides for the computation of capital gains and losses.

352 Counsel for the Minister provided only a fleeting mention of this provision in argument. The comments were so brief that I could not really determine what the nature of the abuse argument concerning section 39 was. I do not propose to discuss this provision further.

353 Although the Minister asserts that the sole reason for the 1998 reorganization was to minimize Canadian tax on the sale of PMPL, counsel did not argue that the tax consequences should be determined under the GAAR as if 1998 reorganization did not take place.

354 If I understand the Minister's position correctly, it is that the 1998 reorganization was undertaken solely to minimize Canadian tax on the sale of PMPL. The Minister suggests that the avoidance provisions in sections 94 and 75(2) are intended to apply when trusts are used in this manner. Accordingly, it is submitted that the tax consequences should be determined as if section 94 or subsection 75(2) applies. In effect, the Minister is suggesting that the tax consequences be determined as if the reorganization had not been implemented in a manner that avoided these provisions.

355 Central to that argument, I think, is the submission that the holding companies, 325 and 333, were inserted into the structure so that the Trusts did not acquire shares of PMPL.

356 The Minister also submits that there was an abuse of the Treaty, but only in reference to the appeals of the Trusts.

357 In reference to the Treaty, the Minister submits that there was an abuse of Article XIV(4). The following arguments were made:

(a) it is an abuse of the Treaty to avoid an anti-avoidance rule such as s. 94;

(b) Article XIV(4) of the Treaty is designed to exempt only true nonresidents of Canada;

(d) Article XIV(4) is only intended to prevent double taxation; and

(e) the Treaty was not intended to permit such an erosion of the Canadian tax base that could occur with the widespread use of this type of planning.

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358 The appellants chose to limit their submissions under the GAAR to one point only. They submitted that the GAAR does not apply because there is no abuse of the Treaty.

359 During oral argument, I asked counsel for the appellants to also address whether there had been an abuse of s. 75(2). Counsel submitted in response that it should not be necessary to address this issue because it was not raised by the Minister in any of the replies.

360 In reference to the Trusts' use of the Treaty exemption, the appellants submit that this is in accord with both the plain meaning and a purposive interpretation of Article XIV(4).

361 Particular reference was made by counsel to the following comments of Pelletier J. in MIL (Investments) S.A. v. R., 2007 FCA 236, 2007 D.T.C. 5437 (Eng.) (F.C.A.):

[1] In order to succeed in this appeal, the appellant Her Majesty the Queen must persuade us ... that the tax benefit achieved by the Respondent MIL (Investments) S.A. is an abuse or misuse of the object and purpose of article 13(4) of the [Canada-Luxembourg Treaty].

[6] [...] The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose.

C. Analysis

362 I will first comment on the procedural point raised by the appellants in reference to whether there was an abuse of s. 75(2).

363 I agree with counsel for the appellants on this issue. It would be unfair for the appellants to have to respond to an argument that was not raised before argument. Since an abuse of s. 75(2) was not mentioned either in the pleadings or in the Minister's opening statement, I would conclude that it has been raised too late.

364 I also note that the appellants sought confirmation from the Minister during the discovery process as to the abuse argument. The question and answer, identified as undertaking 54, is reproduced below from the portion of the discovery transcript read in by the appellants:

Q. With reference to paragraph 17(xxx) of the Summersby Settlement Reply, is this paragraph a complete statement of what the Respondent says is the misuse or abuse for purposes of section 245 of the ITA.

A. Please see the Reply for Summersby Settlement. The Reply sets out the complete statement of what the Respondent says is the misuse or abuse of section 245 of the ITA.

In the event that the Respondent intends to add to that statement the Respondent will so advise.

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This answer also applies with respect to A. Dunin, Fundy Settlement, M. Garron, B. Garron and the Garron Family Trust.

365 The above answer refers to the reply for Summersby. Neither it, nor any of the other replies, mentions s. 75(2) in reference to the GAAR.

366 The appellants were entitled to rely on the replies and on this answer in formulating their argument in reference to the GAAR.

367 The appellants chose to limit their arguments respecting the GAAR to whether there was an abuse of the Treaty. The arguments likely would have been different if the Minister had submitted earlier that there had been an abuse of s. 75(2).

368 It is only necessary, then, to consider whether the Treaty has been abused.

369 It is well established that the Minister must identify an object, spirit or purpose of provisions that are claimed to have been abused. In Canada Trustco Mortgage Co. v. R., 2005 SCC 54, 2005 D.T.C. 5523 (Eng.) (S.C.C.), McLachlin C.J. and Major J. stated:

[65] [...] The taxpayer, once he or she has shown compliance with the wording of a provision, should not be required to disprove that he or she has thereby violated the object, spirit or purpose of the provision. It is for the Minister who seeks to rely on the GAAR to identify the object, spirit or purpose of the provisions that are claimed to have been frustrated or defeated, when the provisions of the Act are interpreted in a textual, contextual and purposive manner. The Minister is in a better position than the taxpayer to make submissions on legislative intent with a view to interpreting the provisions harmoniously within the broader statutory scheme that is relevant to the transaction at issue.

370 As mentioned above, the Minister has raised several arguments.

371 First, the Minister submits that it is an abuse of the Treaty to use the exemption in Article XIV(4) to avoid an anti-avoidance rule such as s. 94. Counsel relies on the following comment of Bowman J. in RMM Canadian Enter- prises Inc. v. R. (1997), 97 D.T.C. 302 (T.C.C.), at 313 -314:

[...] It would be a surprising conclusion that Canada, or indeed any of the other countries with which it has tax treaties, including the United States, had intentionally or inadvertently bargained away its right to deal with tax avoidance or tax evasion by residents of treaty countries in its own domestic tax laws. It would be equally surprising if tax avoidance schemes that are susceptible of attack under either general anti-avoidance provisions or specific anti-avoidance rules, if carried out by Canadian residents, could be perpetrated with impunity by non-residents under the protection of a treaty. That is not what treaties are for.

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373 First, it is contrary to the approach suggested by the Federal Court of Appeal in MIL, above. It does not make sense that a transaction that is subject to tax under the Act by virtue of an anti-avoidance provision necessarily constitutes a misuse or abuse of the Treaty. I would note in particular that the term "anti-avoidance provision" is commonly used in reference to a broad range of provisions in the Act.

374 Further, I agree with the argument of counsel for the appellants that the Minister's position is contrary to commentary published by the OECD in 1977 in reference to the organization's Model Double Taxation Convention.

375 The relevant commentary relates to Article I of the model convention. It corresponds with Article I of the Treaty. Paragraph 7 of that commentary confirms that treaties are not intended to help tax avoidance, but it suggests that treaties should be amended to take into account domestic tax avoidance legislation. The relevant paragraph is reproduced below.

The purpose of double tax conventions is to promote by, eliminating international double taxation... they should not, however, help tax avoidance or evasion. True, taxpayers have the possibility, double taxation conventions being left aside, to exploit the differences in tax levels as between States and the tax advantages provided by various countries' taxation laws, but it is for the States concerned to adopt provisions in their domestic law, to counter possible manoeuvres. Such states will then wish, in their bilateral double taxation conventions, to preserve the application of a provision of this kind contained in their domestic laws.

[Emphasis added]

376 Although this commentary is not binding for purposes of the Treaty, I would note that it had been adopted by OECD members (including Canada) at the time that the Treaty was agreed to, which was in 1980, and the commentary would have been available as a guide to both Canada and Barbados at the time that the Treaty was negotiated.

377 Second, I would mention that the judge who decided RMM, former Chief Justice Bowman, later distanced himself from the abuse analysis in that decision.

378 In Evans v. R., 2005 TCC 684, 2005 D.T.C. 1762 (Eng.) (T.C.C. [General Procedure]), the former Chief Justice commented as follows:

[34] Counsel argues that this case is similar to Justice Bonner's decision in McNichol v. The Queen, 97 D.T.C. 111 and mine in RMM Canadian Enterprises Inc. et al., v. The Queen, 97 D.T.C. 302. These cases were early general anti-avoidance rule cases and we did not have the benefit of the Supreme Court of Canada's guidance that we have today. If we had had the benefit of the Supreme Court of Canada's views, our analysis might have been quite different. The principal basis of my decision in RMM Canadian Enterprises Inc. was subsection 84(2) of the Income Tax Act. One must bear in mind that what the appellants were attempting to circumvent in RMM and McNichol was subsection 84(2). That is not the situation here. 117679 continued to carry on business and it in fact

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paid dividends. The situation here is not analogous to the RMM and McNichol cases. In any event, reference to these two early cases does not in my view satisfy the onus that the Supreme Court of Canada has placed on the Crown.

[Emphasis added.]

379 I am not satisfied that an abuse of the Treaty has been established merely because section 94 is found to be applicable, either standing alone or under the GAAR as a result of a transaction that is abusive of section 94.

380 The Minister also submits that the Treaty exemption was not intended to apply to the Trusts because they had very little connection with Barbados. It was noted that the assets, contributors and beneficiaries are all Canadian. To apply the Treaty exemption in these circumstances would facilitate the avoidance of tax by Canadians.

381 The problem that I have with this argument is that, if accepted, it would result in a selective application of the Treaty to residents of Barbados, depending on criteria other than residence. It seems to me that this is contrary to the object and spirit of the Treaty, which is apparent in Article I and Article IV(1). Residents of Barbados, as defined for purposes of the Treaty, are entitled to the benefits of Article XIV(4) as long as they are not also residents of Canada.

382 I would also mention that there is no special rule for trusts in the Treaty. They are defined as persons in Article III(1)(c) of the Treaty.

383 If the Trusts are resident only in Barbados under these principles, then the Treaty contemplates that Article XIV(4) will apply to them. It does not matter that the Trusts have few connections with Barbados.

384 The Minister submits, further, that the Treaty was not intended to exempt foreign accrual property income.

385 The basis for this argument is found in Article XXX(2) of the Treaty which provides:

2. Nothing in this Agreement shall be construed so as to prevent Canada from imposing its tax on amounts included in the income of a resident of Canada according to section 91 of the Canadian Income Tax Act.

386 The problem with this position is that Article XXX(2) does not encompass all income that may be described as "foreign accrual property income."

387 By its plain meaning, Article XXX(2) applies only to amounts that are included in the income of Canadian residents by virtue of section 91 of the Act. It does not apply to the gains realized by the Trusts that are at issue here. I am not persuaded that the object and spirit of this provision extends beyond the plain meaning.

388 The Minister also submits that Article XIV(4) should be restricted to situations in which there is double taxation.

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389 The appellants referred me to the following comment from the Federal Court of Australia in Commissioner of Taxation v. Lamesa Holdings BV (1997), 97 A.T.C. 4752 (Australia Fed. Ct.), at page 4755:

The allocation [in a treaty] is of the right to tax. There is nothing in the Agreement that compels a jurisdiction to exercise that right.

390 They also referred me to the decision of the High Court of Justice in Smallwood, at para. 40.

391 I agree with the appellants' argument on this issue. I do not believe that further discussion is necessary.

392 Finally, counsel for the Minister submits that one cannot look at the Treaty as if section 94 and FAPI were not there because there would be no tax base left. All Canadians would transfer their assets offshore, it is suggested.

393 Even if the Minister is correct that the tax base would be severely eroded if Article XIV(4) of the Treaty were considered to override section 94, this is not a sufficient basis to find that the Treaty has been abused.

394 The question is what the drafters of the Treaty from both countries intended. I would have thought that if Canada had intended that section 94 should override the Treaty, this would have been specifically mentioned in the Treaty.

395 For these reasons, the Minister has not established that the avoidance transactions in these appeals result in an abuse of the Treaty.

VIII. Issue 5 — Should sale proceeds be reallocated by virtue of section 68?

396 The Minister submits that the Trusts received an unreasonable portion of the proceeds from the sale of PMPL. A portion should be reallocated to the Other Appellants, it is submitted. The Minister's written submission regarding section 68 is reproduced below:

Section 68

160. The fair market value of the Preference Shares as at April 6, 1998 was substantially greater than the value of $50,000,000, concluded by KMPG as the fair market value of the 50 Class A shares and 50 Class B shares as at February 28, 1998.

161. As a consequence of the implementation of the tax plan, GHL and DHI were allocated $50 million of proceeds on the sale to Oak Hill. The amount allocated to GHL and DHI is less than the amount that can reasonably be regarded as the consideration for the disposition of the shares they held in the capital of PMPL.

162. The amount of proceeds of disposition allocated to the shareholder of 325 being Summersby, from the sale of the shares of 325 being the holder of the Class B and Class C shares of PMPL, was correspondingly

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more that the amount that can reasonably be regarded as the consideration for the disposition of the shares indirectly held in PMPL.

163. The amount of proceeds of disposition allocated to the shareholder of 333 being Fundy, from the sale of the shares of 333 being the holder of the Class C shares of PMPL, was correspondingly more that the amount that can reasonably be regarded as the consideration for the disposition of the shares indirectly held in PMPL.

397 The appellants submit that the allocation of the proceeds on the sale to Oak Hill was reasonable. Even if the value of PMPL at the time of the 1998 reorganization was greater than $50,000,000, the preference shares were redeemable for only $50,000,000 at the time of the sale because the adjustment mechanism had not been triggered at that point.

398 The appellants also suggest that section 68 can only be used to adjust amounts between properties, not between taxpayers. They rely in support on the reasons of C. Miller J. in Robert Glegg Investment Inc. v. R., 2008 TCC 20, 2008 D.T.C. 2466 (Eng.) (T.C.C. [General Procedure]). The decision was affirmed on other grounds by the Fed- eral Court of Appeal (2008 FCA 332, 2009 D.T.C. 5515 (Eng.) (F.C.A.)).

399 The Minister's written submission does not fully address these issues. I have concluded that in all the circumstances it would be preferable to defer a consideration of section 68 for another day.

IX. Conclusion

400 As a result of the conclusions above,

(a) the appeals of Summersby Settlement and Fundy Settlement will be dismissed, and

(b) the appeals of Andrew Dunin, Myron Garron, Berna Garron, and the Garron Family Trust will be allowed, and their assessments will be referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that no part of the proceeds received by Summersby Settlement and Fundy Settlement on the sale of 325 and 333 should be included in their income.

401 The respondent is entitled to costs, with one set of counsel fees for all appeals.

Order accordingly.

APPENDIX I — Relevant Statutory Provisions

Canada-Barbados Income Tax Agreement

Article I — Personal Scope

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This Agreement shall apply to persons who are residents of one or both of the Contracting States.

Article III — General Definitions

1. (c) the term "person" includes an individual, an estate, a trust, a company, a partnership and any other body of persons;

Article IV — Fiscal Domicile

Article XIV — Gains from the Alienation of Property

4. Gains from the alienation of any property, other than those mentioned in paragraphs 1, 2 and 3 may be taxed only in the Contracting State of which the alienator is a resident.

Article XXX — Miscellaneous Rules

Income Tax Conventions Interpretation Act

4.1 Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that section 245 of the Income Tax Act applies to any benefit provided under the convention.

Income Tax Act

68. Allocation of amounts in consideration for disposition of property. Where an amount received or receivable from a person can reasonably be regarded as being in part the consideration for the disposition of a particular property of a taxpayer or as being in part consideration for the provision of particular services by a taxpayer,

(a) the part of the amount that can reasonably be regarded as being the consideration for the disposition shall be deemed to be proceeds of disposition of the particular property irrespective of the form or legal

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effect of the contract or agreement, and the person to whom the property was disposed of shall be deemed to have acquired it for an amount equal to that part; and

(b) the part of the amount that can reasonably be regarded as being consideration for the provision of particular services shall be deemed to be an amount received or receivable by the taxpayer in respect of those services irrespective of the form or legal effect of the contract or agreement, and that part shall be deemed to be an amount paid or payable to the taxpayer by the person to whom the services were rendered in respect of those services.

. . . . .

75(2) Trusts — Where, by a trust created in any manner whatever since 1934, property is held on condition

(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person"), or

(ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust, or

(b) that, during the lifetime of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction,

any income or loss from the property or from property substituted therefor, any taxable capital gain or allowable capital loss from the disposition of the property or of property substituted therefor, shall, during the lifetime of the person while the person is resident in Canada be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the person.

. . . . .

94. (1) Application of certain provisions to trusts not resident in Canada — Where,

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

(i) a person resident in Canada,

(ii) a corporation or trust with which a person resident in Canada was not dealing at arm's length, or

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(b) at any time in or before the taxation year of the trust,

(i) the trust, or a non-resident corporation that would, if the trust were resident in Canada, be a controlled foreign affiliate of the trust, has, other than in prescribed circumstances, acquired property, directly or indirectly in any manner whatever, from

(A) a particular person who

(I) was the beneficiary referred to in paragraph (a), was related to that beneficiary or was the uncle, aunt, nephew or niece of that beneficiary,

(II) was resident in Canada at any time in the 18 month period before the end of that year or, in the case of a person who has ceased to exist, was resident in Canada at any time in the 18 month period before the person ceased to exist, and

(III) in the case of an individual, had before the end of that year been resident in Canada for a period of, or periods the total of which is, more than 60 months, or

(B) a trust or corporation that acquired the property, directly or indirectly in any manner whatever, from a particular person described in clause (A) with whom it was not dealing at arm's length

and the trust was not

(D) a testamentary trust that arose as a consequence of the death of an individual before 1976, or

(E) governed by a foreign retirement arrangement, or

(ii) all or any part of the interest of the beneficiary in the trust was acquired directly or indirectly by the beneficiary by way of

(A) purchase,

(B) gift, bequest or inheritance from a person referred to in clause (i)(A) or (B), or

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the following rules apply for that taxation year of the trust:

(A) the amount, if any, that would but for this subparagraph be its taxable income earned in Canada for the year,

(B) the amount that would be its foreign accrual property income for the year if

(I) except for the purpose of applying subsections 104(4) to (5.2) to days after 1998 that are determined under subsection 104(4), the trust were a non-resident corporation all the shares of which were owned by a person who was resident in Canada,

(II) the description of A in the definition "foreign accrual property income" in subsection 95(1) were, in respect of dividends received after 1998, read without reference to paragraph (b) of that description,

(III) the descriptions of B and E in that definition were, in respect of dispositions that occur after 1998, read without reference to "other than dispositions of excluded property to which none of paragraphs (2)(c), (d) and (e) apply",

(IV) the value of C in that definition were nil, and

(V) for the purposes of computing the trust's foreign accrual property income, the consequences of the application of subsections 104(4) to (5.2) applied in respect of days after 1998 that are determined under subsection 104(4),

(C) the amount, if any, by which the total of all amounts each of which is an amount required by subsection 91(1) or (3) to be included in computing its income for the year exceeds the total of all amounts each of which is an amount deducted by it for that year under subsection 91(2), (4) or (5), and

(D) the amount, if any, required by section 94.1 to be included in computing its income for the year

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(E) the amount, if any, by which the total of all amounts each of which is an amount deducted by it under subsection 91(2), (4) or (5) in computing its income for the year exceeds the total of all amounts each of which is an amount included in computing its income for the year because of subsection 91(1) or (3), and

(ii) for the purposes of section 126,

(A) the amount that would be determined under subparagraph (i) in respect of the trust for the year, if that subparagraph were read without reference to clause (i)(A), is deemed to be income of the trust for the year from sources in the country other than Canada in which the trust would, but for subparagraph (i), be resident, and

(B) any income or profits tax paid by the trust for the year (other than any tax paid because of this section), to the extent that it can reasonably be regarded as having been paid in respect of that income, is deemed to be non-business income tax paid by the trust to the government of that country, and

(d) in any other case, for the purposes of subsections 91(1) to (4) and sections 95 and 233.4,

(i) the trust shall, with respect to any beneficiary under the trust the fair market value of whose beneficial interest in the trust is not less than 10% of the aggregate fair market value of all beneficial interests in the trust, be deemed to be a non-resident corporation that is controlled by the beneficiary,

(ii) the trust shall be deemed to be a non-resident corporation having a capital stock of a single class divided into 100 issued shares, and

(iii) each beneficiary under the trust shall be deemed to own at any time the number of the issued shares that is equal to the proportion of 100 that

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

is of

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

[...]

(6) Where financial assistance given — For the purposes of paragraph (1)(b), a trust or a non-resident corporation shall be deemed to have acquired property from any person who has given a guarantee on its

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. . . . .

104(1) Reference to trust or estate. In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall, unless the context otherwise requires, be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property, but, except for the purposes of this subsection, subsection (1.1), subparagraph (b)(v) of the definition "disposition" in subsection 248(1) and paragraph (k) of that definition, a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property unless the trust is described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1).

[Note: The proviso in the last seven lines does not apply in connection with transfers of property before December 24, 1998.]

(2) Taxed as individual. A trust shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for that person's own income tax, be deemed to be in respect of the trust property an individual, but where there is more than one trust and

(a) substantially all of the property of the various trusts has been received from one person, and

(b) the various trusts are conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary, or group or class of beneficiaries,

such of the trustees as the Minister may designate shall, for the purposes of this Act, be deemed to be in respect of all the trusts an individual whose property is the property of all the trusts and whose income is the income of all the trusts.

. . . . .

110. (1) Deductions permitted — For the purpose of computing the taxable income of a taxpayer for a taxation year, there may be deducted such of the following amounts as are applicable:

[...]

(f) deductions for payments — [...] any amount that is

(i) an amount exempt from income tax in Canada because of a provision contained in a tax convention or agreement with another country that has the force of law in Canada,

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to the extent that it is included in computing the taxpayer's income for the year;

. . . . .

245. General anti-avoidance rule.

(1) Definitions. In this section,

"tax benefit" — "tax benefit" means a reduction, avoidance or deferral of tax or other amount payable under this Act or an increase in a refund of tax or other amount under this Act, and includes a reduction, avoidance or deferral of tax or other amount that would be payable under this Act but for a tax treaty or an increase in a refund of tax or other amount under this Act as a result of a tax treaty;

"tax consequences" — "tax consequences" to a person means the amount of income, taxable income, or taxable income earned in Canada of, tax or other amount payable by or refundable to the person under this Act, or any other amount that is relevant for the purposes of computing that amount;

"transaction" — "transaction" includes an arrangement or event.

(2) General anti-avoidance provision. Where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that, but for this section, would result, directly or indirectly, from that transaction or from a series of transactions that includes that transaction.

(3) Avoidance transaction. An avoidance transaction means any transaction

(b) that is part of a series of transactions, which series, but for this section, would result, directly or indirectly, in a tax benefit, unless the transaction may reasonably be considered to have been undertaken or arranged primarily for bona fide purposes other than to obtain the tax benefit.

(4) Application of subsection (2). Subsection (2) applies to a transaction only if it may reasonably be considered that the transaction

(a) would, if this Act were read without reference to this section, result directly or indirectly in a misuse of the provisions of any one or more of

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(i) this Act,

(ii) the Income Tax Regulations,

(iii) the Income Tax Application Rules,

(iv) a tax treaty, or

(v) any other enactment that is relevant in computing tax or any other amount payable by or refundable to a person under this Act or in determining any amount that is relevant for the purposes of that computation; or

(b) would result directly or indirectly in an abuse having regard to those provisions, other than this section, read as a whole.

(5) Determination of tax consequences. Without restricting the generality of subsection (2), and notwithstanding any other enactment,

(a) any deduction, exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof may be allowed or disallowed in whole or in part,

(b) any such deduction, exemption or exclusion, any income, loss or other amount or part thereof may be allocated to any person,

(d) the tax effects that would otherwise result from the application of other provisions of this Act may be ignored,

in determining the tax consequences to a person as is reasonable in the circumstances in order to deny a tax benefit that would, but for this section, result, directly or indirectly, from an avoidance transaction.

(6) Request for adjustments. Where with respect to a transaction

(a) a notice of assessment, reassessment or additional assessment involving the application of subsection (2) with respect to the transaction has been sent to a person, or

(b) a notice of determination pursuant to subsection 152(1.11) has been sent to a person with respect to the transaction,

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any person (other than a person referred to in paragraph (a) or (b)) shall be entitled, within 180 days after the day of mailing of the notice, to request in writing that the Minister make an assessment, reassessment or additional assessment applying subsection (2) or make a determination applying subsection 152(1.11) with respect to that transaction.

(7) Exception. Notwithstanding any other provision of this Act, the tax consequences to any person, following the application of this section, shall only be determined through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) involving the application of this section.

(8) Duties of Minister. On receipt of a request by a person under subsection (6), the Minister shall, with all due dispatch, consider the request and, notwithstanding subsection 152(4), assess, reassess or make an additional assessment or determination pursuant to subsection 152(1.11) with respect to that person, except that an assessment, reassessment, additional assessment or determination may be made under this subsection only to the extent that it may reasonably be regarded as relating to the transaction referred to in subsection (6).

APPENDIX II — Statement of Agreed Facts

1. The Appellant Andrew T. Dunin ("Dunin") is an individual resident in Aurora, Ontario.

2. The Appellant Myron A. Garron ("Garron") is an individual resident in Unionville, Ontario.

3. The Appellant Berna V. Garron ("Berna") is an individual resident in Unionville, Ontario.

4. The Appellant Garron Family Trust ("GF Trust") was a trust established pursuant to a trust indenture dated April 26, 1993.

5. Garron and Berna were the trustees of the GF Trust.

6. The beneficiaries of the GF Trust included the children and grandchildren of Garron and Berna.

7. Prior to 1992, Garron and his wife, Berna, owned all the shares of Progressive Moulded Products Limited ("Products") and Progressive Tools Limited ("Tools") through a family holding company, Garron Holdings Limited ("GHL").

