BETWEEN:
and
Counsel for the Appellant: Terry S. Gill
Counsel for the Respondent: Susan Wong
REASONS FOR JUDGMENT
(Delivered orally from the bench on
November 7, 2006, at Vancouver, British Columbia.)
Miller J.
[1] In 1994, Jean and John Walter Howson made a major decision to move the house and family from South Africa to Canada. Based on their description of the rampant crime and the uncertainty in South Africa at that time, and the success achieved in Canada since, it was clearly a good decision. They received advice at the time of their move to Canada as to how to structure their affairs to get a five-year tax holiday, as Mr. Howson put it. One element of this somewhat complicated structure was putting funds into a trust, the Howson Family Trust. The only issue in this case is whether the funds that were put into the Howson Family Trust by Jean Howson were put in by way of loan. If so, as Ms. Howson contends, then subsection 75(2) of the Income Tax Act of Canada does not apply to attribute income to Ms. Howson in 1996, 1997 and 1998. If the funds were deposited into the Howson Family Trust other than by loan, as the Crown contends, then subsection 75(2) would apply to attribute income to Ms. Howson in the three years in question.
[2] I want to be clear that the Respondent has not argued that the arrangement that Ms. Howson entered into may have been a loan, but was a type of loan in the circumstances, that would be caught by subsection 75(2). No, the Crown's argument was that there simply was not a loan. I will go over the facts in a little more detail.
Facts
[3] The Howsons decided to leave South Africa in 1994 for reasons of safety and for a brighter future for their four children. They decided on Canada as they were familiar with Canada, specifically Vancouver. They had a friend in Vancouver, and also a colleague who advised that the Howsons could avail themselves of a five-year tax holiday if they immigrated to Canada.
[4] A Canadian firm of accountants of Wolridge Mann provided Mr. Howson with a plan as to how to achieve the tax holiday. He in turn provided this plan to his South African advisors and asked them to implement it. The result of this instruction by Mr. Howson to his legal and accounting advisors in South Africa was the following.
[5] First, a Deed of Trust establishing the Howson Family Trust. The Howson Family Trust was settled with 1,000 South African Rand, contributed by a friend and associate, Mr. Jenner. The Howsons' lawyer, Mr. Cohen and two of the accountants, Mr. Miller and Mr. Hogan, acted as trustees of this Trust. They were replaced in 1996 by a friend and two accountants from a newly-retained firm, Mr. Neale and I believe it was Ms. Whitecross. The donees or beneficiaries of the Howson Family Trust were Mr. and Mrs. Howson and the four children, and any other lawful descendants of John Walter Howson.
[6] Some other provisions of the trust that I made particular note of, were section 4, section 7, section 16.12, section 16.14 and section 29.2:[1]
4. VESTING
There shall be no vesting of any capital of the trust hereby created in the donees unless or until such time as payment may actually have been effected to the donees by the trustees of the amounts in question and vesting shall only take place concurrently with the payment of the capital to the donees in the circumstances contemplated in this deed of trust or if the trustees resolve to do so. It is the donor's intention that the trustees may either pay any part of the capital of the trust to any donee or alternatively allocate any part of the capital of the trust to any donee. In the event of there being any payment that part of the capital of the trust so paid shall vest in the donee to who the payment is made. If the trustees shall allocate any part of the capital to any donee such allocation shall be deemed to be a loan by such donee to the trust and which loan shall be payable to the donee at the trustees' discretion either with or without interest as the trustees may from time to time agree with the donee.
7. ACCEPTANCE OF GIFTS, PAYMENTS AND REQUESTS
The trustees are hereby empowered to accept and acquire for the purpose of the trust hereby constituted, any gifts, bequests or payments from any