8. Products and Tools carried on the business of manufacturing injection moulds and plastic parts used in a variety of businesses under the name of "Progressive".

9. In November, 1990, Dunin was hired by Garron as the general manager of Progressive.

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10. Under Dunin's supervision, Progressive's business began to concentrate on producing plastic parts used in the assembly of automobiles.

11. In 1992, PMPL Holdings Ltd. ("PMPL") was incorporated. GHL transferred the shares it held in the capital of Products and Tools to PMPL in exchange for shares of PMPL. Beginning in 1992, Dunin began to acquire shares of PMPL.

12. Garron, GHL, Garron Trust, Dunin, PMPL, Products and Tools entered into a shareholders agreement dated November 20, 1992 (the "1992 Shareholders Agreement").

13. By 1996, Dunin had acquired a 50% interest in PMPL with the result that the only issued and outstanding shares in PMPL were as follows:

(a) 50 Class A common shares owned by GHL; and

(b) 50 Class B common shares owned by Dunin.

14. Once Dunin had acquired the 50 Class B common shares, the Class A common shares and Class B common shares of PMPL had the same rights and restrictions and the shares held by GHL and Dunin were of equal value.

15. The corporate structure at this point is graphically depicted at Appendix "A".

16. 1287325 Ontario Limited ("325") was incorporated on March 19, 1998.

17. 1287333 Ontario Inc. ("333") was incorporated on March 19, 1998.

18. On March 24, 1998, Dunin caused Dunin Holdings Inc. ("DHI") to be incorporated under the Business Corporations Act (Ontario) and Dunin subscribed for one common share on March 27, 1998.

19. As at March 31, 1998, PMPL was held 50% by GHL and 50% by Dunin. GHL held 50 Class A common shares and Dunin held 50 Class B common shares.

20. On April 1, 1998, Dunin transferred his 50 Class B common shares of PMPL to DHI pursuant to section 85 of the Income Tax Act (Canada) (the "Act") in exchange for 499 common shares of DHI.

21. Paul Ambrose ("Ambrose") is a long-time friend of Garron who resides in Kingstown, St. Vincent.

22. Ambrose is not, and has never been, a resident of Canada.

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23. Prior to April 2, 1998, Garron asked Ambrose if Ambrose would be willing to do a favour for Garron and settle a trust for the benefit of Garron and Garron's family and a trust for the benefit of Dunin and Dunin's family. Ambrose agreed to accommodate Garron's request.

24. Ambrose executed a document entitled "Fundy Settlement Trust Indenture" on April 2, 1998.

25. During the process of drafting the Fundy Settlement Trust Indenture, Ambrose provided no input into the particulars and no instructions as to the content or terms of the Fundy Settlement Trust Indenture.

26. Ambrose's signature on the Fundy Settlement Trust Indenture was witnessed by Agnes E. Cato, a barrister and solicitor in St. Vincent and the Grenadines ("Cato").

27. Prior to Ambrose signing the Fundy Settlement Trust Indenture, Cato reviewed the contents of the Fundy Settlement Trust Indenture with Ambrose.

28. Ambrose signed the Fundy Settlement Trust Indenture and forwarded it to St. Michael Trust Corporation together with a bank draft in the amount of US$100 as the settlement amount referred to at Article 1.2 of the Fundy Settlement Trust Indenture.

29. The US$100 amount provided to St. Michael Trust Corporation as the settlement amount referred to at Article 1.2 of the Fundy Settlement Trust Indenture came from Ambrose's own funds.

30. Ambrose executed a document entitled "Summersby Settlement Trust Indenture" on April 2, 1998.

31. During the process of drafting the Summersby Settlement Trust Indenture, Ambrose provided no input into the particulars and no instructions as to the content or terms of the Summersby Settlement Trust In- denture.

32. Ambrose's signature on the Summersby Settlement Trust Indenture was witnessed by Cato.

33. Prior to Ambrose signing the Summersby Settlement Trust Indenture, Cato reviewed the contents of the Summersby Settlement Trust Indenture with Ambrose.

34. Ambrose signed the Summersby Settlement Trust Indenture and forwarded it to St. Michael Trust Cor- poration together with a bank draft in the amount of US$100 as the settlement amount referred to at Article 1.2 of the Summersby Settlement Trust Indenture.

35. The US$100 amount provided to St. Michael Trust Corporation as the settlement amount referred to at Article 1.2 of the Summersby Settlement Trust Indenture came from Ambrose's own funds.

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36. On April 2, 1998, Julian Gill ("Gill"), a relative of Ambrose's and a friend of Garron's, lent US$7,190 to the Summersby Settlement ("Summersby").

37. The terms of the loan from Gill to Summersby were that the loan carried interest at 10% and the loan was repayable either on the sale by Summersby of its shares in 325 or payment of a dividend from 325.

38. On April 2, 1998, Gill lent US$7,190 to the Fundy Settlement ("Fundy").

39. The terms of the loan from Gill to Fundy were that the loan carried interest at 10% and the loan was repayable either on the sale by Fundy of its shares in 333 or payment of a dividend from 333.

40. On April 3, 1998, 1,000 Class A and 1,000 Class B shares of 325 were issued to Summersby.

41. On April 3, 1998, 1,000 Class A and 1,000 Class B shares of 333 were issued to Fundy.

42. PMPL, Dunin and Garron requested KPMG to provide a valuation of PMPL. The value KPMG arrived at for all the issued and outstanding common shares of PMPL as at February 28, 1998 was $50 million.

43. On April 6, 1998, the share capital of PMPL was reorganized such that:

(a) each existing Class A common share and each existing Class B common share was converted into 10 Class A shares (the "Preference Shares") such that there were, in aggregate, 1,000 Preference Shares;

(b) 100 Class B shares were created (the "Special Value Shares"); and

44. As at April 6, 1998, DHI and GHL each owned an equal number of Preference Shares.

45. On April 6, 1998, 325 subscribed for 100 Special Value Shares of PMPL for an aggregate subscription price of $10.00 and subscribed for 800 New Common Shares for an aggregate subscription price of $80.00.

46. On April 6, 1998, 333 subscribed for 800 New Common Shares for an aggregate subscription price of $80.00.

47. The Preference Shares:

(a) were voting fixed-value preference shares; and

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(b) were not participating unless and until they were redeemed at which time dividends would be cumulative and payable between the date of a request to redeem the Preference Shares and the redemption of those Preference Shares.

48. The Special Value Shares:

(a) were non-voting;

(b) carried no dividend entitlement;

(c) were retractable at a redemption amount equal to 10% of the amount by which the fair market value of all the shares of PMPL and Progressive Marketing, Inc. (as defined in the PMPL Articles of Amendment) at the time of the Event of Retraction exceeds $50,000,000 divided by 100;

49. The New Common Shares were fully participating but non-voting common shares.

50. The corporate structure at April 6, 1998 is graphically depicted at Appendix "B".

51. The 1992 Shareholders Agreement was amended and restated on April 6, 1998 (the "1998 Shareholders Agreement") among PMPL, the shareholders of PMPL (GHL, DHI, 333 and 325) and Dunin and Garron.

52. Subsequent to April 6, 1998, PMPL continued to operate.

53. An offer to purchase was made in March 2000 by Oak Hill Capital Partners LP, a large third party United States-based private equity capital fund, through 1424666 Ontario Ltd.

54. The offer from 1424666 Ontario Ltd. was accepted and was the subject of a share purchase agreement made as of June 21, 2000 (the "Share Purchase Agreement").

55. Pursuant to the Share Purchase Agreement, on August 10, 2000:

(a) Fundy sold all 1,000 Class A shares and 1,000 Class B shares in 333 to 1424666 Ontario Ltd. for $217,118,436 cash;

(b) the shareholders of GHL (Garron, Berna and GF Trust) sold all of the shares of GHL to 1424666 Ontario Ltd. for $25,000,000;

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(d) DHI transferred the Preference Shares held by it to 3045036 Nova Scotia Limited, the parent company of 1424666 Ontario Ltd., in exchange for an interest in 3045036 Nova Scotia Limited valued at $25,000,000.

56. On August 29, 2000, after the sale of the shares of 325, the loan from Gill to Summersby of US$7,190 was repaid in full with interest.

57. On August 29, 2000, after the sale of the shares of 333, the loan from Gill to Fundy of US$7,190 was repaid in full with interest.

58. In accordance with the Share Purchase Agreement, Dunin continued to be employed by the new purchaser of PMPL.

59. The relationship between PMPL and each of Garron, Berna and Anne Dunin (the spouse of Dunin) terminated on August 10, 2000.

60. 1424666 Ontario Limited withheld $80,122,326 from the purchase price for the 907 Class A shares and 907 Class B shares of 325 and remitted that amount to the Receiver General for Canada.

61. 1424666 Ontario Limited withheld $72,372,812 from the purchase price for the shares of 333 and remitted that amount to the Receiver General for Canada.

62. In computing income for the 2000 taxation year, Summersby did not report any capital gain from the disposition of the 907 Class A shares and the 907 Class B shares of 325 to 1424666 Ontario Limited as subject to tax in Canada based on its view that the gain was subject to tax only in Barbados by virtue of Ar- ticle XIV(4) of the Agreement Between Canada and Barbados for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (the "Treaty").

63. In computing income for the 2000 taxation year, Fundy did not report any capital gain from the disposition of the shares of 333 to 1424666 Ontario Limited as subject to tax in Canada based on its view that the gain was subject to tax only in Barbados by virtue of Article XIV(4) of the Treaty.

64. In respect of the 2000 taxation year of each of the Appellants, the Minister of National Revenue (the "Minister") assessed each of the Appellants as follows (the "Assessments"):

(a) Summersby was assessed taxable income of $160,244,591 by a Notice of Assessment dated Sep- tember 1, 2004;

(b) Fundy was assessed taxable income of $144,745,557 by a Notice of Assessment dated September 1, 2004;

2009 CarswellNat 2600, 2009 TCC 450, 2009 D.T.C. 1287 (Eng.), 50 E.T.R. (3d) 241, [2010] 2 C.T.C. 2346, 181 A.C.W.S. (3d) 819 (c) Dunin was assessed taxable income of $162,298,420 by a Notice of Assessment dated June 17, 2004;

(d) Garron was assessed taxable income of $14,147,031 by a Notice of Assessment dated June 30, 2004;

(e) Berna was assessed taxable income of $938,441 by a Notice of Assessment dated June 16, 2004; and

(f) GF Trust was assessed taxable income of $133,514,811 by a Notice of Assessment dated June 18, 2004.

65. A reconciliation of the amounts reported by each Appellant and assessed by the Minister is attached as Appendix "C".

66. Each Appellant filed a Notice of Objection with the Minister, and the Minister confirmed each of the Assessments by a Notice of Confirmation dated February 21, 2006 and each such Notice of Confirmation has now been appealed to this Court.

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APPENDIX III — Trustee's Memoranda of Intention

Re Fundy

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It is the Trustee's intention, with respect to the Fundy Settlement (Trust), as follows:

1. Investment Policy

(a) that the shares of 1287333 Ontario Limited ("1287333") be held until such time as the other shareholders of PMPL Holdings Inc., decide to sell their shares. At that time we will facilitate the sale of the shares of 1287333;

(b) any sale proceeds which arise from the sale of the shares of 1287333 (and any other amounts received by the Trust as a consequence of the realisation of any assets of 1287333 or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the Trust; and

2. Distribution Policy

(a) that during the lifetime of Myron Garron the primary consideration in making distributions of income and capital should be the best interests of Myron Garron subject only to his wishes with respect to distributions to other beneficiaries;

(b) if Myron Garron should die at a time we continue to hold assets under the terms of the Trust, distribution shall be made in view of the best interests of Myron Garron's widow during her lifetime, and thereafter the best interests of his issue, as defined in the Trust deed.

Re Summersby

1. Investment Policy

(a) the shares of 1287325 Ontario Limited ("1287325") should be held until such time as the other shareholders of PMPL Holdings Inc. decide to sell their shares. At that time, we, as the trustee, will facilitate the sale of our shares of 1287325;

(b) any sale proceeds which arise from the sale of our shares of the [sic] 1287325 (and any other amounts received by the Trust as a consequence of the realisation of any assets of 1287325 or of any entity in which it has a direct or indirect interest) will be invested prudently with a view to the long term preservation of the capital of the Trust; and

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2. Distribution Policy

During the lifetime of Andrew Dunin, the primary consideration in making distributions of income and capital should be the best interests of Andrew Dunin, subject only to his wishes with respect to distributions to other beneficiaries. If Andrew Dunin should die at a time when we, as trustee, continue to hold assets under the terms of the Trust, distributions shall be made in view of the best interests of Andrew Dunin's widow during her lifetime, and thereafter the best interests of his issue (as defined in the Set- tlement Deed).

3. Power to Amend Trust

FN1 Throughout these reasons, the term "common shares" is used to describe either common shares or special shares with rights to participate in profits.

FN2 The $50,000,000 share consideration was held by, or on behalf of, Mr. Dunin and Summersby equally. Mr. Dunin's interest was effected by having DHI exchange its shares of PMPL for shares of a company owned by the buyer. It is not clear from the evidence how Summersby's interest was implemented but nothing turns on this. It is not part of the gain that is at issue in these appeals.

FN3 According to the transcript, Mr. Hutchinson stated at one point that he began to work for St. Michael in 1990. This appears to be a clerical error in the transcript.

FN4 David Sherman, ed., Department of Finance Technical Notes, Income Tax, 20th ed. (Toronto: Carswell, 2008)

FN5 This argument was made in reference to section 68.

FN6 The admission of an avoidance transaction was conditional on the Federal Court of Appeal's decision in MacKay v. R., 2008 D.T.C. 6238 (Eng.) (F.C.A.), being a final decision. It has now become final as the Supreme Court of Canada denied leave for further appeal.

END OF DOCUMENT

Guerin v. R.

Delbert Guérin, Joseph Becker, Eddie Campbell, Mary Charles, Gertrude Guérin and Gail Sparrow Suing on their Own Behalf and on Behalf of all other Members of the Musqueam Indian Band, Appellants v. Her Majesty The Queen, Respondent and The National Indian Brotherhood, Intervener

GUERIN et al. v. R. and NATIONAL INDIAN BROTHERHOOD

Supreme Court of Canada

Laskin C.J.C., Ritchie, Dickson, Beetz, Estey, McIntyre, Chouinard, Lamer and Wilson JJ.

Proceedings: Reversed (1982), [1983] 2 F.C. 656, 13 E.T.R. 245, [1983] 2 W.W.R. 686, [1983] 1 C.N.L.R. 20, 45 N.R. 181, 143 D.L.R. (3d) 416, 1982 CarswellNat 142, 1982 CarswellNat 443 (Fed. C.A.); Reversed (1981), [1982] 2 F.C. 385, [1982] 2 C.N.L.R. 83, 10 E.T.R. 61, 1981 CarswellNat 13, 1981 CarswellNat 530 (Fed. T.D.)

Counsel: M.R.V. Storrow , J.I. Reynolds , L.F. Harvey , for the appellants

W.I.C. Binnie, Q.C. , M.R. Taylor , M. Freeman , for the respondent

B.A. Crane, Q.C. , W. Badcock , A.C. Pape , for the intervener

Subject: Property; Estates and Trusts; Civil Practice and Procedure; Public

Limitation of Actions --- Statutory limitation periods — Effect of fraud

Native Law --- Reserves and real property — Leases

Trusts and Trustees --- Breach of trust — General

Indians and Eskimos — Reserves and real property — Leasing — Indian band surrendering property to Crown for lease to golf club — Crown in position of fiduciary — Crown breaching fiduciary obligations when entering lease not containing oral terms agreed to by band — Court applying trust principles in awarding damages — Trial court correctly evaluating damages on basis of lost opportunity for residential development of surrendered property.

Limitation of actions — Personal actions — Accrual of cause of action: computation of time — Crown breaching fiduciary obligation to Indian band by entering lease of reserve lands contrary to terms as orally agreed — Crown equitably fraudulent in concealing terms of lease — Cause of action accruing from time Indians receiving copy of lease.

Indians — Reserve lands — Surrender — Lease entered by Crown on band's behalf — Lease bearing little ressem- blance to terms approved at surrender meeting — Whether or not breach of fiduciary duty, breach of trust, or breach of agency — Indian Act, R.S.C. 1952, c. 149, s. 18(1) — Trustee Act, R.S.B.C. 1960, c. 390, s. 98 (now R.S.B.C. 1979, c. 414).

An Indian Band surrendered valuable surplus reserve lands to the Crown for lease to a golf club. The terms obtained by the Crown, however, were much less favourable than those approved by the Band at the surrender meeting. The surrender document did not refer to the lease or disclose the terms approved by the Band. The Indian Affairs Branch officials did not return to the Band for its approval of the revised terms. Indeed, they withheld pertinent information from both the Band and an appraiser assessing the adequacy of the proposed rent. The trial judge found the Crown in breach of trust in entering the lease and awarded damages as of the date of the trial on the basis of the loss of income which might reasonably have been anticipated from other possible uses of the land. The Federal Court of Appeal set aside that judgment and dismissed a cross-appeal seeking more damages.

The Indians' interest in their land is a pre-existing legal right not created by the Royal Proclamation of 1763, by s. 18(1) of the Indian Act , or by any other executive order or legislative provision. The nature of the Indians' interest is best characterized by its inalienability, coupled with the fact that the Crown is under an obligation to deal with the land on the Indians' behalf when the interest is surrendered.

Held: The appeal should be allowed.

Per Dickson, Beetz, Chouinard, Lamer JJ.

The nature of Indian title and the framework of the statutory scheme established for disposing of Indian land place upon the Crown an equitable obligation, enforceable by the courts, to deal with the land for the benefit of the Indians. Successive federal statutes including the present Indian Act provide for the general inalienability of Indian reserve land, except upon surrender to the Crown. The purpose of the surrender requirement is to interpose the Crown between the Indians and prospective purchasers or lessees of their land so as to prevent the Indians from being exploited. Through the confirmation in s. 18(1) of the Indian Act of the Crown's historic responsibility to protect the interests of the Indians in transactions with third parties, Parliament has conferred upon the Crown a discretion to decide for itself where the Indians' best interests lie. Where by statute, by agreement or perhaps by unilateral undertaking, one party

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 has an obligation to act for the benefit of another, and that obligation carries with it a discretionary power, the party thus empowered becomes a fiduciary. Equity will then supervise the relationship by holding him to the fiduciary's strict standard of conduct.

Section 1. 1) of the Indian Act confers upon the Crown a broad discretion in dealing with the surrendered land. In the present case, the document of surrender confirms this discretion in the clause conveying the land to the Crown. When, as here, an Indian band surrenders its interest to the Crown, a fiduciary obligation takes hold to regulate the manner in which the Crown exercises its discretion in dealing with the land on the Indians' behalf. The Crown's agents promised the band to lease the land in question on certain specified terms and then, after surrender, obtained a lease on different terms which was much less valuable. The Crown was not empowered by the surrender document to ignore the oral terms which the band understood would be embodied in the lease. After the Crown's agents had induced the band to surrender its land on the understanding that the land would be leased on certain terms, it would be unconscionable to permit the Crown simply to ignore these terms. Equity will not countenance unconscionable behaviour in a fiduciary whose duty is that of utmost loyalty to his principal. In obtaining without consultation a much less valuable lease than that promised, the Crown breached the fiduciary obligation it owed to the band and it must make good the loss suffered in consequence. The quantum of damages falls to be determined by analogy with principles of trust law. The trial judge considered all the relevant evidence and his judgment disclosed no error of principle: his award should therefore be adopted.

The band's action is not barred by either the Statute of Limitations , R.S.B.C. 1960, c. 370, or the equitable doctrine of laches.

Per Ritchie, McIntyre, Wilson JJ.

The Crown acted in breach of its fiduciary duty when it "barrelled ahead" with a lease unacceptable to its cestui que trust . The Crown owed a fiduciary duty -- not a mere political obligation -- to the band arising from its control over the use to which reserve lands could be put. The Crown's discretion in deciding these uses was limited to those which were "...for the benefit of the Band". This fiduciary duty, although recognized by s. 18(1), existed independently of the section. Although the limited nature of Indian title meant that the Crown was not a trustee of the lands themselves under s. 18(1) it did not preclude its owing a fiduciary duty to the band with respect to their use. This fiduciary duty, upon surrender, crystallized into an express trust of the land for the purpose specified.

While the surrender document was silent as to the terms of the lease the Crown was well aware of these terms and could not hide behind the language of its own document.

Although there was a withholding of information by Indian Affairs personnel which amounted in the circumstances to equitable fraud, it did not, in the absence of dishonesty or moral turpitude, give rise to an action for deceit at common law or support a claim for punitive damages. It did, however, disentitle the Crown to relief for breach of trust under s. 98 of the Trustee Act .

The lost opportunity to develop the land for a lengthy period was to be compensated as at the date of trial notwithstanding the fact that market values may have increased since the date of the breach. In equity, the presumption is that

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 the Band would have wished to develop its land in the most advantageous way possible during the period covered by the unauthorized lease. The damage issue was properly approached on the basis of a lost opportunity for residential development and, absent an error of principle, this Court should not interfere with the quantum of damages. There was no reason to interfere with the decision to refuse pre-judgment interest and to award post-judgment interest at the statutory rate.

Per Estey J.

The essence of an agent's position is that he is only an intermediary between two other parties. Here, an agency prescribed by Parliament existed and the agent (the Crown) was bound in all its actions to serve only the interest of the native population whose rights alone are the subject of the protective measures of the statute. That the agent and principal were prescribed by statute neither detracted in law from the agent's legal capacity to act as agent nor diminished the rights of the principal to call upon the agent to account for the performance of the mandate. Indeed, the principal was even more secure in his rights than in situations absent a statutorily prescribed agency, for, although the statute restricts the choice of agent, it nowhere protects the agent from the consequence in law of a breach of the agency. The damages awarded by the trial judge were in no way affected by ascribing the resultant rights in the plaintiff to a breach of agency.

Appeal from judgment of Federal Court of Appeal, [1983] 2 F.C. 656, [1983] 2 W.W.R. 686, 13 E.T.R. 245, 143 D.L.R. (3d) 416, [1983] 1 C.N.L.R. 20, 45 N.R. 181 , allowing appeal from judgment of Collier J., [1982] 2 F.C. 385, 10 E.T.R. 61, [1982] C.N.L.R. 83 , awarding damages for Crown's breach of trust in leasing Indian reserve lands contrary to oral terms approved by Indian band.

Calder v. Attorney General of British Columbia, [1973] S.C.R. 313 , applied; Re Dawson: Union Fidelity Trustee Co. v. Perpetual Trustee Co. (1966), 84 W.N. (Pt. 1) (N.S.W.) 399; St. Catherine's Milling and Lumber Co. v. The Queen (1888), 14 App. Cas. 46 ; Johnson v. McIntosh (1823), 8 Wheaton 543 , considered; Kinloch v. Secretary of State for India in Council (1882), 7 App. Cas. 619 ; Tito v. Waddell (No. 2), [1977] 3 All E.R. 129 ; Civilian War Claimants Association, Ltd. v. The King, [1932] A.C. 14 ; Hereford Railway Co. v. The Queen (1894), 24 S.C.R. 1 , distinguished; Smith v. The Queen, [1983] 1 S.C.R. 554 ; Robertson v. Minister of Pensions, [1949] 1 K.B. 227 ; Lever Finance Ltd. v. Westminster (City) London Borough Council, [1971] 1 O.B. 222 ; Kitchen v. Royal Air Force Asso- ciation, [1958] 1 W.L.R. 563 ; Fales v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302 ; Toronto-Dominion Bank v. Uhren (1960), 32 W.W.R. 61 ; Bartlett v. Barclays Bank Trust Co. (No. 2), [1980] 2 All E.R. 92 ; McNeil v. Fultz (1906), 38 S.C.R. 198 ; Penvidic Contracting Co. v. International Nickel Co. of Canada, [1976] 1 S.C.R. 267 ; Worcester v. State of Georgia (1832), 6 Peters 515 ; Amodu Tijani v. Southern Nigeria (Secretary), [1921] 2 A.C. 399 ; Attorney-General for Quebec v. Attorney-General for Canada, [1921] 1 A.C. 401 ; Attorney-General of Canada v. Giroux (1916), 53 S.C.R. 172 ; Cardinal v. Attorney General of Alberta, [1974] S.C.R. 695 ; Western International Contractors Ltd. v. Sarcee Developments Ltd., [1979] 3 W.W.R. 631 ; Miller v. The King, [1950] S.C.R. 168 ; Laskin v. Bache & Co. Inc. (1971), 23 D.L.R. (3d) 385 ; Goldex Mines Ltd. v. Revill (1974), 7 O.R. 21 Pettkus v. Becker, [1980] 2 S.C.R. 834 ; Rathwell v. Rathwell, [1978] 2 S.C.R. 436 ; Central London Property Trust Ltd. v. High Trees House Ltd., [1947] K.B. 130 ; In Re West of England and South Wales District Branch, ex parte Dale & Co. (1879), 11 Ch. D. 772 ; Ontario Mining Co. v. Seybold, [1903] A.C. 73 ,affirming (1899), 31 O.R. 386 ; St. Ann's Island Shooting and Fishing Club Ltd. v. The King, [1950] S.C.R. 211 ; Surrev (Corporation of) v. Peace Arch Enterprises Ltd. (1970), 74 W.W.R. 380 ; The King v. McMaster, [1926] Ex. C.R. 68 , referred to.

Per Curiam:

The appeal is allowed. The judgment of the Federal Court of Appeal is set aside and the judgment at trial is restored with costs to the appellants in all courts. There will be no costs payable by or to the intervener.

Wilson J.:

1 The appellant, Delbert Guerin, is the Chief of the Musqueam Indian Band, the members of which are descended from the original inhabitants of Greater Vancouver. The other appellants are Band Councillors. In 1955 there were 235 members in the Band and they lived on a reserve located within the charter area of the City of Vancouver which contained approximately 416.53 acres of very valuable land.

2 The subject of the litigation is a lease of 162 acres of the reserve land entered into on January 22, 1958 on behalf of the Band by the Indian Affairs Branch of the federal government with the Shaughnessy Heights Golf Club as lessee. The trial judge found that the Crown was in breach of trust in entering into this lease and awarded the Band $10 million in damages. The Crown appealed to the Federal Court of Appeal to have the trial judgment set aside and the Band cross-appealed seeking an increase in the award of damages. By a unanimous judgment the Crown's appeal was allowed and the cross-appeal dismissed. The Band sought and was granted leave to appeal to this Court.

3 There are four main grounds on which the appellants submit that the trial judge's finding of liability should have been upheld in the Court of Appeal. I paraphrase them from the appellants' factum as follows:

1. Section 18(1) of the Indian Act , R.S.C. 1952, c. 149 imposes a trust or, at a minimum, fiduciary duties on the Crown with respect to reserve lands held by it for the use and benefit of Indian Bands. This trust or those fiduciary duties are not merely political in nature but are enforceable in the courts like any other trust or fiduciary duty.

2. The Federal Court of Appeal should not have allowed the Crown to put forward the concept of "political trust" as a defence to the Band's claim since, as the learned trial judge pointed out, it was not specifically pleaded as required by Rule 409 of the Federal Court Rules.

3. The leased lands were surrendered by the Band to the Crown in trust for lease to the Golf Club on very specific terms and those terms were not obtained. The terms which were obtained were much less favourable to the Band and the Band would not have surrendered the land for lease on those terms.

4. The Crown, by misrepresenting the terms it could and would obtain on the lease, induced the Band to surrender its land and thereby committed the tort of deceit.

4 In any case of alleged breach of trust the facts are extremely important and none more so than in this case. We are fortunate, however, in having very careful and extensive findings by the learned trial judge and, although counsel on both sides roamed at large through the transcript for evidence in support of their various propositions, I have con-

1. The Facts

5 There can be little doubt that by the mid '50s the Indian Affairs Branch was well aware that the appellants' reserve was a very valuable one because of its location. Indeed, offers to lease or buy large tracts of the reserve had already been received. We know this from a report dated October 11, 1955 made by Mr. Anfield who was in charge of the Vancouver agency at the time to Mr. Arneil, the Indian Commissioner for British Columbia. Both these men are since deceased which is unfortunate since Mr. Anfield played a lead role in the impugned lease transaction. In a later report to Mr. Arneil Mr. Anfield suggested that a detailed study should be made of the Band's requirements of its reserve lands so that the surplus, if any, could be identified and turned to good account for the Band's benefit. He suggested that not only should they obtain an appraisal of land values but that a land use planning survey should be prepared aimed at maximum development in order to provide long-term revenue for the Band. He continued:

It seems to me that the real requirement here is the service of an expert estate planner with courage and vision and whose interest and concern would be as much the future of the Musqueam Indians as the revenue use of the lands unrequired by these Indians. It is essential that any new village be a model community. The present or any Agency staff set up could not possibly manage a project like this, and some very realistic and immediate plans must be formulated to bring about the stated wish of these Musqueam people, the fullest possible use and development for their benefit, of what is undoubtedly the most potentially valuable 400 acres in Metropolitan Vancouver today.

Mr. Anfield went on to speak in terms of "another potential British Properties" and suggested that all parties interested in the land should be advised that the land not required by the Band for its own use, when defined and surrendered, would be publicly advertised.

6 About this time the Shaughnessy Heights Golf Club was looking for a new site. Its lease from the Canadian Pacific Railway was due to expire in 1960 and the Club had been told that it would not be renewed. The Club turned its attention therefore to the Musqueam Reserve. At the same time an active interest in the reserve was being displayed by a representative of a prominent Vancouver real estate firm on behalf of a developer client interested in a long-term lease. Although his contact had been directly with the Indian Affairs Branch in Ottawa Messrs. Arneil and Anfield were both aware of it. Indeed, when he suggested to them that he meet with the Chief and Councillors of the Band to try to work out some arrangement, he was told by Mr. Anfield not to do so but to deal only through Indian Affairs personnel. That he followed this advice is made clear from the evidence of the Band members who testified. They were told of no interest in their land other than that expressed by the Golf Club.

7 The learned trial judge dealt specifically with the issue of the credibility of the members of the Band because he was very conscious of the fact that neither Mr. Arneil nor Mr. Anfield was alive to testify. He found the Band members to be "honest, truthful witnesses" and accepted their testimony.

8 The Band agreed that its surplus land should be leased and authorized a land appraisal to be made and paid for out of Band funds. In fact the appraisal was done by Mr. Howell of the Veterans Land Act Administration. Although he was a qualified appraiser, he was not a land use expert. He divided the reserve for valuation purposes into four

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 areas, the first of which included the 162 acres leased to the Golf Club. This area comprised 220 acres classified by Mr. Howell as "first-class residential area" and valued at $5,500 per acre making a total of $1,209,120. The other three areas which were all low lying he valued at $625 per acre. The Band was not given a copyof his report and indeed Mr. Arneil and Mr. Anfield had difficulty getting copies. They were very anxious to get the report because they were considering a lease of 150 acres to the Golf Club at "a figure of say $20,000 to $25,000 a year". The documentary evidence at trial showed that meetings and discussions had taken place between Mr. Anfield and the president of the Golf Club in 1956 and in the early part of 1957. It is of interest to note that Mr. Anfield had told the president of the Golf Club about the appraisal which was being carried out and had subsequently reviewed Mr. Howell's report with them. The Golf Club was, of course, advised that any proposal made by it would have to be laid before the Band for its approval.

9 On April 7, 1957 the Band Council met, Mr. Anfield presiding. The trial judge found that the Golf Club proposal was put to the Chief and Councillors only in the most general terms. They were told the lease would be of approximately 160 acres, that it would be for an initial term of 15 years with options to the Club for additional 15 year periods and that it would be "on terms to be agreed upon". In fact the rent that had been proposed by the Club was $25,000 a year for the first 15 years with the rent for each successive 15-year period being settled by mutual agreement or failing that by arbitration. However, under the proposal the rent for the renewal periods was subject to a ceiling increase of 15% of the initial rent of $25,000.

10 The learned trial judge found that when Mr. Bethune, the Superintendent of Reserves and Trusts in Ottawa, was advised of the $25,000 rental figure he questioned its adequacy and suggested to Mr. Arneil that he consult with Mr. Howell, the appraiser, as to what a proper return on the 160 acres would be. Unfortunately, Mr. Howell was not given all the facts. He was not told of the 15% ceiling on rent increases. He was not told that the Golf Club would have the right to remove all improvements on termination of the lease although he was told that the Club proposed to spend up to a million dollars in buildings and improvements on the leased land. Mr. Howell therefore recommended acceptance of the Golf Club's offer stating: "These improvements will revert to the Band at the end of the lease" and "The Department will be in a much sounder position to negotiate an increase in rental in fifteen years time when the Club will have invested a considerable amount of capital in the property, which they will have to protect". Mr. Howell testified at trial that he would not have recommended acceptance of the Golf Club's offer had he known that the improvements would not revert to the Band and that the rental on renewal periods was subject to a 15% ceiling increase.

11 Mr. Howell's letter was forwarded to Ottawa with the request that surrender documents be prepared for submission to the Band and this was done. It is interesting to note, however, that in the letter forwarding the surrender documents Mr. Bethune indicated to Mr. Arneil that he would like to see the 15% ceiling on rent removed and rent for subsequent periods established either by mutual agreement or by arbitration.

12 A Band Council meeting was held on July 25, 1957 again with Mr. Anfield in the chair. There was further discussion of the proposed lease to the Golf Club and two Councillors expressed the view that the renewal period should be at 10 year intervals rather than 15. It was at this meeting that the resolution was passed to hold a general meeting of Band members to consider and vote on the surrender of the 162 acres to the Crown for purposes of the lease. The meeting of the Band was held on October 6, 1957 but prior to that there was another meeting of Councillors on September 27, 1957. Mr. Harrison and Mr. Jackson of the Shaughnessy Golf Club attended this meeting and Mr.

Anfield, who had in the interval been promoted to Assistant Indian Commissioner for British Columbia, was there along with a Mr. Grant who was described as "Officer in charge - Vancouver Agency". In the presence of the Golf Club representatives Chief Sparrow took issue with the $25,000 per annum rental figure and stipulated for something in the neighbourhood of $44,000 to $44,500 per annum. The Golf Club representatives balked at this and they were asked to step outside while the Band Council and the Indian Affairs personnel had a private discussion.

13 Mr. Anfield expressed the view that the $44,000 figure was unreasonable and suggested $29,000 to which the Councillors agreed on the understanding that the first lease period would be for 10 years and subsequent rental negotiations would take place every five years. Mr. Grant testified that Mr. Anfield advised the Council to go ahead with the lease at the $29,000 figure and in ten years demand a healthy increase from the Golf Club. Mr. Grant also testified that the Council objected to any ceiling on future rental and Mr. Anfield said that he would convey their concern to the Department of Indian Affairs. On that basis the Council, according to Mr. Grant, reluctantly accepted the $29,000 figure.

14 At the meeting of the Band on October 6, 1957 ("the surrender meeting") Chief Sparrow was present along with the Councillors and members. Mr. Anfield presided as usual. The learned trial judge made specific findings as to what transpired at the meeting and I reproduce them from his reasons:

(a) Before the Band members voted, those present assumed or understood the golf club lease would be, aside from the first term, for 10-year periods, not 15 years.

(b) Before the Band members voted, those present assumed or understood there would be no 15% limitation on rental increases.

(c) The meeting was not told the golf club proposed it should have the right, at any time during the lease and for a period of up to 6 months after termination, to remove any buildings or structures, and any course improvements and facilities.

(d) The meeting was not told that future rent on renewal periods was to be determined as if the land were still in an uncleared and unimproved condition and used as a golf club.

(e) The meeting was not told that the Golf Club would have the right at the end of each 15-year period to terminate the lease on six-month's prior notice.

Neither (d) nor (e) were in the original Golf Club proposal and first appeared in the draft lease following the surrender meeting. They were not brought before the Band Council or the Band at any time for comment or approval. The Band voted almost unanimously in favour of the surrender.

15 Bythe surrenderdocumenttheChiefand CouncillorsoftheBand actingonbehalfoftheBand surrendered 162 acres to the Crown:

TO HAVE AND TO HOLD the same unto Her said Majesty the Queen, her Heirs and Successors forever in trust to lease the same to such person or persons, and upon such terms as the Government of Canada may deem most conducive to our Welfare and that of our people.

AND upon the further condition that all moneys received from the leasing thereof, shall be credited to our revenue trust account at Ottawa.

AND WE, the said Chief and Councillors of the said Musqueam Band of Indians do on behalf of our people and for ourselves, hereby ratify and confirm, and promise to ratify and confirm, whatever the said Government may do, or cause to be lawfully done, in connection with the leasing thereof.

It will be noted that there is no reference in the surrender to the proposed lease to the Golf Club. The position of the Crown at trial was that once the surrender documents were signed the Crown could lease to anyone on whatever terms it saw fit.

16 After the surrender there was considerable correspondence between Mr. Anfield and personnel in the Indian Affairs Branch in Ottawa particularly over the more controversial provisions of the lease but none of this correspondence was communicated to the Band Council nor were they given a copy of the draft lease which would have drawn these controversial provisions to their attention. The trial judge states:

Put baldly, the band members, regardless of the whole history of dealings and the limited information imparted at the surrender meeting, were not consulted.

But it was their land. It was their potential investment and revenue. It was their future.

17 The learned trial judge accepted that the Chief, the Councillors and the Band members were wholly excluded from any further discussions or negotiations among the Indian Affairs personnel, the Golf Club officers and their respective solicitors with respect to the terms of the lease. The trial judge found an explanation, although not a justi- fication, for this in the possibility that Indian Affairs personnel at the time took a rather paternalistic attitude towards the Indian people whom they regarded as wards of the Crown.

18 I turn now to the essential terms of the lease as entered into in January 22, 1958 as described by the learned trial judge:

1. The term is for 75 years, unless sooner terminated.

2. The rent for the first 15 years is $29,000 per annum.

3. For the 4 succeeding 15-year periods, annual rent is to be determined by mutual agreement, or failing such agreement, by arbitration...

such rent to be equal to the fair rent for the demised premises as if the same were still in an uncleared and unimproved condition as at the date of each respective determination and considering the restricted use to which the Lessee may put the demised premises under the terms of this lease;

4. The maximum increase in rent for the second 15-year period (January 1, 1973 to January 1, 1988) is limited to 15% of $29,000, that is $4350 per annum.

5. The golf club can terminate the lease at the end of any 15-year period by giving 6 months' prior notice.

6. The golf club can, at any time during the lease and up to 6 months after termination, remove any buildings or other structures, and any course improvements and facilities.

19 Mr. Grant stated in evidence that the terms of the lease ultimately entered into bore little resemblance to what was discussed and approved at the surrender meeting and the learned trial judge agreed. He found that had the Band been aware of the terms in fact contained in the lease they would never have surrendered their land.

20 So much for the facts as found by the learned trial judge. What recourse in law, if any, does the Band have in such circumstances?

2. Section 18 of the Indian Act

21 The appellants contend that the Federal Court of Appeal erred in failing to find that s. 18 of the Indian Act imposed on the Crown a fiduciary obligation enforceable in the courts. The section reads as follows:

18 (1) Subject to the provisions of this Act, reserves shall be held by Her Majesty for the use and benefit of the respective bands for which they were set apart; and subject to this Act and to the terms of any treaty or surrender, the Governor in Council may determine whether any purpose for which lands in a reserve are used or are to be used is for the use and benefit of the band.

Mr. Justice Le Dain, after concluding on the authorities that there was nothing in principle to prevent the Crown from having the status of a trustee in equity, found that s. 18 nevertheless did not have that effect. It merely imposed on the Crown a governmental obligation of an administrative nature. It was a public law obligation rather than a private law obligation. Section 18 could not therefore afford a basis for an action for breach of trust.

22 WhileIaminagreementthats.18doesnot per se create a fiduciary obligation in the Crown with respect to Indian reserves, I believe that it recognizes the existence of such an obligation. The obligation has its roots in the aboriginal title of Canada's Indians as discussed in Calder v. Attorney General of British Columbia, [1973] S.C.R. 313 . In that case the Court did not find it necessary to define the precise nature of Indian title because the issue was whether or not it had been extinguished. However, in St. Catherine's Milling and Lumber Co. v. The Queen (1889) 14 App. Cas. 46 Lord Watson, speaking for the Privy Council, had stated at p. 54 that "the tenure of the Indians [is] a personal and usufructuary right". That description of the Indian's interest in reserve lands was approved by this Court

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 most recently in Government of Canada v. Smith (1983) 47 N.R. 132 . It should be noted that no constitutional issue such as arose in the St. Catherine's and Smith cases arises in this case since title to Indian reserve land in British Columbia was transferred to the Crown in right of Canada in 1938: see British Columbia Orders in Council 208 and 1036 passed pursuant to Article 13 of the Terms of Union of 1870.

23 I think that when s. 18 mandates that reserves be held by the Crown for the use and benefit of the Bands for which they are set apart, this is more than just an administrative direction to the Crown. I think it is the acknowledgment of a historic reality, namely that Indian Bands have a beneficial interest in their reserves and that the Crown has a responsibility to protect that interest and make sure that any purpose to which reserve land is put will not interfere with it. This is not to say that the Crown either historially or by s. 18 holds the land in trust for the Bands. The Bands do not have the fee in the lands; their interest is a limited one. But it is an interest which cannot be derogated from or interfered with by the Crown's utilization of the land for purposes incompatible with the Indian title unless, of course, the Indians agree. I believe that in this sense the Crown has a fiduciary obligation to the Indian Bands with respect to the uses to which reserve land may be put and that s. 18 is a statutory acknowledgment of that obligation. It is my view, therefore, that while the Crown does not hold reserve land under s. 18 of the Act in trust for the Bands because the Bands' interests are limited by the nature of Indian title, it does hold the lands subject to a fiduciary obligation to protect and preserve the Bands' interests from invasion or destruction.

24 The respondent submits, however, that any obligation imposed on the Crown by s. 18(1) of the Indian Act is political only and unenforceable in courts of equity. Section 18, he says, gives rise to a "trust in the higher sense" as discussed in Kinloch v. Secretary of State for India in Council (1882) 7 App. Cas. 619 (H.L.) and Tito v. Waddell (1977) 3 All E.R. 129 (Ch.) . Mr. Justice Le Dain, delivering the judgment of the Federal Court of Appeal, adopted this approach. He expressed the view that these cases indicate that "in a public law context neither the use of the words 'in trust' nor the fact that the property is to be held or dealt with in some manner for the benefit of others is conclusive of an intention to create a true trust". He found that the discretion conferred on the Crown by s. 18(1) evidenced an intention to exclude the equitable jurisdiction of the courts.

25 With respect, while I agree with the learned justice that s. 18 does not go so far as to create a trust of reserve lands for the reasons I have given, it does not in my opinion exclude the equitable jurisdiction of the courts. The discretion conferred on the Governor in Council is not an unfettered one to decide the use to which reserve lands may be put. It is to decide whether any use to which they are proposed to be put is "for the use and benefit of the band". This discretionary power must be exercised on proper principles and not in an arbitrary fashion. It is not, in my opinion, open to the Governor in Council to determine that a use of the land which defeats Indian title and affords the band nothing in return is a "purpose" which could be "for the use and benefit of the band". To so interpret the concluding part of s. 18 is to deprive the opening part of any substance.

26 Moreover, I do not think we are dealing with a purely public law context here. Mr. Justice Le Dain agrees that a band has a beneficial interest in its reserve. I believe it is clear from s. 18 that that interest is to be respected and this is enough to make the so-called "political trust" cases inapplicable.

27 In Kinloch (supra ) in which Lord Selborne L.C. first advanced the idea of the political trust, the issue was whether a Royal Warrant that "granted" booty of war to the respondent Secretary of State for India "in trust" for the

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 officers and men of certain forces created a trust enforceable in the courts. It was held that it did not, the effect of the Warrant being to constitute the Secretary of State an agent of the Crown for the distribution of the booty rather than a trustee. In Civilian War Claimants Association, Ltd. v. The King, [1932] A.C. 14 the plaintiffs, as the assignees of civilian claimants who had suffered loss at the hands of the Germans during World War I, alleged, inter alia , that money received by the Crown as war reparations from Germany pursuant to treaty was being held for the claimants on trust. Their claim was rejected by the House of Lords. In Hereford Railway Co. v. The Queen (1894) 24 S.C.R. 1 , money alleged by the plaintiff railway to have been granted by the legislature as a subsidy was held not to be subject to a trust enforceable in the courts. In all these cases the funds at issue were the property of the Crown (or, at least, as in Kinloch (supra ), in the possession of the Crown) and none of those laying claim to them as beneficiaries could show a right to share in the funds independent of the treaty, statute or other instrument alleged to give rise to an enforceable trust.

28 In Tito v. Waddell (supra) the plaintiff Banaban Islanders asserted that certain royalties payable to the local government Commissioner as a result of mining operations on their land gave rise to trusts in their favour. In rejecting their claims on the basis of a number of different considerations, Megarry V.C. found at pp. 225-26 that there was not a sufficient relationship between the land on which the mining operations took place and the royalties to give rise to a fair inference that a true trust of the royalties was intended. The royalties were exclusively Crown property and the fact that the Banaban Islanders owned the land did not give them an interest in the royalties. I believe it is implicit in Megarry V.C.'s reasons that if the Banaban Islanders could have shown an interest in the royalties themselves, a stronger case would have arisen in favour of a trust.

29 It seems to me that the "political trust" line of authorities are clearly distinguishable from the present case because Indian title has an existence apart altogether from s. 18(1) of the Indian Act . It would fly in the face of the clear wording of the section to treat that interest as terminable at will by the Crown without recourse by the Band.

30 Continuing with the analysis of s. 18, it seems to me quite clear from the wording of the section that the Governor in Council's authority to determine in good faith whether any purpose to which reserve lands are proposed to be put is for the use and benefit of the Band is "subject to the terms of any treaty or surrender". I take this to means that if a Band surrenders its beneficial interest in reserve lands for a specific purpose, then the Governor in Council's authority under the section to decide whether or not the purpose is for the use and benefit of the Band is pre-empted. The Band has itself agreed to the purpose and the Crown may rely upon that agreement. It will be necessary to consider this in greater detail in connection with the surrender which in fact took place in this case.

3. The failure to plead the defence of "political trust"

31 The second ground of appealputforward bythe appellants concernsthe factthatthe defence of"politicaltrust" which was accepted by the Federal Court of Appeal and formed the basis of its decision was not specifically pleaded as required by Rule 409 of the Federal Court Rules.

32 I need say very little about this ground since I think the case falls to be decided on the substantive rather than the procedural issues. However, I agree with the appellants' submission that the Crown's tactics in this regard left a lot to be desired. It is quite apparent that when the trial judge indicated a willingness to permit an amendment at trial but

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 went on to order discovery on the issue, the Crown renounced the defence both at trial and through ministerial statements made out of court. It nevertheless went ahead and sought and obtained leave to raise it in the Federal Court of Appeal. Even although, as the Court of Appeal pointed out, the defence is a strictly legal one and the Band was probably not prejudiced by the absence of discovery, the Crown's behaviour does not, in my view, exemplify the high standard of professionalism we have come to expect in the conduct of litigation.

4. The surrender

33 Reference has already been made to the language of s. 18 and in particular to the fact that the Crown's fiduciary duty under it is "subject to the terms of any ... surrender". The implications of this have to be considered in the context of the learned trial judge's finding that the Band surrendered the 162 acres to the Crown for lease to the Golf Club on specific terms which were not obtained. The trial judge found that the surrender itself created a trust relationship between the Crown and the Band. The subject of the trust, the trust res , was not the Band's beneficial interest in the land but the land itself. The Crown prior to the surrender had title to the land subject to the Indian title. When the Band surrendered the land to the Crown, the Band's interest merged in the fee. The Crown then held the land free of the Indian title but subject to the trust for lease to the Golf Club on the terms approved by the Band at its meeting on October 6, 1957. This trust was breached by the Crown when it leased the land to the Club on terms much less favourable to the Band.

34 It was submitted on behalf of the Crown that even if the surrender gave rise to a trust between the Crown and the Band, the terms of the trust must be found in the surrender document and it was silent both as to the lessee and the terms of the lease. Indeed, it expressly gave the government complete discretion both as to the lessee and the terms of the lease and contained a ratification by the Band of any lease the government might enter into.

35 I cannot accept the Crown's submission. The Crown was well aware that the terms of the lease were important to the Band. Indeed, we have the trial judge's finding that the Band would not have surrendered the land for the purpose of a lease on the terms obtained by the Crown. It ill becomes the Crown, therefore, to obtain a surrender of the Band's interest for lease on terms voted on and approved by the Band members at a meeting specially called for the purpose and then assert an overriding discretion to ignore those terms at will: see Robertson v. Minister of Pensions, [1949] 1 K.B. 227 ; Lever Finance Ltd. v. Westminster (City) L.B.C., [1971] 1 Q.B. 222 (C.A.) . It makes a mockeryof the Band's participation. The Crown well knew that the lease it made with the Golf Club was not the lease the Band surrendered its interest to get. Equity will not permit the Crown in such circumstances to hide behind the language of its own document.

36 I return to s. 18. What effect does the surrender of the 162 acres to the Crown in trust for lease on specific terms have on the Crown's fiduciary duty under the section? It seems to me that s. 18 presents no barrier to a finding that the Crown became a full-blown trustee by virtue of the surrender. The surrender prevails over the section 18 duty but in this case there is no incompatibility between them. Rather the fiduciary duty which existed at large under the section to hold the land in the reserve for the use and benefit of the Band crystallized upon the surrender into an express trust of specific land for a specific purpose.

37 There is no magic to the creation of a trust. A trust arises, as I understand it, whenever a person is compelled in

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 equity to hold property over which he has control for the benefit of others (the beneficiaries) in such a way that the benefit of the property accrues not to the trustee, but to the beneficiaries. I think that in the circumstances of this case as found by the learned trial judge the Crown was compelled in equity upon the surrender to hold the surrendered land in trust for the purpose of the lease which the Band members had approved as being for their benefit. The Crown was no longer free to decide that a lease on some other terms would do. Its hands were tied.

38 What then should the Crown have done when the Golf Club refused to enter into a lease on the approved terms? It seems to me that it should have returned to the Band and told them. It was certainly not open to it at that point of time to go ahead with the less favourable lease on the basis that the Governor in Council considered it for the benefit of the Band. The Governor in Council's discretion in that regard was pre-empted by the surrender. I think the learned trial judge was right in finding that the Crown acted in breach of trust when it barrelled ahead with a lease on terms which, according to the learned trial judge, were wholly unacceptable to its cestui que trust .

5. The claim in deceit

39 The appellants base their claim against the Crown in deceit as well as in trust. They were unsuccessful on this aspect of their claim at trial but have raised it again on appeal to this Court. While the learned trial judge found that the conduct of the Indian Affairs personnel amounted to equitable fraud, it was not such as to give rise to an action for deceit at common law. He found no dishonesty or moral turpitude on the part of Mr. Anfield, Mr. Arneil and the others. Their failure to go back to the Band and indicate that the terms it had approved were unobtainable, their entry into the lease on less favourable terms and their failure to report to the Band what those terms were all flowed, he found, from their paternalistic attitude to the Band rather than from any intent to deceive them or cause them harm.

40 Nevertheless, there was a concealment amounting to equitable fraud. It was "conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other" (Kitchen v. Royal Air Force Association et al, [1958] 1 W.L.R. 563 per Lord Evershed M.R. at p. 573). The effect of the finding of equitable fraud was to disentitle the Crown to relief for breach of trust under s. 98 of the Trustee Act , R.S.B.C. 1960, c. 390; now R.S.B.C. 1979, c. 414. A trustee cannot be exonerated from liability for breach of trust under that section unless he has acted "honestly and reasonably".

41 The trial judge's findings on this aspect of the Band's claim are, I believe, sufficient to dispose of this ground of appeal.

6. The measure of damages

42 I come now to one of the most difficult issues on the appeal, namely the principles applicable to determine the measure of damages. No assistance is to be derived on this issue from the Federal Court of Appeal which exonerated the Crown from any liability. I turn therefore to the approach taken by the learned trial judge.

43 The trial judge stated as general principles that the measure of damages is "the actual loss which the acts or omissions have caused to the trust estate": Fales et al v. Canada Permanent Trust Company, [1977] 2 S.C.R. 302 per Dickson J. at p. 320 and that the beneficiary is "entitled to be placed in the same position so far as is possible as if there

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 had been no breach of trust": Toronto Dominion Bank v. Uhren (1960) 32 W.W.R. 61 (Sask. C.A.) per Gordon J.A. at p. 66; Culliton J.A. at p. 73. The learned trial judge then considered whether the proper measure of damages might not be the difference in value between a lease on the terms approved by the Band and the lease which was in fact obtained from the Golf Club. He discarded this measure on the basis that the evidence of the witnesses for the Golf Club satisfied him that the Club would never have entered into a lease on the terms approved by the Band. It was his conclusion that the difference in the value of the two leases could not be used as the proper measure in face of the evidence of the Golf Club witnesses that caused the learned trial judge to consider other approaches based on other uses of the land. Was he correct in this?

44 Viewed from one perspective it may be said that he was wrong. The Band authorized and was prepared to accept a lease of a certain value and received a lease of lesser value. Prima facie then, its loss was the difference between the two. On the other hand, how can it be said that the breach of trust cost the Band a lease which the Club would never have entered into? The problem here seems to be one of causation. The breach of trust undoubtedly cost the Band something because they are fixed with a lease which is worth substantially less than the one they surrendered their land to receive. But against what is their loss to be measured if not against the value of the lease they expected to get?

45 The learned trial judge reviewed the evidence adduced by experts as to what would have been a fair return from a golf club lease over the period from 1958 to the date of trial based on the capital value attributed to the land over that period by these experts. This method of assessment made it clear that the Golf Club lease actually entered into did not yield a fair return. The learned trial judge, however, rejected the concept that the Band's loss was the difference in value between a "fair and reasonable" lease and the actual lease. He said:

My problem, unfortunately, is not whether the present Golf Club lease is reasonable or not, it is to determine the amount of loss suffered on the basis a Golf course lease would probably not have been entered into . I have outlined the evidence, on this one aspect of value, merely to illustrate, among other things, the remarkable increase in value of this and other land since 1957 and 1958. (Emphasis added)

In other words, just as he had found that the lease the Band wanted would not have been entered into and therefore the value of that lease could not be used in assessing the Band's damages, he likewise found that no golf club lease would have been entered into, presumably on the basis that a so-called "fair" lease could not have been obtained. The value of the land in 1957 and 1958 and its increase in value subsequently made use as a golf course uneconomic.

46 The trial judge therefore moved to other potential uses and concluded on the evidence that the 162 acres would at some point of time have been successfully marketed as pre-paid 99-year leasehold lots for residential development. He found, however, that such a development would not have got underway for some years following the date of the Golf Club lease. Time would have been required for planning, for tenders and for negotiation. Moreover, development might have been slow at first. However, based on the evidence before him as to economic, business and population trends, real estate values, housing accommodation demand and raw land shortages over the period 1958 to 1973, he concluded that the area would probably have been well on the way to full development on a residential, leasehold basis by 1968 to 1971. He noted in passing that this type of development had taken place on other parts of the reserve and he made due allowance for the fact that those developments were probably assisted by the presence of the golf

47 Based then on the possibility that this type of development might have taken place on the 162 acres and applying the anticipated return from such development against the return from the Golf Club lease, the learned trial judge came up with a global assessment of $10 million. He acknowledged that this figure could not be mathematically documented but stated that it was "a considered reaction based on the evidence, the opinions, the arguments and, in the end, my conclusions of fact". However, he did go on to set out the various factors and contingencies that he had taken into account in reaching his assessment. He did not allocate percentages to these contingencies.

48 It seems to me that what the trial judge was doing once he rejected the value of a golf club lease (either the one the Band authorized or one which could be described objectively as "fair") as the value against which the Band's loss was to be measured was to put a value as of the date of trial on the Band's lost opportunity to develop the land for residential purposes and assess the Band's damages in terms of the difference between that figure and the value of the Golf Club lease. Is this a proper approach to compensation for breach of trust?

49 The Crown submits that it is not. It points out that the Band was prepared to settle for a golf club lease and the lease it obtained was the best golf club lease available in 1958. The Band therefore suffered no loss. It seems to me, however, that this completely overlooks the terms of the trust and the failure of the Crown to return to the Band and tell them that these terms were not available. At that point the Band might well have abandoned the idea of a golf club lease entirely and canvassed other options. I do not think that that reality can be ignored. What the Crown did, therefore, was to commit the Band to an unauthorized long-term lease which deprived it of the opportunity to use the land for any other purpose. I do not think it is open to the Crown to say: "You wanted a golf club lease and you got one: your only loss arises from the fact that you didn't get as good a one as you wanted".

50 The position at common lawconcerning damages for breach of trust and, in particular, the difference between the principles in trust law from those applicable in tort and contract, are well summarized in the following passages from Mr. Justice Street's judgment in the Australian case of Re Dawson: Union Fidelity Trustee Co. Ltd. v. Perpetual Trustee Co. Ltd. (1966) 84 W.N.N.S.W. 399 at pp. 404-06:

...The obligation of a defaulting trustee is essentially one of effecting a restitution to the estate. The obligation is of a personal character and its extent is not to be limited by common law principles governing remoteness of damage.

.....

Caffrey v. Darby (1801) 6 Vas. Jun. 488; 31 E.R. 1159 is consistent with the proposition that if a breach has been committed then the trustee is liable to place the trust estate in the same position as it would have been in if no breach had been committed. Considerations of causation, foreseeability and remoteness do not readily enter into the matter.

.....

The principles embodied in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach. Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach.

.....

The cases to which I have referred demonstrate that the obligation to make restitution, which courts of equity have from very early times imposed on defaulting trustees and other fiduciaries, is of a more absolute nature than the common-law obligation to pay damages for tort or breach of contract. It is on this fundamental ground that I regard the principles in Tomkinson's case (Tomkinson v. First Pennsylvania Banking-Trust Co., [1961] A.C. 1007 ) as distinguishable. More over the distinction between common-law damages and relief against a defaulting trustee is strikingly demonstrated by reference to the actual form or relief granted in equity in respect of breaches of trust. The form of relief is couched in terms appropriate to require the defaulting trustee to restore to the estate the assets of which he deprived it. Increases in market values be-ween the date of breach and the date of recoupment are for the trustee's account; the effect of such increase would, at common law, be excluded from the computation of damages but in equity a defaulting trustee must make good the loss by restoring to the estate the assets of which he deprived it notwithstanding that market values may have increased in the meantime. The obligation to restore to the estate the assets of which he deprived it necessarily connotes that, where a monetary compensation is to be paid in lieu of restoring assets, that compensation is to be assessed by reference to the value of the assets at the date of restoration and not at the date of deprivation . In this sense the obligation is a continuing one and ordinarily, if the assets are for some reason not restored in specie, it will fall for quantification at the date when recoupment is to be effected, and not before.

The reasoning which the House of Lords adopted in Tomkinson's case proceeds upon the basis that damages at common law are ordinarily not affected by subsequent fluctuations in currency exchange rates any more than ordinarily they are affected by subsequent fluctuations in market values. This reasoning is not available in a claim against a defaulting trustee as his obligation has always been regarded as tantamount to an obligation to effect restitution in specie; such an obligation must necessarily be measured in the light of market fluctuations since the breach of trust; and in my view it must also necessarily be affected, where relevant, by currency fluctuations since the breach. (Emphasis added)

51 This statement of the law has been cited with approval in Underhill's Law of Trusts and Trustees , 13th ed., 1979, at pp. 702-03, and was also recently adopted by Brightman L.J. in Bartlett v. Barclays Bank Trust Co. Ltd. (No. 2), [1980] 2 All E.R. 92 (Ch.) at p. 93: see also Waters, Law of Trusts in Canada , 1974, at pp. 843-45.

52 In this case the Band surrendered the land to the Crown for lease on certain specified terms. The trial judge found as a fact that such a lease was impossible to obtain. The Crown's duty at that point was to go back to the Band, consult with it, and obtain further instructions. Instead of doing that it went ahead and leased the land on unauthorized terms. In my view it thereby committed a breach of trust and damages are to be assessed on the basis of the principles enunciated by Mr. Justice Street. The lost opportunity to develop the land for a period of up to 75 years in duration is to be compensated as at the date of trial notwithstanding that market values may have increased since the date of

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 breach. The beneficiary gets the benefit of any such increase. It seems to me that there is no merit in the Crown's submission that "if a trustee is under a duty to alienate land by lease or otherwise, the date to assess compensation for breach of that duty is the date when the alienation should have taken place not the date of trial or judgment". Since the lease that was authorized by the Band was impossible to obtain, the Crown's breach of duty in this case was not in failing to lease the land, but in leasing it when it could not lease it on the terms approved by the Band. The Band was thereby deprived of its land and any use to which it might have wanted to put it. Just as it is to be presumed that a beneficiary would have wished to sell his securities at the highest price available during the period they were wrongfully withheld from him by the trustee (see McNeill v. Fultz (1906) 38 S.C.R. 198 ), so also it should be presumed that the Band would have wished to develop its land in the most advantageous way possible during the period covered by the unauthorized lease. In this respect also the principles applicable to determine damages for breach of trust are to be contrasted with the principles applicable to determine damages for breach of contract. In contract it would have been necessary for the Band to prove that it would have developed the land; in equity a presumption is made to that effect: see Waters, Law of Trusts in Canada , at p. 845.

53 I cannot find that the learned trial judge committed any error in principle in approaching the damage issue on the basis of a lost opportunity for residential development. It was urged upon us by counsel for the Band that the $10 million figure was inordinately low because the learned trial judge took into consideration the contingency that the Golf Club would decide to exercise its right to terminate the lease which it could do at any time. Counsel for the Band submitted that there was no evidence to suggest that the Golf Club would terminate the lease before the year 2033 and that indeed there was evidence to the contrary. The Golf Club had only recently expended $750,000 on capital improvements. There was no other land available in Vancouver to which the Golf Club could move. Even if there was, relocation would require the Golf Club to spend substantial amounts of money in creating a new golf course quite apart from the cost of acquisition of the land.

54 Be that as it may, I do not think it is the function of this Court to interfere with the quantum of damages awarded by the trial judge if no error in principle in determining the measure of damages has been demonstrated. The trial judge was entitled to treat the termination of the lease by the Club as a contingency tending towards diminution of the Band's damages and it is not for this Court to substitute the value it would have put upon that contingency for his. I would not, therefore, interfere with the quantum. The trial judge's task was not an easy one but I think he "did the best he could": (see Penvidic Contracting Co. Limited v. International Nickel Co. of Canada Limited, [1976] 1 S.C.R. 267 at 279-80 ).

7. Punitive damages, interest and costs

55 TheCourtadvised Crown counselatthe hearingoftheappealthatit was notnecessaryto hear fromhimon the subject of punitive damages. That claim falls on the same grounds as the claim for damages in deceit.

56 I would not interfere with the trial judge's refusal to award pre-judgment interest. The award was made for breach of trust not tort. Section 3(1) of the Crown Liability Act R.S.C. 1970, c. C-38 has therefore no application. Moreover, damages were assessed as of the date of trial and took the form of a global award.

57 The trial judge committed no error in awarding post-judgment interest at the statutory rate. I would not in-

Disposition

58 For the reasons given, I would allow the appeal, set aside the judgment of the Federal Court of Appeal and re-instate the judgment of the learned trial judge. I would award the appellants their costs both here and in the Federal Court of Appeal.

Dickson J.:

59 The question is whether the appellants, the Chief and Councillors of the Musqueam Indian Band, suing on their own behalf and on behalf of all other members of the band, are entitled to recover damages from the federal Crown in respect of the leasing to a golf club of land on the Musqueam Indian Reserve. Collier J., of the Trial Division of the Federal Court, declared that the Crown was in breach of trust. He assessed damages at $10,000,000. The Federal Court of Appeal allowed a Crown appeal, set aside the judgment of the Trial Division and dismissed the action.

I General

60 Before adverting to the facts, reference should be made to several of the relevant sections of the Indian Act , R.S.C. 1952 c.149 as amended. Section 18(1) provides in part that reserves shall be held by Her Majesty for the use of the respective Indian bands for which they were set apart. Generally, lands in a reserve shall not be sold, alienated, leased or otherwise disposed of until they have been surrendered to Her Majesty by the band for whose use and benefit in common the reserve was set apart (s.37). A surrender may be absolute or qualified, conditional or unconditional (s.38(2)). To be valid, a surrender must be made to Her Majesty, assented to by a majority of the electors of the band, and accepted by the Governor in Council (s.39(1)).

61 The gist of the present action is a claim that the federal Crown was in breach of its trust obligations in respect of the leasing of approximately 162 acres of reserve land to the Shaughnessy Heights Golf Club of Vancouver. The band alleged that a number of the terms and conditions of the lease were different from those disclosed to them before the surrender vote and that some of the lease terms were not disclosed to them at all. The band also claimed failure on the part of the federal Crown to exercise the requisite degree of care and management as a trustee.

II The Facts

62 The Crown does not attack the findings of fact made by the trial judge. The Crown simply says that on those facts no cause of action has been made out. The following summary of the facts derives directly from the judgment at trial. Musqueam Indian Reserve (No. 2) in 1955 contained 416.53 acres, situated within the charter area of the City of Vancouver. The Indian Affairs Branch recognized that the reserve was a valuable one, "the most potentially valuable 400 acres in Vancouver today". In 1956 the Shaughnessy Heights Golf Club was interested in obtaining land on the Musqueam Reserve. There were others interested in developing the land, although the band was never told of the proposals for development.

63 On April 4, 1957, the President of the golf club wrote to Mr. Anfield, District Superintendent of the Indian Affairs Branch, setting forth a proposal for the lease of 160 acres of the Indian Reserve, the relevant terms of which were as follows:

1. The club was to have the right to construct on the leased area a golf course and country club and such other buildings and facilities as it considered appropriate for its membership.

2. The initial term of the lease was to be for fifteen years commencing May 1, 1957, with the club to have options to extend the term for four successive periods of fifteen years each, giving a maximum term of seventy-five years.

3. The rental for the first fifteen year term was to be $25,000 per annum.

4. The rental for each successive fifteen year period was to be determined by mutual agreement between the Department and the club and failing agreement, by arbitration, but the rental for any of the fifteen year renewal periods was in no event to be increased or decreased by over that payable for the preceding fifteen year period by more than 15% of the initial rent.

5. At any time during the term of the lease, and for a period of up to six months after termination, the club was to have the right to remove any buildings and other structures it had constructed or placed upon the leased area, and any course improvements and facilities.

64 On April 7, 1957 a band council meeting was held. Mr. Anfield presided. The trial judge accepted evidence on behalf of the plaintiffs that not all of the terms of the Shaughnessy proposal were put before the band council at the meeting. William Guerin, a councillor, said copies of the proposal were not given to them; he did not recall any mention of $25,000 per year for rental; he described it as a vague general presentation with reference to 15-year periods. Chief Edward Sparrow said he did not recall the golf club proposal being read out in full. At the meeting the band council passed a resolution which the trial judge presumed to have been drawn up by Mr. Anfield. The relevant part of the resolution reads:

That we do approve the leasing of unrequired lands on our Musqueam I.R. 2 and that in connection with the application of the Shaughnessy Golf Club, we do approve the submission to our Musqueam Band of surrender documents for leasing 160 acres approximately as generally outlined on the McGuigan survey in red pencil.

These events followed the band council meeting:

(a) Mr. Bethune, Superintendent of Reserves and Trusts of the Indian Affairs Branch, in Ottawa, questioned the adequacy of the $25,000 annual rental for the first fifteen years. At an investment return of five to six percent, the annual rental value would be between $40,000 and $48,000 per year for the first 15 years. The golf club proposal meant an investment re turn of approximately 3%. Mr. Bethune suggested that the opinion of Mr. Alfred Howell be obtained. Mr. Howell, with the Veterans Land Act administration, had earlier made an appraisal of the reserve

lands at the request of the Indian Affairs Branch.

(b) On May 16, 1957 Mr. Anfield wrote Mr. Howell asking for the latter's opinion as to whether the $25,000 per year rental for the first 15 years was "just and equitable". Mr. Howell was not given all the details of the Shaughnessy proposal. He was not told that rent increases would be limited to 15%. Nor was he made aware that the golf club proposed to have the right to remove any buildings or improvements.

(c) In his reply to Mr. Anfield, Mr. Howell expressed the view that a 75-year lease, adjustable over 15 years and made with a financially sound tenant, eliminated any risk factor. On that basis he felt the then government bond rate of 3.75% was the most that could be expected.

At trial Mr. Howell said that if he had known the improvements would not revert to the band, he would have recommended a rate ofreturn of4 to 6%. He expressed shock at the 15% clause. He had assumed that at the end of the initial term the rental could be renegotiated on the basis of "highest and best use" without any limitation on rental increase.

(d) On September 27, 1957 a band council meeting was held at the reserve, attended by members of the band council, Mr. Anfield, two other officials of the Department of Indian Affairs and representatives of the golf club. Chief Sparrow stipulated for 5% income on the value of 162 acres, amounting to $44,000 per annum. The golf club people balked. They were asked to step outside while the band council and the Indian Affairs personnel had a private discussion. Mr. Anfield said the demand of $44,000 was unreasonable. Eventually, the band council reluctantly agreed to a figure of $29,000. William Guerin testified the councillors agreed to $29,000 because they understood the first lease period was to be 10 years; subsequent rental negotiations would be every five years; and the band council felt it could negotiate for 5% of the subsequent values.

Mr. Grant, officer in charge of the Vancouver agency of the Department of Indian Affairs, testified that there was "absolutely no question that the vote was for a specific lease to a specific tenant on specific terms" and that the band did not give Mr. Anfield "authority to change things around".

(e) On October 6, 1957, a meeting of members of the band was held at the reserve, the so-called "surrender meeting". The trial judge made these findings: (i) those present assumed or understood the golf club lease would be, aside from the first term, for 10-year periods, not 15 years; (ii) those present assumed or understood there would be no 15% limitation on rental increases; (iii) the meeting was not told that the golf club had proposed that it should have the right to remove any buildings, structures, course improvements and facilities.

The trial judge found further that two matters which subsequently found their way into the lease were not even put before the surrender meeting. They were not in the original golf club proposal. They first appeared in draft leases, after the meeting. The first of these terms was the method of determining future rents; failing mutual agreement, the matter was to be submitted to arbitration; the new rent would be the fair rent as if the land were still in an uncleared and unimproved condition and used as a golf club. The second term gave the golf club, but not the Crown, the right at the end of each 15-year period to terminate the lease on six month's prior notice. These two terms were not subsequently brought before the band council or the band for comment or approval.

The surrender, which was approved by a vote of 41 to 2, gave the land in question to Her Majesty the Queen on the following terms:

AND upon the further condition that all monies received from the leasing thereof, shall be credited to our revenue trust account at Ottawa.

AND WE, the said Chief and Councillors of the said Musqueam Band of Indians do on behalf of our people and for ourselves, hereby ratify and confirm, and promise to ratify and confirm, whatever the said Govern- ment may do, or cause to be lawfully done, in connection with the leasing thereof.

(f) On December 6, 1957 the surrender of the lands was accepted by the federal Crown by Order-in-Council P.C. 1957-1606, "in order that the lands covered thereby may be leased".

(g) On January 9, 1958, a band council meeting was held. A letter was read regarding the proposed golf club lease. The letter indicated the renewal periods were to be 15 years instead of 10 years. Chief Sparrow pointed out that the band had demanded 10-year periods. William Guerin said the council members were "flabbergasted" to learn about the 15-year terms. Guerin testified the band was told it was "stuck" with the 15-year terms. The band council then passed a resolution agreeing the first term should be 15 years, but insisting the renewal periods be 10-year terms.

(h) The lease was signed January 22, 1958. It provided, inter alia :

1. The term is for 75 years, unless sooner terminated.

2. The rent for the first 15 years is $29,000 per annum.

3. For the succeeding 15-year periods, annual rent is to be determined by mutual agreement, or failing such agreement, by arbitration, such rent to be equal to the fair rent for the demised premises as if the same were still in an uncleared and unimproved condition and used as a golf course.

4. The maximum increase in rent for the second 15-year period (January 1, 1973 to January 1, 1988) is limited to 15% of $29,000, that is $4350 per annum.

5. The golf club can terminate the lease at the end of any 15-year period by giving 6 months' prior notice.

6. The golf club can at any time during the lease and up to 6 months after termination, remove any buildings

or other structures, and any course improvements and facilities.

The band was not given a copy of the lease, and did not receive one until twelve years later, in March 1970.

(i) Mr. Grant testified that the terms of the lease ultimately entered into bore little resemblance to what was discussed at the surrender meeting. The judge agreed. He found that the majority of those who voted on October 6, 1957 would not have assented to a surrender of the 162 acres if they had known all the terms of the lease of January 22, 1958.

III Assessment At Trial and on Appeal of the Legal Effect of the Facts as Found

65 The plaintiffs based their case on breach of trust. They asserted that the federal Crown was a trustee of the surrendered lands. The trial judge agreed.

66 The Crown attempted to argue that if there was a trust it was, at best, a "political trust", enforceable only in Parliament and not a "true trust", enforceable in the courts. This distinction was recognized in two leading English cases dealing with the position of the Crown as trustee: Tito v. Waddell (No. 2), [1977] 3 All E.R. 129 ; Kinloch v. Secretary of State for India (1882) 7 App. Cas. 619 .

67 In Kinloch Lord Selbourn L.C. said at pp.625-6:

Now the words "in trust for" are quite consistent with, and indeed are the proper manner of expressing, every species of trust - a trust not only as regards those matters which are the proper subjects for an equitable jurisdiction to administer, but as respects higher matters, such as might take place between the Crown and public officers discharging, under the directions of the Crown, duties or functions belonging to the prerogative and to the authority of the Crown. In the lower sense they are matters within the jurisdiction of, and to be administered by, the ordinary Courts of Equity; in the higher sense they are not. What their sense is here, is the question to be determined, looking at the whole instrument and at its nature and effect.

68 Counsel for the band objected to any argument on the "political trust" defence because the Crown had failed to plead it. Collier J. gave leave, on terms, to amend the defence to raise the point but the Crown chose not to take advantage of the opportunity to amend. Collier J. therefore refused to consider the point.

69 The Crown then argued that if there were a legally enforceable trust its terms were those set out in the surrender document, permitting it to lease the 162 acres to anyone, for any purpose, and upon any terms which the Crown deemed most conducive to the welfare of the band. In the Crown's submission the surrender document imposed on it no obligation to lease to the golf club on the terms discussed at the surrender meeting; nor did it impose any duty on the Crown to obtain the approval of the band in respect of the terms of the lease ultimately entered into.

70 The trial judge rejected these submissions. He held, citing the Tito case, supra , that the Crown can, if it chooses, act as a trustee. He held also that the surrender of October 6, 1957 imposed on the Crown, as trustee, a duty as

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 of that date, to lease the surrendered land to the golf club on the conditions contemplated by the band. Substantial changes were made to these conditions, in respect of which no instruction or authorization was sought by the Crown, as trustee, from the members of the band, the cestuis que trust . The judge found the Crown liable for breach of trust.

71 In respect of damages, there was a great deal of evidence at trial, most of it by experts. Citing Fales et al v. Canada Permanent Trust Co., [1977] 2 S.C.R. 302 at 320 , the judge held that the measure of damages is the actual loss which the acts or omissions have caused to the trust estate, the plaintiffs being entitled to be placed in the same position so far as possible as if there had been no breach of trust. The judge proceeded on the basis that the band would not have agreed to the terms of the lease as signed and the club would not have agreed to a lease on the terms found by the judge to be the terms of the trust. Therefore it would have been possible for the band at some point to have leased the land for residential purposes on a 99-year leasehold basis on extremely favourable terms. In quantifying the award, the judge confessed to being unable to set out a precise rationale or approach, mathematical or otherwise. He said that the award was obviously a "global" figure: a considered reaction based on the evidence, the opinions, the arguments and, in the end, his own conclusions of fact. The judge assessed the plaintiffs' damages at $10,000,000.

72 The Federal Court of Appeal, speaking through Mr. Justice Le Dain, proceeded on the premise that the case presented on behalf of the band rested on the existence of a statutory trust in the private law sense based primarily on the terms of s.18(1) of the Indian Act . Section 18(1) reads:

Subject to the provisions of this Act, reserves shall be held by Her Majesty for the use and benefit of the respective bands for which they were set apart; and subject to this Act and to the terms of any treaty or surrender, the Governor in Council may determine whether any purpose for which lands in a reserve are used or are to be used is for the use and benefit of the band.

73 Le Dain J. scrutinized this section and concluded that it was not consistent with a "true trust" in the sense of an equitable obligation enforceable in a court of law. Especially telling, in his opinion, was the discretion vested by s.18(1) in the Governor in Council to determine whether a particular purpose to which reserve land is being put, or is proposed to be put, is "for the use and benefit of the band". In his view this discretion indicated it was for the government, not the courts, to determine what was for the use and benefit of the band. Such a discretion, in his opinion, was incompatible with an intention to impose an equitable obligation, enforceable in court, to deal with the land in a certain manner. Section 18(1) was therefore incapable of making the Crown a true trustee of those lands:

The extent to which the government assumes an administrative or management responsibility for the reserves of some positive scope is a matter of governmental discretion, not legal or equitable obligation. I am, therefore, of the opinion that section 18 of the Indian Act does not afford a basis for an action for breach of trust in the management or disposition of reserve lands.

74 Le Dain J. also rejected the alternative contention on behalf of the band that a trust was created by the terms of the surrender document, especially the words "in trust to lease the same..." and that the Crown was in breach of that trust by its alleged failure to exercise ordinary skill and prudence in leasing the land:

...it is my opinion that the words "in trust" in the surrender document were intended to do no more than indicate

that the surrender was for the benefit of the Indians and conferred an authority to deal with the land in a certain manner for their benefit. They were not intended to impose an equitable obligation or duty to deal with the land in a certain manner. For these reasons, I am of the opinion that the surrender did not create a true trust and does not, therefore, afford a basis for liability based on a breach of trust.

75 Even if he had been able to find a "true trust", Le Dain J. would have refused to follow Collier J. in concluding that the terms of such a trust were defined by the Indians' understanding of conditions the Crown was to secure in the lease. These conditions did not appear in the surrender document and they did not comply with ss.37 to 41 of the Indian Act , governing the conditions of a surrender:

From these provisions it is argued that the conditions of a surrender, in order to be valid, must be voted on and approved by a majority of the electors of a band, be certified by the superintendent or other officer who attended the meeting and by the chief or a member of the council of the band, and be submitted to and approved by the Governor in Council, all of which presuppose that the conditions will be in written form. I agree with these contentions. These solemn formalities have been prescribed as a matter of public policy for the protection of a band and the proper discharge of the government's responsibility for the Indians. They are also important as ensuring certainty as to the effect of a surrender and the validity of a subsequent disposition of surrendered land. It is to be noted that they are the only provisions of the Act excluded from the power of the Governor in Council under section 4(2) to declare by proclamation that particular provisions of the Act shall not apply in certain cases. The oral terms found by the Trial Judge were not voted on and approved by a majority of the band. They were deduced by the Trial Judge from the testimony of three members of the band and a former official of the Indian Affairs Branch as to what was said at the meetings, and in some cases as to what was not said. The oral terms of the surrender found by the Trial Judge were not accepted by the Governor in Council, as required by the Act. What was accepted by Order in Council P.C. 1957-1060 of December 6, 1957 was the "attached surrender dated the sixth day of October, 1957". It was an unqualified acceptance of the written surrender, with no reference, express or implied, to other terms or conditions.

76 Le Dain J. concluded that the oral conditions of the surrender found by the trial judge could not afford a basis in law for finding liability and awarding damages.

77 Having found no basis for the trust alleged, the Federal Court of Appeal allowed the Crown's appeal.

IV Fiduciary Relationship

78 The issue of the Crown's liability was dealt with in the courts below on the basis of the existence or non-existence of a trust. In dealing with the different consequences of a "true" trust, as opposed to a "political" trust, Le Dain J. noted that the Crown could be liable only if it were subject to an "equitable obligation enforceable in a court of law". I have some doubt as to the cogency of the terminology of "higher" and "lower" trusts, but I do agree that the existence of an equitable obligation is the sine qua non for liability. Such an obligation is not, however, limited to relationships which can be strictly defined as "trusts". As will presently appear, it is my view that the Crown's obligations vis-à-vis the Indians cannot be defined as a trust. That does not, however, mean that the Crown owes no enforceable duty to the Indians in the way in which it deals with Indian land.

79 In my view, the nature of Indian title and the framework of the statutory scheme established for disposing of Indian land places upon the Crown an equitable obligation, enforceable by the courts, to deal with the land for the benefit of the Indians. This obligation does not amount to a trust in the private law sense. It is rather a fiduciary duty. If, however, the Crown breaches this fiduciary duty it will be liable to the Indians in the same way and to the same extent as if such a trust were in effect.

80 The fiduciary relationship between the Crown and the Indians has its roots in the concept of aboriginal, native or Indian title. The fact that Indian bands have a certain interest in lands does not, however, in itself give rise to a fiduciary relationship between the Indians and the Crown. The conclusion that the Crown is a fiduciary depends upon the further proposi tion that the Indian interest in the land is inalienable except upon surrender to the Crown.

81 An Indian band is prohibited from directly transferring its interest to a third party. Any sale or lease of land can only be carried out after a surrender has taken place, with the Crown then acting on the band's behalf. The Crown first took this responsibility upon itself in the Royal Proclamation of 1763. It is still recognized in the surrender provisions of the Indian Act . The surrender requirement, and the responsibility it entails, are the source of a distinct fiduciary obligation owed by the Crown to the Indians. In order to explore the character of this obligation, however, it is first necessary to consider the basis of aboriginal title and the nature of the interest in land which it represents.

(a) The Existence of Indian Title

82 In Calder v. Attorney General of British Columbia, [1973] S.C.R. 313 , this Court recognized aboriginal title as a legal right derived from the Indians' historic occupation and possession of their tribal lands. With Judson and Hall JJ. writing the principal judgments, the Court split three-three on the major issue of whether the Nishga Indians' aboriginal title to their ancient tribal territory had been extinguished by general land enactments in British Columbia. The Court also split on the issue of whether the Royal Proclamation of 1763 was applicable to Indian lands in that Prov- ince. Judson and Hall JJ. were in agreement, however, that aboriginal title existed in Canada (at least where it had not been extinguished by appropriate legislative action) independently of the Royal Proclamation. Judson J. stated expressly that the Proclamation was not the "exclusive" source of Indian title (pp.322-23, 328). Hall J. said (at p.390) that "aboriginal Indian title does not depend on treaty, executive order or legislative enactment".

83 The Royal Proclamation of 1763 reserved "under our Sovereignty, Protection, and Dominion, for the use of the said Indians, all the Lands and Territories not included within the Limits of Our said Three new Governments, or within the Limits of the Territory granted to the Hudson's Bay Company, as also all the Lands and Territories lying to the Westward of the Sources of the Rivers which fall into the Sea from the West and North West as aforesaid" (R.S.C. 1970, Appendices 123, at p.127). In recognizing that the Proclamation is not the sole source of Indian title the Calder decision went beyond the judgment of the Privy Council in St. Catherine's Milling and Lumber Co. v. The Queen (1888), 14 App. Cas. 46 . In that case Lord Watson acknowledged the existence of aboriginal title but said it had its origin in the Royal Proclamation. In this respect Calder is consistent with the position of Chief Justice Marshall in the leading American cases of Johnson v. McIntosh (1823), 8 Wheaton 543 , and Worcester v. State of Georgia (1832), 6 Peters 515 , cited by Judson and Hall JJ. in their respective judgments.

84 In Johnson v. McIntosh Marshall C.J., although he acknowledged the Proclamation of 1763 as one basis for recognition of Indian title, was nonetheless of opinion that the rights of Indians in the lands they traditionally occupied prior to European colonization both predated and survived the claims to sovereignty made by various European nations in the territories of the North American continent. The principle of discovery which justified these claims gave the ultimate title in the land in a particular area to the nation which had discovered and claimed it. In that respect at least the Indians' rights in the land were obviously diminished; but their rights of occupancy and possession remained unaffected. Marshall C.J. explained this principle as follows, at pp.573-74:

The exclusion of all other Europeans, necessarily gave to the nation making the discovery the sole right of acquiring the soil from the natives, and establishing settlements upon it. It was a right which all asserted for themselves, and to the assertion of which, by others, all assented.

Those relations which were to exist between the discoverer and the natives, were to be regulated by themselves. The rights thus acquired being exclusive, no other power could interpose between them.

In the establishment of these relations, the rights of the original inhabitants were, in no instance, entirely disre- garded; but were necessarily, to a considerable extent, impaired. They were admitted to be the rightful occupants of the soil, with a legal as well as just claim to retain possession of it , and to use it according to their own discretion; but their rights to complete sovereignty, as independent nations, were necessarily diminished, and their power to dispose of the soil at their own will, to whomsoever they pleased, was denied by the original fundamental principle, that discovery gave exclusive title to those who made it. (emphasis added)

85 The principle that a change in sovereignty over a particular territory does not in general affect the presumptive title of the inhabitants was approved by the Privy Council in Amodu Tijani v. Secretary of State, Nigeria, [1921] 2 A.C. 399 . That principle supports the assumption implicit in Calder that Indian title is an independent legal right which, although recognized by the Royal Proclamation of 1763, nonetheless predates it. For this reason Kinloch v. Secretary of State for India, supra; Tito v. Waddell, supra , and the other "political trust" decisions are inapplicable to the present case. The "political trust" cases concerned essentially the distribution of public funds or other property held by the government. In each case the party claiming to be beneficiary under a trust depended entirely on statute, ordinance or treaty as the basis for its claim to an interest in the funds in question. The situation of the Indians is entirely different. Their interest in their lands is a pre-existing legal right not created by Royal Proclamation, by s.18(1) of the Indian Act , or by any other executive order or legislative provision.

86 It does not matter, in my opinion, that the present case is concerned with the interest of an Indian band in a reserve rather than with unrecognized aboriginal title in traditional tribal lands. The Indian interest in the land is the same in both cases: see Attorney General of Quebec v. Attorney General of Canada, [1921] 1 A.C. 401 at pp.410-11 (the Star Chrome case). It is worth noting, however, that the reserve in question here was created out of the ancient tribal territory of the Musqueam band by the unilateral action of the Colony of British Columbia, prior to Confeder- ation.

(b) The Nature of Indian Title

87 In the St. Catherine's Milling case, supra , the Privy Council held that the Indians had a "personal and usufructuary right" in the lands which they had traditionally occupied. Lord Watson said that "there has been all along vested in the Crown a substantial and paramount estate, underlying the Indian title, which became a plenum dominium whenever the title was surrendered or otherwise extinguished" (at p.55). He reiterated this idea, stating that the Crown "has all along had a present proprietary estate in the land, upon which the Indian title was a mere burden" (at p.58). This view of aboriginal title was affirmed by the Privy Council in the Star Chrome case. In Amodu Tijani, supra , Viscount Haldane, adverting to the St. Catherine's Milling and Star Chrome decisions, explain ed the concept of a usufructuary right as "a mere qualification of or burden on the radical or final title of the Sovereign..." (p.403). He described the title of the Sovereign as a pure legal estate, but one which could be qualified by a right of "beneficial user" that did not necessarily take the form of an estate in land. Indian title in Canada was said to be one illustration "of the necessity for getting rid of the assumption that the ownership of land naturally breaks itself up into estates, con- ceived as creatures of inherent legal principle." Chief Justice Marshall took a similar view in Johnson v. McIntosh, supra , saying, "All our institutions recognize the absolute title of the Crown, subject only to the Indian right of occupancy..." (p.588).

88 It should be noted that the Privy Council's emphasis on the personal nature of aboriginal title stemmed in part from constitutional arrangements peculiar to Canada. The Indian territory at issue in St. Catherine's Milling was land which in 1867 had been vested in the Crown subject to the interest of the Indians. The Indians' interest was "an interest other than that of the Province", within the meaning of s.109 of the Constitution Act, 1867 . Section 109 provides:

All Lands, Mines, Minerals, and Royalties belonging to the several Provinces of Canada, Nova Scotia, and New Brunswick at the Union, and all Sums then due or payable for such Lands, Mines, Minerals, or Royalties, shall belong to the several Provinces of Ontario, Quebec, Nova Scotia, and New Brunswick in which the same are situate or arise subject to any Trusts existing in respect thereof, and to any Interest other than that of the Province in the same.

89 When the land in question in St. Catherine's Milling was subsequently disencumbered of the native title upon its surrender to the federal government by the Indian occupants in 1873, the entire beneficial interest in the land was held to have passed, because of the personal and usufructuary nature of the Indians' right, to the Province of Ontario under s.109 rather than to Canada. The same constitutional issue arose recently in this Court in Government of Canada v. Smith (1983), 47 N.R. 132 , in which the Court held that the Indian right in a reserve, being personal, could not be transferred to a grantee, whether an individual or the Crown. Upon surrender the right disappeared "in the process of release".

90 No such constitutional problem arises in the present case, since in 1938 the title to all Indian reserves in British Columbia was transferred by the provincial government to the Crown in right of Canada.

91 It is true that in contexts other than the constitutional the characterization of Indian title as "a personal and usufructuary right" has sometimes been questioned. In Calder, supra , for example, Judson J. intimated at p.328 that this characterization was not helpful in determining the nature of Indian title. In Attorney General of Canada v. Giroux (1916), 53 S.C.R. 172 , Duff J., speaking for himself and Anglin J., distinguished St. Catherine's Milling on the ground that the statutory provisions in accordance with which the reserve in question in Giroux had been created conferred

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 beneficial ownership on the Indian band which occupied the reserve. In Cardinal v. Attorney General of Alberta, [1974] S.C.R. 695 , Laskin J., dissenting on another point, accepted the possibility that Indians may have a beneficial interest in a reserve. The Alberta Court of Appeal in Western International Contractors Ltd. v. Sarcee Developments Ltd., [1979] 3 W.W.R. 630 , accepted the proposition that an Indian Band does indeed have a beneficial interest in its reserve. In the present case this was the view as well of Le Dain J. in the Federal Court of Appeal. See also the judgment of Kellock J. in Miller v. The King, [1950] S.C.R. 168 , in which he seems implicitly to adopt a similar position. None of these judgments mentioned the Star Chrome case, however, in which the Indian interest in land specifically set aside as a reserve was held to be the same as the "personal and usufructuary right" which was discussed in St. Catherine's Milling .

92 It appears to me that there is no real conflict between the cases which characterize Indian title as a beneficial interest of some sort, and those which characterize it a personal, usufructuary right. Any apparent inconsistency derives from the fact that in describing what constitutes a unique interest in land the courts have almost inevitably found themselves applying a somewhat inappropriate terminology drawn from general property law. There is a core of truth in the way that each of the two lines of authority has described native title, but an appearance of conflict has nonetheless arisen because in neither case is the categorization quite accurate.

93 Indians have a legal right to occupy and possess certain lands, the ultimate title to which is in the Crown. While their interest does not, strictly speaking, amount to beneficial ownership, neither is its nature completely exhausted by the concept of a personal right. It is true that the sui generis interest which the Indians have in the land is personal in the sense that it cannot be transferred to a grantee, but it is also true, as will presently appear, that the interest gives rise upon surrender to a distinctive fiduciary obligation on the part of the Crown to deal with the land for the benefit of the surrendering Indians. These two aspects of Indian title go together, since the Crown's original purpose in declaring the Indians' interest to be inalienable otherwise than to the Crown was to facilitate the Crown's ability to represent the Indians in dealings with third parties. The nature of the Indians' interest is therefore best characterized by its general inalienability, coupled with the fact that the Crown is under an obligation to deal with the land on the Indians' behalf when the interest is surrendered. Any description of Indian title which goes beyond these two features is both unnecessary and potentially misleading.

94 The concept of fiduciary obligation originated long ago in the notion of breach of confidence, one of the original heads of jurisdiction in Chancery. In the present appeal its relevance is based on the requirement of a "surrender" before Indian land can be alienated.

95 The Royal Proclamation of 1763 provided that no private person could purchase from the Indians any lands that the Proclamation had reserved to them, and provided further that all purchases had to be by and in the name of the Crown, in a public assembly of the Indians held by the governor or commander-in-chief of the colony in which the lands in question lay. As Lord Watson pointed out in St. Catherine's Milling, supra , at p.54, this policy with respect to the sale or transfer of the Indians' interest in land has been continuously maintained by the British Crown, by the governments of the colonies when they became responsible for the administration of Indian affairs, and, after 1867, by the federal government of Canada. Successive federal statutes, predecessors to the present Indian Act , have all pro-

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 vided for the general inalienability of Indian reserve land except upon surrender to the Crown, the relevant provisions in the present Act being ss.37-41.

96 The purpose of this surrender requirement is clearly to interpose the Crown between the Indians and prospective purchasers or lessees of their land, so as to prevent the Indians from being exploited. This is made clear in the Royal Proclamation itself, which prefaces the provision making the Crown an intermediary with a declaration that "great Frauds and Abuses have been committed in purchasing Lands of the Indians, to the great Prejudice of our Interests, and to the great Dissatisfaction of the said Indians...". Through the confirmation in the Indian Act of the historic responsibility which the Crown has undertaken, to act on behalf of the Indians so as to protect their interests in transactions with third parties, Parliament has conferred upon the Crown a discretion to decide for itself where the Indians' best interests really lie. This is the effect of s.18(1) of the Act .

97 This discretion on the part of the Crown, far from ousting, as the Crown contends, the jurisdiction of the courts to regulate the relationship between the Crown and the Indians, has the effect of transforming the Crown's obligation into a fiduciary one. Professor Ernest Weinrib maintains in his article "The Fiduciary Obligation" (1975), 25 U.T.L.J. 1 at p.7, that "the hallmark of a fiduciary relation is that the relative legal positions are such that one party is at the mercy of the other's discretion." Earlier, at p.4, he puts the point in the following way:

[Where there is a fiduciary obligation] there is a relation in which the principal's interests can be affected by, and are therefore dependent on, the manner in which the fiduciary uses the discretion which has been delegated to him. The fiduciary obligation is the law's blunt tool for the control of this discretion.

98 I make no comment upon whether this description is broad enough to embrace all fiduciary obligations. I do agree, however, that where by statute, agreement, or perhaps by unilateral undertaking, one party has an obligation to act for the benefit of another, and that obligation carries with it a discretionary power, the party thus empowered becomes a fiduciary. Equity will then supervise the relationship by holding him to the fiduciary's strict standard of conduct.

99 It is sometimes said that the nature of fiduciary relationships is both established and exhausted by the standard categories of agent, trustee, partner, director, and the like. I do not agree. It is the nature of the relationship, not the specific category of actor involved that gives rise to the fiduciary duty. The categories of fiduciary, like those of negligence, should not be considered closed. See, e.g. Laskin v. Bache & Co. Inc. (1972), 23 D.L.R. (3d) 385 (Ont.C.A.) at p.392: Goldex Mines Ltd. v. Revill (1974), 7 O.R. 216 (Ont.C.A.) at p.224.

100 It should be noted that fiduciary duties generally arise only with regard to obligations originating in a private law context. Public law duties, the performance of which requires the exercise of discretion, do not typically give rise to a fiduciary relationship. As the "political trust" cases indicate, the Crown is not normally viewed as a fiduciary in the exercise of its legislative or administrative function. The mere fact, however, that it is the Crown which is obligated to act on the Indians' behalf does not of itself remove the Crown's obligation from the scope of the fiduciary principle. As was pointed out earlier, the Indians' interest in land is an independent legal interest. It is not a creation of either the legislative or executive branches of government. The Crown's obligation to the Indians with respect to that interest is therefore not a public law duty. While it is not a private law duty in the strict sense either, it is nonetheless in

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 the nature of a private law duty. Therefore, in this sui generis relationship, it is not improper to regard the Crown as a fiduciary.

101 Section 18(1) of the Indian Act confers upon the Crown a broad discretion in dealing with surrendered land. In the present case, the document of surrender, set out in part earlier in these reasons, by which the Musqueam band surrendered the land at issue, confirms this discretion in the clause conveying the land to the Crown "in trust to lease ... upon such terms as the Government of Canada may deem most conducive to our Welfare and that of our people". When, as here, an Indian band surrenders its interest to the Crown, a fiduciary obligation takes hold to regulate the manner in which the Crown exercises its discretion in dealing with the land on the Indians' behalf.

102 I agree with Le Dain J. that before surrender the Crown does not hold the land in trust for the Indians. I also agree that the Crown's obligation does not somehow crystallize into a trust, express or implied, at the time of surrender. The law of trusts is a highly developed, specialized branch of the law. An express trust requires a settlor, a beneficiary, a trust corpus, words of settlement, certainty of object and certainty of obligation. Not all of these elements are present here. Indeed, there is not even a trust corpus. As the Smith decision, supra , makes clear, upon unconditional surrender the Indians' right in the land disappears. No property interest is transferred which could constitute the trust res , so that even if the other indicia of an express or implied trust could be made out, the basic requirement of a settlement of property has not been met. Accordingly, although the nature of Indian title coupled with the discretion vested in the Crown are sufficient to give rise to a fiduciary obligation, neither an express nor an implied trust arises upon surrender.

103 Nor does surrender give rise to a constructive trust. As was said by this Court in Pettkus v. Becker, [1980] 2 S.C.R. 834 at p.847, "The principle of unjust enrichment lies at the heart of the constructive trust". See also Rathwell v. Rathwell, [1978] 2 S.C.R. 436 . Any similarity between a constructive trust and the Crown's fiduciary obligation to the Indians is limited to the fact that both arise by operation of law; the former is an essentially restitutionary remedy, while the latter is not. In the present case, for example, the Crown has in no way been enriched by the surrender transaction, whether unjustly or otherwise, but the fact that this is so cannot alter either the existence or the nature of the obligation which the Crown owes.

104 The Crown's fiduciary obligation to the Indians is therefore not a trust. To say as much is not to deny that the obligation is trust-like in character. As would be the case with a trust, the Crown must hold surrendered land for the use and benefit of the surrendering band. The obligation is thus subject to principles very similar to those which govern the law of trusts concerning, for example, the measure of damages for breach. The fiduciary relationship between the Crown and the Indians also bears a certain resemblance to agency, since the obligation can be characterized as a duty to act on behalf of the Indian bands who have surrendered lands, by negotiating for the sale or lease of the land to third parties. But just as the Crown is not a trustee for the Indians, neither is it their agent; not only does the Crown's authority to act on the band's behalf lack a basis in contract, but the band is not a party to the ultimate sale or lease, as it would be if it were the Crown's principal. I repeat, the fiduciary obligation which is owed to the Indians by the Crown is sui generis . Given the unique character both of the Indians' interest in land and of their historical relationship with the Crown, the fact that this is so should occasion no surprise.

105 The discretion which is the hallmark of any fiduciary relationship is capable of being considerably narrowed

1984 CarswellNat 813, 59 B.C.L.R. 301, [1984] 2 S.C.R. 335, [1984] 6 W.W.R. 481, 36 R.P.R. 1, 20 E.T.R. 6, [1985] 1 C.N.L.R. 120, (sub nom. Guerin v. Canada) 55 N.R. 161, 13 D.L.R. (4th) 321, J.E. 84-991 in a particular case. This is as true of the Crown's discretion vis-à-vis the Indians as it is of the discretion of trustees, agents, and other traditional categories of fiduciary. The Indian Act makes specific provision for such narrowing in ss.18(1) and 38(2). A fiduciary obligation will not, of course, be eliminated by the imposition of conditions that have the effect of restricting the fiduciary's discretion. A failure to adhere to the imposed conditions will simply itself be a prima facie breach of the obligation. In the present case both the surrender and the Order-in-Council accepting the surrender referred to the Crown leasing the land on the band's behalf. Prior to the surrender the band had also been given to understand that a lease was to be entered into with the Shaughnessy Heights Golf Club upon certain terms, but this understanding was not incorporated into the surrender document itself. The effect of these so-called oral terms will be considered in the next section.

(d) Breach of the Fiduciary Obligation

106 The trial judge found that the Crown's agents promised the band to lease the land in question on certain specified terms and then, after surrender, obtained lease on different terms. The lease obtained was much less valuable. As already mentioned, the surrender document did not make reference to the "oral" terms. I would not wish to say that those terms had nonetheless somehow been incorporated as conditions into the surrender. They were not formally assented to by a majority of the electors of the band, nor were they accepted by the Governor in Council, as required by s.39(1)(b) and s.39(1)(c). I agree with Le Dain J. that there is no merit in the appellants' submission that for purposes of s.39 a surrender can be considered independently of its terms. This makes no more sense than would a claim that a contract can have an existence which in no way depends on the terms and conditions that comprise it.

107 Nonetheless, the Crown, in my view, was not empowered by the surrender document to ignore the oral terms which the band understood would be embodied in the lease. The oral representations form the backdrop against which the Crown's conduct in discharging its fiduciary obligation must be measured. They inform and confine the field of discretion within which the Crown was free to act. After the Crown's agents had induced the band to surrender its land on the understanding that the land would be leased on certain terms, it would be unconscionable to permit the Crown simply to ignore those terms. When the promised lease proved im possible to obtain, the Crown, instead of proceeding to lease the land on different, unfavourable terms, should have returned to the band to explain what had occurred and seek the band's counsel on how to proceed. The existence of such unconscionability is the key to a conclusion that the Crown breached its fiduciary duty. Equity will not countenance unconscionable behaviour in a fiduciary, whose duty is that of utmost loyalty to his principal.

108 While the existence of the fiduciary obligation which the Crown owes to the Indians is dependent on the nature of the surrender process, the standard of conduct which the obligation imports is both more general and more exacting than the terms of any particular surrender. In the present case the relevant aspect of the required standard of conduct is defined by a principle analogous to that which underlies the doctrine of promissory or equitable estoppel. The Crown cannot promise the band that it will obtain a lease of the latter's land on certain stated terms, thereby inducing the band to alter its legal position by surrendering the land, and then simply ignore that promise to the bands detriment. See, e.g. Central London Property Trust Ltd. v. High Trees House Ltd., [1947] 1 K.B. 130 ; Robertson v. Minister of Pensions, [1949] 1 K.B. 227 (C.A.) .

109 In obtaining without consultation a much less valuable lease than that promised, the Crown breached the

VI Limitation of Action and Laches

110 The Crown contends that the band's claim is barred by the Statute of Limitations , R.S.B.C. 1960 c.370 because it was not filed by January 22, 1964, six years from the date the lease was signed. The trial judge, however, found that the band and its members were not aware of the actual terms of the lease, and therefore of the breach of fiduciary duty, until March of 1970. This was not for lack of effort on the band's part. The Indians Affairs Branch, in conformity with its then policy, had refused to give a copy of the lease to the band, despite repeated requests.

111 It is well established that where there has been a fraudulent concealment of the existence of a cause of action, the limitation period will not start to run until the plaintiff discovers the fraud, or until the time when, with reasonable diligence, he ought to have discovered it. The fraudulent concealment necessary to toll or suspend the operation of the statute need not amount to deceit or common law fraud. Equitable fraud, defined in Kitchen v. Royal Air Force As- sociation et al, [1958] 1 W.L.R. 563 , as "conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other", is sufficient. I agree with the trial judge that the conduct of the Indian Affairs Branch toward the band amounted to equitable fraud. Although the Branch officials did not act dishonestly or for improper motives in concealing the terms of the lease from the band, in my view their conduct was nevertheless unconscionable, having regard to the fiduciary relationship between the Branch and the band. The limitations period did not therefore start to run until March 1970. The action was thus timely when filed on December 22, 1975.

112 Little need be said about the Crown's alternative contention that the band's claim is barred by laches. Since the conduct of the Indian Affairs Branch personnel amounted to equitable fraud; since the band did not have actual or constructive knowledge of the actual terms of the golf club lease until March 1970; and since the Crown was not prejudiced by reason of the delay between March 1970 until suit was filed in December 1975, there is no ground for application of the equitable doctrine of laches.

VII Measure of Damages

113 In my opinion the quantum of damages is to be determined by analogy with the principles of trust law: see, e.g. West of England and South Wales District Branch ex. p. Dale & Co. , (1879) 11 Ch.D. 772 at p.778. Reviewing the record it seems apparent that the judge at trial considered all the relevant evidence. His judgment, as I read it, discloses no error in principle. I am content to adopt the quantum of damages awarded by the judge, rejecting, as he did, any claim for exemplary or punitive damages.

114 I would therefore allow the appeal, set aside the judgment in the Federal Court of Appeal and reinstate without variation the trial judge's award, with costs to the present appellants in all courts.

Estey J.:

115 The facts and issues in this appeal are fully dealt with in the reasons for judgment of my colleague, Wilson J., and need no repetition by me. I hasten to say at the outset that I respectfully agree with the disposition proposed by each of them. This action, in my respectful view, however, should be disposed of on the very simple basis of the law of agency.

116 There is no difference between the parties on the factual relationship between them. The only issue is, what is the appropriate juridical basis upon which the remedy and consequential relief should be founded. The nature of the interests of the Indian band, the Federal Crown and the Crown in the right of the Province has been long ago settled in St. Catherine's Milling and Lumber Co. v. The Queen (1888), 14 App. Cas. 46 , and in Ontario Mining Co. v. Seybold, [1903] A.C. 73 , affirming (1899), 31 O.R. 386 ; all of which was, only in 1982, re-examined and affirmed in the unanimous decision of this Court in Smith v. The Queen, [1983] 1 S.C.R. 554 . In 1938, prior to the surrender in question, the title to the Indian reservation land in British Columbia was transferred to the Crown in the right of Canada by British Columbia Orders in Council 208 and 1036 pursuant to Article 13 of the Terms of Union of 1871. Consequently, the primary constitutional issue discussed in the Smith and St. Catherine's Milling cases, supra , do not arise.

117 The Indian Act , R.S.C. 1952, c. 149, as amended, the Constitution, the pre-Confederation laws of the colonies in British North America, and the Royal Proclamation of 1763 all reflect a strong sense of awareness of the community interest in protecting the rights of the native population in those lands to which they had a longstanding connection. One common feature in all these enactments is reflected in the present-day provision in the Indian Act , s. 37, which requires anyone interested in acquiring ownership or some lesser interest in lands set aside for native pop- ulations, from a willing grantor, to do so through the appropriate level of government, now the Federal Government. This section has already been set out by my colleagues. In the elaborate provisions in the Indian Act , there are many alternative ways of protecting the interests of the Indians and of reflecting the community interest in that protection. The statute and the cases make provision for a surrender of the Indian interest in Indian lands as defined in the Act. And cases such as St. Catherine's, supra , indicate the extent to which the Indian band must go in order to sever entirely the connection of the native population from the lands in question. This type of surrender would be better described as a release, in the modern lexicon.

118 Unfortunately, the statute employs the word "surrender" in another connotation. In order to deal with what has been found to be the personal interest of the Indian population in Indian lands, the Act requires the band to "surrender" the land to the Crown in the right of Canada in order to effect the proposed alternate use of the land for the benefit of the Indians. The Act, in short, does not require the Indian to limit his interest in Indian lands to present and continuous occupation. The band may vicariously occupy the lands, or part of such lands, through the medium of a lease or licence. The marketing of the personal interest is not only permitted by the statute, but the machinery is provided for the proper exploitation of this interest by the Indians, subject always to compliance with the statute (vide St. Ann's Island Shooting and Fishing Club Ltd. v. The King, [1950] S.C.R. 211 ). The step to be taken by the Indian band in seeking to avail itself of the benefits of their right of possession in this manner is, unhappily, also referred to in the statute and in the cases as a "surrender" of the lands and their interest therein to the Crown. This is not a release in the sense of that term in the general law. Indeed, it is quite the opposite. It is a retention of interest and the exploitation of that interest in the manner and to the extent permitted by statute law. The Crown becomes the appointed agent of the Indians to develop and exploit, under the direction of the Indians and for their benefit, the usufructuary interest as described in St. Catherine's .

119 The appellants clearly, and beyond any argument here, did not release their interest in the lands in the St. Catherine's sense but appointed the Crown in the right of Canada to carry out the commercial exploitation of the Indian interest in the manner prescribed in detail in Surrey (Corporation of) v. Peace Arch Enterprises Ltd. (1970), 74 W.W.R. 380 (B.C.C.A.) , The King v. McMaster, [1926] Ex.C.R. 68 , and St. Ann's, supra .

120 On the facts here, there is no issue but that the Indian band had determined to exercise their interest in the land through the medium of a lease to the golf club. There is no serious issue with the findings of fact by the learned trial judge as to the detailed instructions given by the Indians to the representatives of the Government of Canada on the terms of the lease, including the rent, the term, rights of renewal, removal of fixtures, and many other features common to the preparation of a lease. There is no issue but that the Government representatives, for whatever reason, did not carry out these instructions. Nor did those officials keep the Indian band apprised of the program of negotiations in the final stages. Most seriously of all, the respondent did not give the instructing Indians a copy of the final lease or a written description of its contents for many years after the lease was executed.

121 One need turn no further than Halsbury's Laws of England (4th ed.), vol. 1, p. 418, to determine the application to these clear and relatively straightforward facts of the principles of the law of agency:

Whether that relation exists in any situation depends not on the precise terminology employed by the parties to describe their relationship, but on the true nature of the agreement or the exact circumstances of the relationship between the alleged principal and agent.

.....

The essence of the agent's position is that he is only an intermediary between two other parties.

122 The fact that the agent is prescribed by statute in no way detracts in law from the legal capacity of the agent to act as such. The further consideration that the principal (the Indian band as holder of the personal interest in the land) is constrained by statute to act through the agency of the Crown, in no way reduces the rights of the instructing principal to call upon the agent to account for the performance of the mandate. The measure of damages applied by the learned trial judge is in no way affected by ascribing the resultant rights in the plaintiff to a breach of agency. Indeed, it is consonant with the purpose of the statutory agency as prescribed by Parliament, now and historically, that the agent (the Crown), in all its actions, shall serve only the interests of the native population whose rights alone are the subject of the protective measures of the statute. If anything, the principal in this relationship is more secure in his rights than in the absence of a statutorily prescribed agency. The principal is restricted in the selection of the agent, but the agent is nowhere protected in the statute from the consequences in law of a breach of that agency.

123 For these reasons, I would, with great respect to all who hold a contrary view, hesitate to resort to the more technical and far-reaching doctrines of the law of trusts and the concomitant law attaching to the fiduciary. The result is the same but, in my respectful view, the future application of the Act and the common law to native rights is much simpler under the doctrines of the law of agency.

124 I therefore share with my colleagues the conclusion that this appeal should be allowed with costs.

Appeal allowed.

END OF DOCUMENT

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

Jewish National Fund v. Royal Trust Co.

Jewish National Fund (Appellant) v. Royal Trust Company (Respondent) and Richter et al (Respondents)

Supreme Court of Canada

Cartwright, Martland, Judson, Ritchie and Spence, JJ.

Counsel: J. J. Robinette, Q.C., and L. F. Lindholm, for appellant.

D. G. Cameron, for respondent, Royal Trust Company.

D. M. Gordon, Q.C., and J. C. Cowan, for respondents, Clara Richter et al.

Subject: Estates and Trusts; International

Charities --- Charitable purposes — Purposes held not charitable — Miscellaneous purposes

Conflict of Laws --- Succession — Wills

Charities — Gift to Jewish National Fund — Perpetuities — Law Relative to Will of Movables.

Appeal from a judgment of the court of appeal for British Columbia (1964) 46 W.W.R. 577, allowing an appeal from a judgment of Wootton, J. (1963) 41 W.W.R. 392. Appeal dismissed. The facts appear in the judgment of Cartwright, J.

Per Cartwright, J., Martland and Ritchie, JJ. concurring, Judson and Spence, JJ. dissenting:

That the general rule to be applied in cases such as the case at bar is that the essential validity of a gift of movables is to be determined by the law of the testator's domicile, in this case, British Columbia; by that law the bequest to trustees of funds to purchase land, at their discretion, in Palestine, the United States of America or any British dominion is

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577 invalid, since it must be presumed, in the absence of proof to the contrary, that the law of all the other countries in which the trustees might decide to purchase land is the same as that of British Columbia. It would be contrary to the authorities, and productive of uncertainty and inconvenience in the administration of estates, to hold that the validity of a trust of personalty to be laid out in the purchase of land created by the will of a testator should be determined not by the law of his domicile or by the law of the situs of the land directed to be purchased but by the law of the residence or domicile of the trustee. Dunne v. Byrne, [1912] A.C. 407, at 410, 81 LJPC 202; Fordyce v. Bridges (1848) 2 Ph 497, 41 ER 1035, 2 Coop T Cott 324, 47 ER 1179; Re Mitchner; Union Trustee Co. of Australia v. Atty.-Gen. for C'Wealth (No. 2) [1922] St R Qd 252, applied.

Per Judson, J. dissenting, Spence, J. concurring:

If a gift is valid by the perpetuities law of the place of administration but invalid by the perpetuities law of the testator's domicile, the law of the place of administration should govern. In the case at bar the executorship in the testator's domicile has ended; the residue of the estate is to be turned over to New York trustees on clearly defined trusts which are recognized as valid by the law of that state; matters of administration thereafter are of no concern to the courts of the domicile, but are controlled by the laws of a jurisdiction which recognizes the validity of the trust. The appeal should be allowed.

Cartwright, J.:

1 Thisisanappeal froma unanimousdecisionofthe courtofappealfor British Columbia(1964) 46 W.W.R. 577, allowing an appeal from a judgment of Wootton, J. (1963) 41 W.W.R. 392 (sub nom. Re Schechter Estate) and declaring that the residuary bequest to the appellant contained in the will of the late Frank Schechter is invalid and that his executor holds the property comprised in that bequest in trust for the next-of-kin of the testator.

2 Frank Schechter, hereinafter referred to as "the testator," died in Victoria, B.C., on May 2, 1961, domiciled in British Columbia. He was unmarried. He left a will dated September 17, 1932, probate of which was granted to the Royal Trust Company, the executor named in the will, on October 13, 1961.

3 The scheme of the will is simple. The testator appoints his executor, gives directions as to his funeral, gives legacies to two charities, gives seven legacies to relatives and then disposes of the residue of his estate in the following words:

I give and devise and bequeath all the residue of my real and personal estate unto my Trustees upon trust, to sell, call in and convert the same into money, and subject to the payments of my debts, funeral and testamentary expenses, legacies and any duties payable on any legacies bequeathed or any real property devised by me herein, as to both capital and income to pay the same to the Jewish National Fund (Keren Kayemeth Le-Israel) Inc., 111 F.ifth Avenue, New York, U.S.A. to be used by the trustees of the said Jewish National Fund as a continuing and separate trust apart from all other funds, for the purchase of a tract or tracts of the best lands obtainable, in Pal- estine, the United States of America or any British Dominion, and the establishment thereon of a Jewish colony or Colonies, to be known as the Frank Schechter Colony or colonies, the land to be rented on such terms as may be decided on by the Jewish National Fund, the proceeds of the said rentals to be used for the purchase of further

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

lands on the basis outlined above, and that the receipt of such monies by the said Jewish National Fund to the Royal Trust Company, to release them from any responsibility of the said monies.

4 The net value of the estate after payment of debts was $351,153.53, of which $9,250 was realty and the balance personalty. The total of the pecuniary legacies mentioned above was $14,300.

5 The validity of the residuary bequest having been questioned by some of the next-of-kin, the executor applied to the court by way of originating notice to have the matter determined.

6 In the courts below it was the contention of the next-of-kin that the residuary clause was void for uncertainty and, alter natively, that it created a perpetual trust which was not charitable and therefore void. For the appellant it was argued that the residuary bequest constituted an absolute gift to it and, alternatively, that it was not void for uncertainty and created a good charitable trust.

7 After stating these submissions, Lett, C.J.B.C. continued as follows, at p. 578:

There was no suggestion in argument that the construction of the will is governed by any law other than that of British Columbia, since the testator was domiciled in this province prior to and at the time of his death. No argument was advanced on any question relating to the conflict of laws.

8 In this court, in addition to the grounds on which it had relied below, the appellant, for the first time, took the position: (i) That in the law of British Columbia the rule against perpetuities is one based on considerations of internal policy and does not apply to invalidate a trust of movables created by a testator domiciled in British Columbia if the trust is to be administered outside that province; (ii) That the trust created by the residuary clause is to be administered in the state of New York; (iii) That the question before us should be determined according to the law of that state; and (iv) That by that law the trust is charitable and valid.

9 In my opinion, the argument that there was an absolute gift to the appellant cannot be supported; it was rejected by each of the members of the court of appeal and there is nothing that I can usefully add to their reasons on this point.

10 If the question is to be determined in accordance with the law of British Columbia, I agree with the conclusion of the court of appeal that the residuary clause does not require the trustees to devote the fund or its proceeds to purposes which are charitable in law and that the trust is void as offending the rule against perpetuities. On this branch of the matter I am content to adopt the reasons of Davey, J.A.

11 Turning now to the appellant's argument summarized above which was advanced for the first time in this court it would seem that prima facie the applicable law is that of British Columbia. The general rule is stated in Dicey's Conflict of Laws, 7th ed., as follows at p. 609:

The material or essential validity of a will of movables or of any particular gift of movables contained therein is governed by the law of the testator's domicile at the time of his death.

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

12 In commenting on this rule the learned author says at p. 610:

It is well settled that the material or essential validity of a will of movables or of any particular gift of movables contained therein is governed by the law of the testator's domicile at the date of his death. That law determines such questions as whether the testator is bound to leave a certain proportion of his estate to his wife and children, whether legacies to charities are valid, to what extent gifts are invalid as infringing the rule against perpetuities or accumulations, whether substitutionary gifts are valid, whether gifts to attesting witnesses are valid, and so on.

If the will bequeaths movables on trusts which are void for remoteness under the rule against perpetuities in force in the country of the testator's last domicile, but the movables are situated and the trust is to be administered in another country by the law of which it is valid, it has been suggested that the law of the place of administration should govern and that the trust should be valid. There is some British authority which supports this suggestion, and it seems reasonable in principle. In the United States the trust appears to be valid if it complies with the rule against perpetuities in force in either the place of administration or the testator's last domicile. The same principle should no doubt be applied to the question whether gifts to charities are valid.

13 In Morris and Leach, The Rule against Perpetuities, 2nd ed., pp. 22 and 23, the effect of the American authorities is stated to be that a gift of movables which infringes the rule against perpetuities in force in the country of the testator's domicile does not fail if it is valid under the law of the place of administration, and a gift which infringes the perpetuities law of the place of administration does not fail if it is valid under the law of the testator's domicile. This statement is followed by the following comment at p. 23:

This may be an acceptable result if the two laws agree in general policy and differ only in detail. It might well not be acceptable to an English court if a testator domiciled in some country where there is no Rule against Perpetu- ities attempted to create a trust of English property, to be administered in England, which infringed the Rule.

14 In Cheshire, Private International Law, 6th ed., the matter is considered at pp. 573 to 577. The learned author says at p. 575:

It should not be assumed that because a testator dies domiciled in England his will is therefore inevitably subject to all the rules of English domestic law concerned with essential validity. This fact has not always been admitted. It has been said, for instance, that whether a restraint upon marriage or a gift for masses, or a gift to a charity is valid, or whether a limitation is void as infringing the rule against perpetuities, must be determined by the lex domicili of the testator no matter what the domicil of the beneficiary may be. It is submitted that this view is neither consonant with principle nor warranted by the authorities. It entirely ignores the essential difference between the right to give and the right to receive. The two are not necessarily in pari materia. The right of a testator to give, as for example whether he is free to bequeath the whole of his property as it pleases him or on the contrary whether he must reserve a legitimate portion for his children, is ex necessitate governed by the English lex successionis from which his testamentary power of disposition is derived. But there is no reason why this law should restrict the right of a foreign legatee to enjoy a gift in accordance with the terms of the will, provided that the legacy is valid according to his personal law and provided that the limitations imposed upon its enjoyment do

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

not offend some rule of public policy so sacred in English eyes as to demand extra-territorial application.

15 Andatp.576:

'Suppose that a testator, domiciled in England, leaves a sum of money in trust that the income thereof shall be used for purposes most conducive to the good of religion in a certain diocese in country X, and that persons domiciled in X are appointed to administer the trust.'

The trust is invalid by English law as not being charitable, but, if it is valid by the law of X, must the court forbid payment of the money to the trustees? Such a ruling would be indefensible. English law confines the definition of a charity within comparatively narrow limits, presumably with the object of restricting the amount of money that may be withdrawn from circulation, but it cannot justifiably claim to impose this policy upon foreign countries. The decisive factor is the law of the country where the trust is to be administered, not the law that governs the instrument of gift. No doubt, three conditions must be satisfied before transfer of the money to the foreign country will be authorized.

Firstly, the charitable bequest must be valid according to the law of the country where it is to be administered.

Secondly, there must be persons in that country willing and competent to undertake the task of administration.

Thirdly, the purposes for which the bequest is to be employed must not conflict with some rule of English public policy intended to operate extra-territorially. It can scarcely be maintained that a rule which confines within narrow limits the possible beneficiaries of a charitable gift is intended to be anything more than local in its operation.

16 For the purposes of this appeal I am prepared to assume, without finally deciding, that if the testator had directed that his residuary estate be paid to the appellant to be used by its trustees for the purchase of a tract or tracts of the best land obtainable in the state of New York to be held for the purposes set out in the residuary clause, the validity of the clause should be determined by the law of the state of New York, and it would have been necessary to consider whether that law has been sufficiently proved.

17 But this is not what the testator has done. He has given to the trustees the choice of purchasing lands in Pal- estine, the United States of America or any British dominion. I have already indicated my agreement with the conclusion of the court of appeal that if the applicable law is that of British Columbia the bequest is invalid. Unless the contrary is alleged and proved, the presumption is that the law of all the other countries in which the trustees might decide to purchase is the same as that of British Columbia. It seems to me that a trust of movables, void under the law of the testator's domicil and under that of many other countries in which the trustees are authorized to carry it out, cannot be rendered valid by the circumstance that the trustees are permitted, but not required, to carry it out in a country in which it would be regarded as valid. To hold otherwise would, in my opinion, be an extension of the exception to the general rule, that the essential validity of a gift of movables is to be determined by the law of the testator's domicil, unwarranted by the two cases of Fordyce v. Bridges (1848) 2 Ph 497, 41 ER 1035, 2 Coop T Cott 324, 47 ER 1179, and Re Mitchner; Union Trustee Co. of Australia v. Atty.-Gen. for C'Wealth (No. 2) [1922] St R Qd 252,

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577 which were chiefly relied on in support of the appellant's argument. Such an extension does not appear to me to be justified by any decision to which we have been referred. It would be productive of inconvenience and uncertainty and would be inconsistent with the underlying rule that a trust is not a valid charitable trust unless the trustees are obligated, not merely permitted, to devote the trust funds to a purpose which is charitable in law.

18 I agree with the submission of counsel for the next-of-kin that in the circumstances of this case "the place of administration" of the trust would be the country in which the lands were purchased and managed and that the place of residence of the trustees would be irrelevant. I find nothing in the two cases last referred to which is contrary to this view.

19 In Fordyce v. Bridges, supra, it would seem from the report that the testator was domiciled in England, that the trustees resided there and that the personal estate was situate there. By the will the trustees were given a discretion to invest the personal estate either in the purchase of lands in England on specified limitations which were valid by the law of England or in the purchase of lands in Scotland in a regular Scotch entail, the limitations of which were valid by the law of Scotland but would have been void as a perpetuity by the law of England. It was held that the personal estate could be validly invested in the purchase of lands in Scotland. It was the law of the situs of the lands purchased that governed, not the law of the residence of the trustees. The will did not give the trustees any power to invest the personal estate in the purchase of lands in England subject to the limitations of a regular Scotch entail, which purchase would have been invalid by the law of England. In the case at bar the trustees in New York are authorized to purchase lands in British Columbia on trusts invalid by the law of that province.

20 In the Mitchner case, supra, the testator, domiciled in Queensland, directed his executors to pay part of his residuary trust funds to named persons in Germany who were to deal with such funds on certain trusts. The supreme court of Queensland held that this direction was void as offending the rule against perpetuities: See Re Mitchner; Union Trustee Co. of Australia by Atty.-Gen. for C'Wealth [1922] St R Qd. 39. This decision was varied by the high court of Australia by a judgment which declared that the gifts did not infringe the law against perpetuities and referred the questions back to the supreme court. What occurred at the second hearing in the supreme court is summarized in the headnote (at p. 253) as follows:

Held, that the bequest was a valid bequest according to Queensland law; but that the Court would not pronounce finally on its validity until informed whether it was practical to give effect in Germany to the trusts declared, and whether the law of Germany would allow them to be carried into effect, because if they could not be carried into effect in Germany, the Queensland Court could not administer cy pres, and the quest would fail.

21 It would appear that the law first applied was that of the testator's domicil which governed subject to ascer- taining that the trusts could be lawfully carried out in Germany.

22 To hold that the validity of a trust of personalty to be laid out in the purchase of land created by the will of a testator should be determined not by the law of his domicil or by the law of the situs of the land directed to be purchased (or perhaps by application of both) but by the law of the residence or the domicile of the trustee appointed to make the purchase would, in my opinion, be contrary to authority and productive of uncertainty and inconvenience in the administration of estates. What, it may be asked, would be the result if the trustee at the date of the testator's death

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577 resided in a jurisdiction by the laws of which the trust was invalid and a year later moved into a jurisdiction by the laws of which the trust was valid? The difficulty suggested by this question is only one of several which would result from attaching importance to the residence or domicil of the trustee.

23 While that case was in no way concerned with the geographical location of the trustee or with the conflict of laws, the following words used by Lord Macnaghten in Dunne v. Byrne, [1912] A.C. 407, at 410, 81 LJPC 202, appear to me to be appropriate:

It is difficult to see on what principle a trust expressed in plain language, whether the words used be sufficient or insufficient to satisfy the requirements of the law, can be modified or limited in its scope by reference to the position or character of the trustee.

24 For the above reasons I would reject this argument of the appellant, even on the assumption that it has been proved that the trust created by the residuary clause would have been regarded as a valid charitable trust under the law of the state of New York. This renders it unnecessary for me to decide whether the law of New York was sufficiently proved. It also becomes unnecessary for me to consider the argument of the respondents, which found favour with Lett, C.J.B.C., that the trust was void for uncertainty and I express no opinion upon it.

25 In the result, I would dismiss the appeal but would direct that the costs of all parties in this court, those of the executor as between solicitor and client, be paid out of the residuary estate of the testator.

Martland, J. concurs with Cartwright, J.:

Judson, J. dissenting:

26 The testator left his residuary estate to be used by the trustees of the Jewish National Fund Inc., New York, as a continuing and separate trust for the purchase of the best lands available in Palestine, the United States of America or any British dominion, and the establishment thereon of a Jewish colony or colonies, the land to be rented on such terms as might be decided on by the Jewish National Fund and the proceeds of the rentals to be used for the purchase of further lands on the basis outlined above. It was also provided that the receipt of the moneys by the Jewish National Fund from the Royal Trust Company (the executor and trustee under the will) was to release them from any further responsibility.

27 On a motion for construction of the will, Wootton, J., the judge of first instance, held that this was a valid charitable disposition (1963) 41 W.W.R. 392 (sub nom. Re Schechter Estate). The court of appeal was unanimously of the opposite opinion (1964) 46 W.W.R. 577. The Jewish National Fund is the appellant in this court and seeks to have the judgment of Wootton, J. restored. The respondents are the next-of-kin of the testator and are interested in an in- testacy.

28 The Jewish National Fund is a corporation which was incorporated in 1926 under the laws of the state of New York. Its principal objects are to collect gifts to be devoted to the purchase of land in Palestine for the purpose of

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577 promoting and furthering the religious, cultural, physical, social, agricultural and general welfare of Jewish settlers and inhabitants of Palestine now or hereafter residing there, and to aid, encourage and promote the development of Jewish life in Palestine. There is evidence in the record that a gift to this corporation would be recognized as a valid charitable gift under the laws of the state of New York.

29 The agent of the New York fund in Israel, Keren Kayemeth Le Israel, is recognized as a charitable organization by the state of Israel. On the other hand, the English counterpart of the New York fund, Keren Kayemeth Le Jisroel, Limited, when it sought exemption from income tax in England, was held not to be "a body of persons ... established for charitable purposes only" (Keren Kayemeth Le Jisroel Ltd. v. Inland Revenue Commrs., [1932] A.C. 650, 101 L.J.K.B. 459) and, as such, entitled to exemption from income tax.

30 I do not think that any valid distinction can be drawn between the objects of the English fund and the New York fund. The English fund was incorporated in 1907 and acquired power to purchase lands in Palestine, Syria and any other parts of Turkey in Asia and the Peninsula of Sinai, for the purpose of settling Jews on these lands. The New York fund can purchase lands in Palestine, the United States of America, or any British dominion. Both funds have many objects ancillary to the main object and, indeed, the New York fund, until shortly after the death of the testator, confined its activities to acting as a collecting agent for the English fund. In 1961 it severed its connection with the English fund and provided for the sending of its moneys direct to Israel. This change of powers came after the death of the testator and nothing decisive can come from the fact that at the date of his death there was some dependant relation of one fund to the other. Under the terms of this trust, it is the New York fund that is to administer this residuary gift through its trustees in the manner specified in the will.

31 It is, however, of significance that when the English fund was litigating with the inland revenue commissioners in 1932, it was held not to be a charitable organization. It was rejected as a trust for religious purposes, as a trust for the relief of poverty and as a trust for other purposes beneficial to the community. The House of Lords was unable to say that there was any identifiable community to be benefited. The British Columbia court of appeal adopted this reasoning as the foundation of their judgment.

32 The only function of the Royal Trust Company under this will as executor and trustee is to convert the estate into money and after payment of debts, funeral and testamentary expenses and legacies and duties, to pay the residue to the New York fund. It has no function in the administration of the trust which the will attempts to set up. The release of the New York fund for these moneys is a complete release to the Royal Trust Company. Nothing is to be done by the Royal Trust Company in the administration of the trust in British Columbia. The trust sought to be set up here is a foreign trust to be administered in a jurisdiction where, according to the evidence, it is a valid charitable trust. As- suming that in British Columbia the trust is not recognized as charitable and that it is a trust the administration of which may last beyond the perpetuity period, the first question is whether the rule against perpetuities applies to a trust of movables created by a person domiciled in British Columbia if the trust is to be administered outside British Co- lumbia in a jurisdiction which recognizes its validity. It has been said that the object of the perpetuity rule is to restrict the withdrawal of property from channels of commerce, a purpose which is purely local.

33 Both in Cheshire, Private International Law, 6th ed., p. 576, and less emphatically in Morris and Leach, The Rule Against Perpetuities, 2nd ed., p. 22, the opinion is expressed that if the gift is valid by the perpetuities law of the

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577 place of administration but invalid by the perpetuities law of the place of the testator's domicile, the governing law should be that of the place of administration.

34 The beginning of the authority on which this opinion is founded is in Fordyce v. Bridges (1848) 2 Ph 496, 41 ER 1035, 2 Coop T Cott 324, 47 ER 1179. Here an English testator left the residue of his estate to trustees upon trust to convert it into money and lay it out in the purchase of land in England or Scotland according to the limitations of a Scottish entail. A purchase of land in England according to these limitations would offend the rule against perpetuities. On a bill being filed to test the propriety of purchases in Scotland, it was held that the legacy to be expended in Scotland in a manner permissible by Scottish law was valid. The ratio is in the following extract from the judgment of Lord Cottenham, at p. 515:

An objection was made that the bequest of a fund to be invested in a regular Scotch entail was void as a perpetuity. The rules acted upon by the Courts in this country with respect to testamentary dispositions tending to perpetuities relate to this country only. What the law of Scotland may be upon such a subject, the Courts of this country have no judicial knowledge, nor will they, I apprehend, inquire: the fund being to be administered in a foreign country is payable here though the purpose to which it is to be applied would have been illegal if the administration of the fund had been to take place in this country. This is exemplified by the well-established rule in cases of bequests within the statutes of Mortmain. A charity legacy void in this country under the Statute of Mortmain is good and payable here if for a charity in Scotland.

35 This case was followed in a Queensland case, Re Mitchner; Union Trustee Co. of Australia v. Atty.-Gen. for C'Wealth (No. 2) [1922] St R Qd 252, in which a testator domiciled in Queens land bequeathed movables to trustees resident in Germany, to be applied on trusts which infringed the rule against perpetuities in force in Queensland but which were valid by German law. The trusts were held to be valid.

36 There is more authority in the United States, beginning with Chamberlain v. Chamberlain (1871) 43 NY 424, where it is said at p. 434:

But so far as the validity of bequests depends upon the general law and policy of the State affecting property and its acquisition generally, and relating to its accumulation and a suspension of ownership and the power of alienation, each State is sovereign as to all property within its territory, whether real or personal.

It is no part of the policy of the State of New York to interdict perpetuities or gifts in mortmain in Pennsylvania or California. Each State determines those matters according to its own views of policy or right, and no other State has any interest in the question; and there is no reason why the courts of this State should follow the funds bequeathed to the Centenary Fund Society to Pennsylvania, to see whether they will be there administered in all respects in strict harmony with our policy and our laws. The question was before the court in Fordyce v. Bridges [supra], upon the bequest of a fund in England, to be invested in a Scotch entail.

37 This case was followed in the following four cases: Robb v. Washington and Jefferson College (1905) 103 App Div 327, 93 NYS 92; In re Chapell's Estate (1923) 213 P 684, 124 Wash 128 (S.C.); Amerige v. Atty.-Gen. (1949) 88 NE 2d 126, 324 Mass 648 (S.C.); Re Grant's Will (1905) 101 NYS 423.

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

38 To the same effect is Gray, The Rule Against Perpetuities, 4th ed., p. 288:

263. 3 Influence of Law of Place of Administration. If a legacy is given on a charitable trust which is to be carried out in another jurisdiction where it would be valid, sometimes the law of the domicil forbids such a legacy absolutely, and in that case the legacy is void; but sometimes the law only forbids such trusts within the state of the domicil, and then the legacy is good. And in this latter case it seems that the trust will be subject to the law of the other jurisdiction in matters of administration.

39 The next-of-kin say that the law of the state of New York has nothing to do with the administration of this trust, that the law of the situs of the purchase of land will govern and that the will permits the trust to be administered in a multitude of places and that the trust fails if it would be non-charitable in any of them. I think that the first assertion is erroneous and that the rest falls with it. The British Columbia executorship has ended. The residue is to be turned over to New York trustees upon clearly defined trusts which are recognized as valid by the law of that state. At that moment it becomes a New York trust to be administered there according to the law of the state. What difficulties of administration, if any, may be encountered outside the boundaries of that state are of no further concern to the court of the domicile. The testator has directed the delivery of the residue to trustees in a foreign jurisdiction where the trust is valid. The administration of the trust from then on is controlled by the laws of a jurisdiction which recognizes its validity.

40 I would allow the appeal on this ground alone. However, the reasons delivered in the court of appeal indicate that this point was not taken before that court. For this reason I think that we should order that all parties should have their costs out of the estate, those of the executor between solicitor and client.

41 It is only necessary to mention briefly the other grounds of appeal that were argued. The first was that as a matter of construction, it should have been held that this was an absolute gift of residue. To me, this was clearly a gift in trust and I think that both courts in British Columbia have correctly rejected this submission.

42 The other argument was that the court of appeal should have held, as did Wootton, J., that this was a valid charitable trust in British Columbia. The court of appeal thought that this course was not open in view of the decision of the House of Lords in the Keren case, supra. It is clear that Wootton, J. did not think that this decision concluded the matter for all time. He was sitting in 1963. A lot had happened in the world since 1932. He felt that this enabled him to find that there was an identifiable world community to be benefited by this disposition. In so finding I think that he was right but I recognize that my opinion on this branch of the case is obiter.

43 I would allow the appeal and direct that all parties to these proceedings should have their costs throughout, those of the executor as between solicitor and client.

Ritchie, J. concurs with Cartwright, J.:

Spence, J. concurs with Judson, J.:

1965 CarswellBC 60, 52 W.W.R. 410, [1965] S.C.R. 784, 53 D.L.R. (2d) 577

END OF DOCUMENT

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

Greenstreet Management Inc., Re

IN THE MATTER OF THE BANKRUPTCY OF GREENSTREET MANAGEMENT INC. OF THE CITY OF VAUGHAN, IN THE PROVINCE OF ONTARIO

Ontario Superior Court of Justice

Morawetz J.

Heard: October 2, 2007 Judgment: November 20, 2007 Docket: 31-971707

Counsel: Geoff R. Hall for Shimmerman Penn Title & Associates Inc., in its capacity as trustee in bankruptcy of the estate of Greenstreet Management Inc.

Timothy J. Hill for Respondent, Bonnydon Ltd.

Subject: Insolvency; Property

Bankruptcy and insolvency --- Property of bankrupt — Choses in action — Right of action of bankrupt — Proceedings pending at date of assignment

Funds paid into court — Purchaser entered into agreement of purchase and sale to acquire parcel of land, pursuant to which it delivered to vendor's solicitor two deposit cheques totalling $250,000 ("deposit proceeds") in trust, pending closing of sale transaction — Purchaser advised vendor that it considered agreement to be null and void, but vendor insisted purchaser complete transaction — Purchaser commenced action alleging misrepresentation — Vendor tendered closing documents on scheduled closing date — Agreement was not completed and vendor counterclaimed against purchaser for breach of agreement — Purchaser's motion for certificate of pending litigation was resolved on consent, with vendor paying deposit proceeds into court — Action was not yet adjudicated — Purchaser made assignment in bankruptcy — Trustee listed deposit proceeds as asset of estate — Trustee applied for directions as to estate's entitlement to deposit proceeds — Deposit proceeds were ordered to remain in court pending adjudication of action as provided for in consent order — Once deposit proceeds were paid over to vendor's solicitors in trust, they

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842 could no longer be considered property of purchaser in absolute sense — Pursuant to terms of agreement and consent order, purchaser had no unilateral right to obtain deposit proceeds or to call for their return — At time of bankruptcy, purchaser did not have right to call for payment, but rather, it only had contingent interest in deposit proceeds, which was contingent upon finding that vendor had defaulted on agreement — In absence of such finding, purchaser had no claim to deposit proceeds, and purchaser's bankruptcy did not change situation — Purchaser's bankruptcy did not elevate trustee to position where it could claim deposit proceeds without first obtaining favourable outcome in litigation. Cases considered by Morawetz J.:

Acepharm Inc., Re (1999), 1999 CarswellOnt 1904, 9 C.B.R. (4th) 1, (sub nom. Acepharm Inc. (Bankrupt), Re) 122 O.A.C. 63 (Ont. C.A.) — considered

Bank of Montreal v. Faclaris (1984), 13 D.L.R. (4th) 245, 48 O.R. (2d) 348, 1984 CarswellOnt 830 (Ont. H.C.) — distinguished

Frechette, Re (1991), 41 E.T.R. 289, 6 C.B.R. (3d) 75, 3 O.R. (3d) 664, 1991 CarswellOnt 187 (Ont. Bktcy.) — considered

Tradmor Investments Ltd. v. Valdi Foods (1987) Inc. (1995), 1995 CarswellOnt 319, 33 C.B.R. (3d) 244 (Ont. Gen. Div.) — considered

Tradmor Investments Ltd. v. Valdi Foods (1987) Inc. (1997), 1997 CarswellOnt 22, 43 C.B.R. (3d) 135 (Ont. C.A.) — referred to

Statutes considered:

Bankruptcy Act, R.S.C. 1970, c. B-3

s. 70(1) — considered

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3

s. 2 "property" — considered

s. 67(1) — considered

s. 70(1) — considered

APPLICATION by trustee for directions as to entitlement of estate to deposit proceeds paid into court in action between bankrupt and vendor.

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

Morawetz J.:

1 Shimmerman Penn Title & Associates Inc. in its capacity as trustee in bankruptcy of the estate of Greenstreet Management Inc. ("the Trustee") moves for directions as to the entitlement, if any, of the estate ("the Estate") of Greenstreet Management Inc. ("Greenstreet") to the Deposit Proceeds (as defined herein) which have been paid into court in an action as between Greenstreet and Bonnydon Limited ("Bonnydon").

2 Subsequent to the Deposit Proceeds being paid into court, Greenstreet made an assignment in bankruptcy. Hence, the dispute now involves the Trustee.

3 On May 31, 2006, Greenstreet entered into an Agreement of Purchase and Sale ("APS") to acquire a parcel of real estate in Vaughan, Ontario, from Bonnydon. Pursuant to the APS, Greenstreet delivered to Bonnydon's solicitor two deposit cheques totalling $250,000 (the "Deposit Proceeds") in trust, pending the closing of the sale transaction.

4 On July 28, 2006, Bonnydon received a letter from new counsel retained by Greenstreet advising that Green- street considered the APS to be null and void. Bonnydon disagreed and insisted that Greenstreet complete the transaction. The APS was scheduled to close on September 1, 2006.

5 On August 30, 2006 Greenstreet commenced an action alleging misrepresentation. Bonnydon's counsel tendered the closing documents upon Greenstreet's solicitor on September 1, 2006. The APS was not completed and Bonnydon brought a counterclaim against Greenstreet for breach of the APS.

6 After commencing its action, Greenstreet brought a motion for a Certificate of Pending Litigation ("CPL"). The motion was resolved on November 16, 2006 on the basis of a consent order dismissing the motion for a CPL and Master Haberman made an order directing that the Deposit Proceeds "be deposited with this Honourable Court by Bonnydon" and "be held by this Honourable Court pending further order of the court or the final adjudication of the herein action".

7 The Deposit Proceeds were paid by Bonnydon's solicitors into court, where they remain. The action has not been adjudicated.

8 On June 22, 2007, Greenstreet made an assignment in bankruptcy. The Trustee listed the Deposit Proceeds as an asset of the Estate and requests an order that they be paid out to the Trustee.

9 The Trustee submits that what is at issue is the application of the legal principle that where funds are paid into court by a party who subsequently becomes bankrupt before entitlement to the funds is finally adjudicated, the funds are the property of the bankrupt and, notwithstanding the pending litigation, must be paid to the trustee in bankruptcy to be distributed to the bankrupt's creditors in accordance with their respective entitlements under bankruptcy law.

10 The Trustee frames the issue as follows:

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

What is the nature of the Deposit Proceeds? Are they (i) held in trust; (ii) the property of Bonnydon; or (iii) the property of Greenstreet (within the meaning of section 67 of the BIA)?

11 Bonnydon asserts that the Deposit Proceeds were forfeited to it when Greenstreet breached the APS and failed to complete the transaction. Bonnydon alternatively asserts that the Deposit Proceeds are subject to a trust and would only become available to the Estate, if the Trustee could establish that Bonnydon was the cause of the failure of the transaction.

12 It was made clear at the hearing that I was not going to determine the merits of the action as between Green- street and Bonnydon. The motion before the Court was to determine whether the Deposit Proceeds should be paid out to the Trustee for the benefit of the Estate.

13 The APS contains a number of standard terms including that the agreement including the schedule attached "shall constitute the entire agreement" between the parties and that there was "no representation, warranty, collateral agreement or condition, which affects the agreement other than as expressed therein".

14 The APS called for deposits to be submitted in two stages.

(a) On the first page, under the heading "DEPOSIT" it provided:

Buyer submits (upon Acceptance) Fifty Thousand Dollars (CDN $) $50,000.00 by negotiable cheque payable to Vendor's Solicitor to be held in trust without interest pending completion or other termination of this Agreement and to be credited toward the Purchase Price on completion. Buyer agrees to pay the balance as more particularly set out in the Schedule A attached.

(b) Schedule A to the Agreement further provided:

The Buyer agrees to pay a further sum of $200,000.00 to Vendor's Solicitor in trust, by negotiable cheque, at the time of notification of fulfillment or removal of the condition pertaining to the due diligence condition, as an additional deposit to be held in trust pending completion or other termination of this Agreement...

15 The terms of the APS concerning deposits are virtually identical to the terms considered in Frechette, Re (1991), 6 C.B.R. (3d) 75 (Ont. Bktcy.).

16 The facts of this case are also similar to those in Frechette. In Frechette, real estate deposit monies were paid "in trust pending completion or other termination of the agreement and to be credited towards the purchase price on completion." The purchaser defaulted, and litigation ensued. In the course of the litigation, the purchaser filed an assignment in bankruptcy. The trustee then brought an application for an order declaring that the deposit monies form part of the property of the bankrupt. The trustee admitted on the court application that the purchaser had been in

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842 default. The court rejected the trustee's claim to the funds. Borins J. (as he then was) held, inter alia, as follows:

...The deposit paid by the purchaser is a guarantee or security for the performance of the contract and is not merely a part payment on account of the purchase price. Where the contract is completed, the deposit forms a credit in favour of the purchaser in respect to the amount owing to the vendor on account of the purchase price. If the sale is not completed because of the purchaser's default, the deposit, being a guarantee of performance, becomes the property of the vendor, because to permit the purchaser to recover the deposit would enable the purchaser to take advantage of his or her wrong. If the sale is not completed because of the vendor's default, the deposit becomes the property of the purchaser. (paragraph 18)

...if there was a trust imposed on the $15,000.00 deposit received by Century 21, it arose by virtue of the language of the agreement of purchase and sale... The cases also confirm my opinion that in determining or identifying the beneficiary of the trust, it is necessary to consider the circumstances surrounding the payment of the deposit, the purpose of the deposit, the circumstances surrounding the completion or other termination of the real estate transaction and the law of vendor and purchaser. (paragraph 28)

Applying the principles of interpretation of trust documents, there can be no difficulty in identifying the potential beneficiaries of the trust. They are either the vendors or the purchaser, depending on the facts at the time when the trustee is called upon to distribute the trust property. For the purposes of this application, I must assume the time of distribution to be the date of the purchaser's assignment in bankruptcy, or at any time between that date and the purchaser's discharge from bankruptcy, because this is the time period to which section 67(c) of the Bankruptcy Act is directed. Once the potential beneficiaries of the trust have been identified, it then becomes a matter of evidence and law at the date of distribution of the trust funds as to whether the vendor or the purchaser is entitled to the trust funds. (paragraph 30)

It is an agreed fact that on the date contracted by the parties for the completion of the purchase and sale, the purchaser did not have sufficient funds to complete the purchase and that he was in breach of the agreement of purchase and sale, and liable to the vendors for damages and/or specific performance. On the basis of well-established principles, because the transaction did not close as a result of the purchaser's default, the deposit paid by the purchaser was forfeited to the vendors. It follows that on the date of the purchaser's assignment in bankruptcy, the deposit did not constitute property of the bankrupt within the meaning of section 67(c) of the Bankruptcy Act. (paragraph 30)

Of course, if the parties to this application had not agreed upon the facts on which it was to be decided, it would have been necessary, as a matter of evidence, for the Court to determine whether it was the default of the vendors or the default of the purchaser which resulted in the failure of the completion of the transaction. (paragraph 31)

The agreement stipulated that the deposit was to be held in trust by the real estate agent 'pending completion or other termination of this agreement', and provided that it 'be credited toward the Purchase Price on completion'. There can be no doubt that the intended beneficiary of the trust money on completion of the agreement is the vendor. One must then ask who the intended beneficiary would be on 'other termination of the agreement'. This, as I have suggested, takes into consideration the circumstances as they are found to exist when the agreement is

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

terminated other than by its completion. 'Other termination' may result from other than the default of the vendor or the purchaser. The agreement may be terminated, as well, by mutual consent. In my view, the words 'or other termination' implied that the trustee will distribute the trust moneys pursuant to the principles of the law of vendor and purchaser or the instructions of the parties if the agreement is terminated by mutual consent. In this case, of course, the 'other termination' was the failure to complete the transaction caused by the purchaser's default, with the result that as a matter of law, the purchaser forfeited the deposit to the vendors. (paragraph 33)

In summary, it is clear from the language of the agreement of purchase and sale that the $15,000 paid by the bankrupt purchaser as a deposit, in the possession of Century 21, constitutes specific property impressed with a trust. (paragraph 34)

[Emphasis added.]

17 In my view it is important to note that at paragraph 31 Borins J. stated that if the parties had not agreed that the purchaser was in default, it would have been necessary, as a matter of evidence, for the court to determine whether it was the default of the vendors or the default of the purchaser which resulted in the failure of the completion of the transaction.

18 Further, at paragraph 35, Borins J. added that had he not been able to resolve the entitlement to the deposit by means of that trust analysis, he would have come to the same result on the basis that "a trustee in bankruptcy, as an officer of the Court, must act in an equitable manner, and the Court will not permit the trustee to exercise his or her rights if to do so would be inconsistent with natural justice. In this case, it would be unfair to enrich the bankrupt's estate at the expense of the innocent vendors and consequent upon the default of the bankrupt purchaser resulting in the vendors being unable to complete the sale of their property. It would be unfair to permit the trustee in bankruptcy by the exercise of a stay of the existing action brought by the vendors to defeat their right to recover the deposit pursuant to the terms of the trust and the facts of this case".

19 There are differences between Frechette and this case. Firstly, in Frechette it was acknowledged that the bankrupt was in breach of the agreement of purchase and sale. In this case, the matter has not been determined.

20 Secondly, at the time of bankruptcy, the funds in Frechette were being held by the vendor's real estate agent in trust. In this case, the Deposit Proceeds have been paid into court.

21 The Trustee submits that the Deposit Proceeds are no longer held in trust, as the funds are held by the Ac- countant of the Superior Court. The Trustee relies on Acepharm Inc., Re, [1999] O.J. No. 2353 (Ont. C.A.) to support this proposition. In Acepharm, disputed funds were held by solicitors in a trust account rather than the Accountant of the Superior Court. The court held that the funds were trust funds in the hands of the law firm. However, at paragraph 9, the court refers to another Court of Appeal decision, Tradmor Investments Ltd. v. Valdi Foods (1987) Inc. (1995), 33 C.B.R. (3d) 244 (Ont. Gen. Div.) affirmed (1997), 43 C.B.R. (3d) 135 (Ont. C.A.):

It could not be argued, (and was not argued), in Tradmore [Tradmore Investments Ltd.v. Valdi Foods (1987) Inc. (1995), 33 C.B.R. (3d) 244 (Ont. Gen. Div.) aff'd (1997) 43 C.B.R. (3d) 135 (Ont. C.A.)] that the Accountant of

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

the (now) Superior Court of Justice was a trustee. That office is simply a repository, which responds not to terms of a trust but to the rules of court and court orders.

22 The Trustee relies on this reference to Tradmore. However, the facts in Tradmor are quite different from this case. In Tradmor, the court held that monies paid into court pursuant to an order on a summary judgment motion did not constitute security within the meaning of section 70(1) of the Bankruptcy Act. In Tradmor, the monies paid into court were not, and never had been, subject to a trust. The mere payment of non-trust monies to the Supreme Court Accountant could not elevate the status of those monies to the status of trust funds, as it did not evidence an intention by the parties to create a trust, where no prior trust existed.

23 Tradmor was a contest between the rights of a trustee in bankruptcy, and a creditor who sought status as a secured creditor, and who, if successful, would have priority over the trustee. The conclusion in Tradmor was that the creditor did not achieve secured status just because the funds had been paid into court.

24 The facts in Tradmor have to be contrasted with the situation in this case which involves a dispute over the Deposit Proceeds, which were trust funds when paid by Greenstreet to Bonnydon's solicitor.

25 The Trustee submits that, on the basis of Acepharm and Tradmor, where funds are paid into court by a party who subsequently becomes bankrupt before entitlement to the funds is finally adjudicated, the funds are the property of the bankrupt and must be paid to the Trustee to be distributed to the bankrupt's creditors in accordance with their respective entitlements under bankruptcy law. Support for this principle comes from sections 2, 67 and 70 of BIA. These sections reads as follows:

2. 'property' means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property.

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person,

(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides, or but it shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

70. (1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor's representative, and except the rights of a secured creditor.

26 I do not take issue with this submission. However, in my view, it has no application in this case. The principle has application in a situation where the trustee is dealing with property of the bankrupt which vests in the trustee. The property of a bankrupt that passes to the trustee is subject to all the equities and liabilities that affected it in the bankrupts' hands and to all dispositions that had been validly made by the bankrupt.

27 In my view, once the Deposit Proceeds had been paid over to Bonnydon's solicitors in trust, the Deposit Proceeds could no longer be considered property of Greenstreet in the absolute sense. Pursuant to the terms of the APS and the Order of Master Haberman, Greenstreet had no unilateral right to obtain the Deposit Proceeds or to call for the return of the Deposit Proceeds. The required ingredients for a trust — certainty of intention, subject matter, and object were present. As a consequence of establishing the trust, Greenstreet no longer had control over the Deposit Proceeds, and at no time prior to its bankruptcy did Greenstreet regain control over the Deposit Proceeds. Greenstreet had only a contingent interest in the Deposit Proceeds. The interest that vested in the Trustee was this contingent interest, which does not give the Trustee the absolute right to the Deposit Proceeds. The Deposit Proceeds could only be returned to Greenstreet in the event of a finding of default by Bonnydon or by mutual consent of the parties.

28 Another case relied upon by the Trustee is Bank of Montreal v. Faclaris (1984), 48 O.R. (2d) 348 (Ont. H.C.). In my view, this case does not assist the Trustee. It can be distinguished on the facts. The monies, in Faclaris, when paid into court, were not subject to a trust.

29 Furthermore, counsel for the trustee submitted that Faclaris established the proposition that the mere fact that the bankrupt, prior to bankruptcy, was not entitled to demand immediate payment of the funds paid into court does not preclude the trustee standing in the shoes of the bankrupt from doing so. The trustee would be so precluded if the bankrupt no longer had the right to call for payment, in other words, if the money ceased to be the bankrupt's in the sense that the bankrupt no longer has any claim to it. In my view, that is the situation here. At the time of the bankruptcy, Greenstreet did not have the right to call for payment. Greenstreet had only a contingent interest in the Deposit Proceeds — contingent on a finding that Bonnydon had defaulted on the APS. In the absence of such a finding, Greenstreet has no claim to the Deposit Proceeds. The bankruptcy of Greenstreet did not change the situation. The bankruptcy of Greenstreet does not elevate the Trustee to a position where it can claim the Deposit Proceeds without first obtaining a favourable outcome in the litigation.

30 That is not to say that the Deposit Proceeds should be paid out to Bonnydon. They should not. The Deposit Proceeds should remain in court pending adjudication of the action as provided for in the order of Master Haberman. This finding is consistent with the conclusion of Borins J. at paragraph 31 of Frechette. (See paragraph 16 above). It seems to me that, prior to paying the monies out of court, it is necessary for the court to determine whether it was the default of Greenstreet or Bonnydon that resulted in the failure of the APS to close. This finding will determine whether

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842 the Deposit Proceeds are property of the Estate or Bonnydon.

31 Not only is this outcome consistent with the principles set out in Frechette, it is also consistent with the intention of the parties the time the Deposit Proceeds were paid into Court. The payment of the Deposit Proceeds into court did not operate so as to modify or amend the terms of the APS. The Deposit Proceeds remained in court pending a determination of the parties' entitlement based on the terms of the APS and the law of vendor and purchaser. The Trustee has a duty, as an officer of the court to act in an equitable manner to all parties, including Bonnydon. This duty requires the Trustee to follow the same legal route that Greenstreet would have to follow in order to obtain the Deposit Proceeds. At the time of bankruptcy Greenstreet had a contingent interest in the funds. The interest could only be realized if it obtained a favourable outcome in the action with Bonnydon, or otherwise resolved the matter with Bonnydon. That is the same position that the Trustee finds itself in. The payment into court serves only to substitute the Accountant of the Superior Court for the lawyers' trust account. It did not change the parties' contingent interest in the funds.

32 In arriving at this conclusion, it is not necessary to determine whether or not the Deposit Proceeds are trust funds in the hands of the Accountant. The primary conclusion is the Trustee must be successful in the litigation before it can obtain the Deposit Proceeds. However, to the extent that the trust issue needs to be determined, I accept the submission of counsel to Bonnydon that the Deposit Proceeds remain trust funds in court. I accept as correct the statement at paragraph 41 of his factum which states:

The mere fact that the trust property has left the hands of the original designated trustee does not negate the fact that it remains property subject to a trust. Beneficiaries have a number of proprietary remedies for recovering trust property from third parties (subject to certain exceptions for bona fide purchasers for value without notice). As observed by Waters: "The starting point is that trust property remains trust property..." (Waters' Law of Trusts, at pgs. 1266, 1267, 1269 and 1272-1273.)

33 Accepting this submission only serves to reinforce the primary conclusion that the bankruptcy of Greenstreet does not in any way elevate the status of the Trustee to the point that it can use the bankruptcy process to defeat the contingent interest that Bonnydon has in the Deposit Proceeds. All factual elements required to resolve this litigation occurred prior to Greenstreet's bankruptcy. The bankruptcy process should not be utilized, in these circumstances, to determine the outcome. The outcome should be determined on the evidence surrounding the breach and the law of vendor and purchaser.

34 The Trustee requested a declaration that the Deposit Proceeds constitute property of the Estate of Greenstreet and an order directing that the Accountant pay the Deposit Proceeds to the Trustee. This relief is denied. The Deposit Proceeds are to remain with the Accountant pending final adjudication or further court order based on mutual consent.

35 On the subject of costs, Bonnydon included submissions in its factum that in the event that it is successful, it should be entitled to costs payable personally by the Trustee, on a substantial indemnity basis. In the event that the parties are unable to agree on costs, I would ask that Bonnydon submit a costs submission within 15 days and that counsel for the Trustee provide a responding submission within 15 days thereafter. Such submissions should be no longer than 4 pages each.

2007 CarswellOnt 7514, 38 C.B.R. (5th) 307, 161 A.C.W.S. (3d) 842

36 Finally, to the extent that Bonnydon wishes to bring a motion for leave to proceed in respect of the action in which the Deposit Proceeds are being held, I may be spoken to as to scheduling.

Order accordingly.

END OF DOCUMENT

2010 CarswellOnt 6180, 2010 ONSC 4596, 70 C.B.R. (5th) 19, 192 A.C.W.S. (3d) 336

Rutherford v. Swanick

Betty Florence Rutherford (Plaintiff) v. Brent W. Swanick, Brent W. Swanick in his capacity as trustee of the Torliam Trust, Brent W. Swanick in his capacity as trustee of the B & G Fair Trust, 1539567 Ontario Inc. and 999388 Ontario Inc. (Defendants)

Ontario Superior Court of Justice

Trotter J.

Heard: June 4, 2010 Judgment: August 23, 2010 Docket: 06-CV-304071PD3

Counsel: Jeffrey Tighe for Plaintiff

Bruce Simpson for Defendant, 999388 Ontario Inc.

Subject: Civil Practice and Procedure; Insolvency; Estates and Trusts

Bankruptcy and insolvency --- Effect of bankruptcy on other proceedings — Proceedings by bankrupt

Bankrupt was beneficiary and trustee of trust — Trust deed provided that beneficiaries did not have interest in trust property unless irrevocably transferred to them at sole discretion of trustee — Trust deed also provided bankrupt could resign and reappoint herself as trustee at her sole discretion — Bankrupt transferred trust property to solicitor who was to hold it in trust for trust — Bankrupt resigned as trustee and appointed solicitor as trustee — Bankrupt assigned herself into bankruptcy and was discharged — Before bankruptcy proceedings were concluded, bankrupt commenced action in capacity of beneficiary against solicitor for damages for breach of trust — After bankruptcy proceedings were concluded, bankrupt reappointed herself as trustee — Bankrupt brought motion for order permitting her to continue action in her capacity as trustee — Solicitor brought cross-motion for order striking out statement of claim as being void ab initio — Motion granted; cross-motion dismissed — It was not clear that action was void ab initio — Trust property had apparently not passed to trustee in bankruptcy since trust property had never been irrevocably transferred to bankrupt — Fact that bankrupt could have reappointed herself as trustee and transferred property to

2010 CarswellOnt 6180, 2010 ONSC 4596, 70 C.B.R. (5th) 19, 192 A.C.W.S. (3d) 336 herself was not conclusive — Trustee in bankruptcy had been in possession of trust deed but never made claim against trust property — In any event, issues would have to be considered properly at trial. Cases considered by Trotter J.:

Giffen, Re (1998), 45 B.C.L.R. (3d) 1, 1998 CarswellBC 147, 1998 CarswellBC 148, [1998] 1 S.C.R. 91, (sub nom. Giffen (Bankrupt), Re) 101 B.C.A.C. 161, (sub nom. Giffen (Bankrupt), Re) 164 W.A.C. 161, 155 D.L.R. (4th) 332, 222 N.R. 29, 1 C.B.R. (4th) 115, [1998] 7 W.W.R. 1, 13 P.P.S.A.C. (2d) 255 (S.C.C.) — referred to

Greenstreet Management Inc., Re (2007), 38 C.B.R. (5th) 307, 2007 CarswellOnt 7514 (Ont. S.C.J.) — distinguished

Lefebvre, Re (2004), (sub nom. Lefebvre (Bankrupt), Re) 326 N.R. 253 (Eng.), (sub nom. Lefebvre (Bankrupt), Re) 326 N.R. 353 (Fr.), 2004 SCC 63, 2004 CarswellQue 2831, 2004 CarswellQue 2832, (sub nom. Lefebvre (Trustee of), Re) 244 D.L.R. (4th) 513, (sub nom. Lefebvre (Trustee of), Re) [2004] 3 S.C.R. 326, 7 C.B.R. (5th) 243, 1 B.L.R. (4th) 19 (S.C.C.) — referred to

Wilson v. Stackhouse (1926), 1926 CarswellOnt 19, 7 C.B.R. 437, 29 O.W.N. 357, [1926] 1 D.L.R. 584 (Ont. S.C.) — referred to

Statutes considered:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3

s. 2 "property" — considered

s. 67 — considered

s. 71 — considered

Rules considered:

Rules of Civil Procedure, R.R.O. 1990, Reg. 194

R. 20 — referred to

R. 21 — referred to

MOTION by beneficiary for order permitting her to continue action against solicitor in her capacity as trustee; CROSS-MOTION by solicitor for order striking out statement of claim as being void ab initio.

2010 CarswellOnt 6180, 2010 ONSC 4596, 70 C.B.R. (5th) 19, 192 A.C.W.S. (3d) 336

Trotter J.:

1 There are two motions before me. First, the plaintiff brings a motion to continue the action in her capacity as trustee of the B & G Fair Trust. Second, the defendant 999388 Ontario Inc. (hereafter "999") brings a motion on behalf of all defendants[FN1] to strike the plaintiff's claim as being void ab initio because the plaintiff lacks the capacity to bring the claim.

2 For the reasons set out below, the plaintiff's motion is allowed; the motion brought by 999 is dismissed.

3 The plaintiff was initially a trustee and beneficiary of two trusts - the B & G Fair Trust (created on August 21, 2000) and the Torliam Trust (created on September 1, 2003). The plaintiff's two minor children are also defined as beneficiaries of the trusts.

4 While she was a trustee, both trusts were involved in land deals. This action concerns the dealings of the B & G Fair Trust. In particular, a piece of real estate held by this trust was transferred to 999 (a corporation controlled by the defendant Swanick) and held in trust for the B & G Fair Trust. The defendant Swanick is a lawyer who acted on the plaintiff's instructions.

5 On September 25, 2003, the plaintiff resigned as trustee of both trusts and appointed the defendant Brent W. Swanick as trustee. This was done pursuant to paragraph 6.5 of both Deeds of Trust. The defendants assert that, at all times, the plaintiff knew that, by virtue of paragraph 6.5 of the Deeds, she had the capacity in her sole discretion to re-appoint herself as trustee of either or both of the trusts at any time.

6 On December 31, 2003, the plaintiff made an assignment in bankruptcy. Paddon + Yorke Inc was the appointed Trustee in Bankruptcy ("the Trustee"). On October 1, 2004, the plaintiff was discharged as a bankrupt.

7 On January 13, 2006 (prior to the discharge of the Trustee and without the Trustee's consent), the plaintiff, in her capacity as a beneficiary of the trusts, issued a Statement of Claim, seeking damages against the defendants. The claim alleges various breaches of trust as against the defendant Swanick and are made with respect to the plaintiff's beneficial interests. The causes of action arose from events and property interests that existed prior to the plaintiff's assignment in bankruptcy.

8 On February 13, 2009, the Trustee was discharged. On July 13, 2009, the plaintiff appointed herself as trustee of both trusts in accordance with the powers contained in section 6.5 of the Deeds. The plaintiff claims that, until fairly recently, she thought she required a court order to remove the defendant Swanick as trustee and reappoint herself.

9 The plaintiff also claims that, pursuant to paragraphs 7.11 of both Deeds, interest in the assets of the trusts were not vested in the beneficiaries and could only be done so at the sole discretion of the trustee of both trusts. At the time she made her assignment in bankruptcy and up and until her discharge, only the defendant Swanick had this power. The defendants assert that the plaintiff knew that she had the sole discretion to re-appoint herself as trustee of both trusts and that she has never denied that she failed to disclose this to the Trustee. The plaintiff counters by contending

2010 CarswellOnt 6180, 2010 ONSC 4596, 70 C.B.R. (5th) 19, 192 A.C.W.S. (3d) 336 that the Trustee was in possession of both Deeds and in contact with the defendant Swanick during the bankruptcy process and was well aware of the entire situation.

Positions of the Parties

10 On the issue of capacity to commence the action, the defendant relies on "Rules 20 or 21" to support its position that the action should be dismissed against all remaining defendants. The defendants take the position that, upon the assignment into bankruptcy, all of the plaintiff's assets (including her interest in the trusts as beneficiary) vested in the Trustee. Further, given that the Trustee did not re-convey any property back to the plaintiff upon her discharge, she lacks the capacity to commence an action in relation to the trusts.

11 The plaintiff takes the position that, by virtue of the Deeds for both trusts, no beneficiary has any interest or right in any portion of the trusts until such time as they become irrevocably vested. This can only be brought about at the sole discretion of the trustee of the trusts. The plaintiff therefore argues that there was no interest in the assets of the trust for the Trustee to seize, and therefore nothing for her to declare or to be re-conveyed back to her.

12 Both parties agree that, should the 999's motion fail, the plaintiff should be permitted to amend her claim to continue the action in her capacity as trustee of the B & G Fair Trust.

Analysis

13 Pursuant to s. 71 of Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, the bankrupt's property "shall...pass to and vest in the trustee." This case really turns on the definition of "property" in ss. 2 and 67 of the Act. The definition of "property" is very broad and includes some contingent interests. However, unless provided for by legislation, a trustee in bankruptcy has no greater interest in the property under his/her responsibility than that of the bankrupt: see Giffen, Re (1998), 1 C.B.R. (4th) 115 (S.C.C.), at pp. 132-133, Lefebvre, Re (2004), 7 C.B.R. (5th) 243 (S.C.C.), at p. 261 and Wilson v. Stackhouse, [1926] 1 D.L.R. 584 (Ont. S.C.).[FN2] Counsel for the defendants has not cited any statutory provision to this effect. Moreover, counsel have not cited any authority that governs the specific scenario raised in these proceedings.

14 When the plaintiff made an assignment into bankruptcy, she was a beneficiary of the trusts. At that point, according to the provisions of both Deeds, which were drafted by the defendant Swanick, the plaintiff had only a contingent interest in the trust property, which could only be irrevocably vested in the sole discretion of the trustee (who was Swanick).

15 The defendant 999 contends that the plaintiff could have appointed herself as trustee of both trusts at anytime. Moreover, it contends that the plaintiff knew (or must have known this). The plaintiff contends that she thought she required a court order to replace the defendant Swanick as a trustee of the trusts. She points to her Statement of Claim in which she asks for an order to this effect. The question of whether the plaintiff knew that she could have appointed herself as a trustee seems to me to be a distraction as it relates to whether her contingent interest as a beneficiary vested in the Trustee. In any event, I find this factual issue, which turns on a question of credibility, impossible to resolve on the paper record before me.

2010 CarswellOnt 6180, 2010 ONSC 4596, 70 C.B.R. (5th) 19, 192 A.C.W.S. (3d) 336

16 Moreover, there are other factual matters in this case that are relevant to the questions raised by the motion brought by 999. For instance, it is quite clear that, after the plaintiff was assigned into bankruptcy, the Trustee was in possession of the Deeds and must be taken to be aware of their terms. Also, correspondence between the Trustee and the defendant Swanick (dated January 20, 2004) discloses the Trustee's awareness that the plaintiff was a beneficiary of both trusts. It also seems clear from what occurred afterwards that the Trustee ultimately had no interest in the trusts as a source of revenue for the plaintiff's creditors.

17 I am inclined towards the conclusion that the plaintiff's contingent interests a beneficiary did not pass to or not vest in the Trustee. If they did, the Trustee enjoyed no greater right to realize upon the assets of the trusts than the plaintiff did (in her capacity as a beneficiary). However, I am of the view that the issue presented by this motion under "Rule 20 or 21" cannot be decided on the paper record before me. There are factual issues (including some issues of credibility) that must be resolved relating to the respective roles and knowledge of the plaintiff, the defendant Swanick and the Trustee. In the end, on this record, I am not persuaded that the plaintiff lacks the capacity to bring this action[FN3] or that it is void ab initio.

18 From best as I can tell, and for reasons that are unclear to me, the plaintiff and defendant Swanick engaged in a series of complicated transactions in dealing with the trusts and the real estate that was transferred to them. The plaintiff's resignation as trustee just prior to her assignment in bankruptcy raises certain concerns. As I have said, the roles of both, and their dealings with the Trustee, are matters that should be addressed at a trial on the merits.

19 Having dismissed 999's motion to strike the claim, the plaintiff is permitted to continue the action in her capacity as trustee of the B & G Fair Trust.

20 The parties may make brief submissions (no more than three pages each) on the issue of costs. The plaintiff shall have until September 15, 2010 to do so. The defendant 999 shall have until September 25, 2010.

Motion granted; cross-motion dismissed.

FN1 As a result of an Order signed on August 20, 2010, other named defendants were released from this action without costs.

FN2 Counsel for the plaintiff cites Greenstreet Management Inc., Re (2007), 38 C.B.R. (5th) 307 (Ont. S.C.J.) for this proposition. I am not confident that the highly fact-specific context of that case stands for such a general proposition.

FN3 I also note that the plaintiff, particularly in her request to amend her pleading, seeks to assert both her own and her minor children's rights in the trusts.

END OF DOCUMENT

THE LAW OF TRUSTS S E C 0 N D E D IT I 0 N

HON. EILEEN E. GILLESE Court of Appeal for Ontario

MARTHA MILCZYNSKI Federal Court of Canada An Introduction to the Law of Trusts 5 B. AN INTRODUCTION TO THE TRUST CONCEPT

To define a trust is a difficult, if not impossible, task. No one definition can encompass all the intricacies of the trust concept. That, in fact, is part of the magic of the trust concept. Having no fixed definition, it is flexible and can adjust to the unending change that is part of modern society. Take, for example, the need that arose in the latter part of this century to deal fairly with property distribution on the breakdown of personal relationships. Trust law, in the form of the constructive trust, was the solution. Consider the huge growth in the area of fiduciaries, again an area largely determined through the application of trust prin ciples. Another important and developing area is that relating to pen sion plans. The framework for analysis, once again, is built on trust principles. The use of trusts has also been enhanced in commerce and business through, for example, income trusts. These examples are in addition to the traditional uses to which trusts have been put. Historically, equity has been dominant in the areas of wills, property, and trusts. There are the obvious tax uses to which trusts can be put, as well. Provision for one's family is still often best accomplished through use of a trust. The desire to create successive interests in property is best accomplished through a trust. Children who ate not of age need to be provided for, as do loved ones who suffer from some type of incapacity; again, perhaps the safest and most secure way of making such provision is through use of a trust. Corporate law is now heavily dependent on the use of trusts - joint ventures, debentures, and insolvencies all rely on the trust as an oper ating mode. On death, the property of a deceased vests automatically in a personal representative who is trustee of such funds. Many statutes rely on trusts to effect their purposes. Pension legislation, for instance, deems that employee contributions to pensions that are collected by employers are deemed to be held in trust until they are deposited into the pension fund. The list could go on, but these examples should serve to show how exciting and important the trust is in modern life. In its simplest terms, a trust arises whenever there is a split in legal and beneficial ownership to property - that is, whenever one person holds legal title to property and is legally obliged to manage that prop erty for the benefit of another. It is an equitable concept that enables two persons to have shared ownership rights in a single piece of prop erty. The person holding the legal title is termed a trustee; the duty to hold the property for the benefit of another is termed a duty of loyalty; the person with equitable or beneficial entitlement is called the bene- 6 THE LAW OF TRUSTS

ficiary. A trust can be created for any purpose so long as the purpose is not illegal or contrary to public policy. Readers who want a more detailed definition of a trust may find Underhill's description useful: A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or cestuis que trust), of whom he may himself be one and any one of whom may enforce the obligation. Any act or neglect on the part of the trustee which is not authorized or excused by the terms of the trust instrument, or by law, is called a breach of trust.2

C. HISTORY AND BACKGROUND

Familiarity with the way in which trusts developed makes it easier to understand what the trust is today, how it can be used, and how it may develop in the future. In general, there were four significant stages in the development of the trust.

1) The Beginning Equity has its origin in the office of the Chancellor. The King had re sidual power to do justice among his subjects in circumstances where justice could, for some reason, not be achieved in the courts of common law. The King delegated this power to the Chancellor. Once a body of decisions by the Chancellor had been developed and there was some predictability that the Chancellor would hear a matter and that he would act according to certain principles, this branch of law was given a name: equity. Equity, it can be seen, was the body of rules that evolved to reduce the rigidity of the rules of common law. Equity became a branch of law that, until the passage of the judicature Act, 1873, was administered by the Court of Chancery. The effect of the judicature Acts was to fuse the equity and the common law systems of law so that both could be dispensed by all courts.3

2 A. Underhill & DJ. Hayton, Law Relating to Trusts and Trustees, 14th ed. by DJ. Hayton (London: Butterworths, 1987) at 3. 3 The Common Law Procedure Act, 1854 (U.K.), 17 & 18 Viet., c. 125, gave the com mon law courts power to dispense equitable remedies. The Chancery Amendment Ending or Changing a Trust 81

An alternative to reservation of a power of revocation in favour of the settlor is to name the settlor as a trustee. This device would not empower the settlor to call for the return of the trust property, but would give the settlor a voice in the administration of the trust, without encountering the tax problem outlined above. Of course, the settlor as trustee would be a fiduciary and, therefore, subject to strict limits, including the restric tion that decisions be made solely and exclusively in the best interests of the beneficiaries and not according to the settlor's priorities.

2) The Rule in Saunders v. Vautier7

EXAMPLE: A man dies. Under his will, he leaves stock worth £2500 in trust for his great-nephew. He stipulates in his will that his great-nephew is not to be given the stock until he turns the age of twenty-five. The great-nephew reaches the age of majority and, through the assistance of the courts, compels the trustee to transfer the stock to him, plus accrued interest and dividends. These are the facts of Saunders v. Vautier. The case created a new right for trust beneficiaries. The proposition of law for which the case stands can be stated as follows: A beneficiary who is sui juris and absolutely entitled can require the trustee to make an immediate distribution of the trust property and thereby terminate the trust prematurely. 8 Ab solute entitlement means that the beneficiary's interest is vested and represents the full (actual and possible) beneficial interest. The Saunders v. Vautier principle has been extended to trusts for more than one beneficiary, whether entitled successively or concur rently, so long as all beneficiaries are ascertained and together the beneficiaries account for the full beneficial interest. Even when the principle is used in this extended sense, it is referred to as the rule in Saunders v. Vautier. There are two parts to the Saunders v. Vautier rule, both of which must be met in order for it to apply. First, the beneficiary or benefi ciaries must be sui juris - adult and of full mental capacity. Second, the beneficiary or beneficiaries must be absolutely entitled to the trust property. To be absolutely entitled, all the beneficiaries must be ascer-

7 (1841), 4 Beav. 115, 49 E.R. 282, aff'd (1841), 1 Cr. & Ph. 240, 41 E.R. 482 (Ch.). 8 As discussed below, the rule in Saunders v. Vautier has been abolished in Al berta and Manitoba through legislation. Where the rule in Saunders v. Vautier would have otherwise applied, legislation in Alberta and Manitoba makes termination subject to judicial discretion. See Trustee Act R.S.O. 2000, T-80 s. 42; The Trustee Act, C. C. S.M. c Tl60, s. 59(2). The rule applies throughout the balance of common law Canada.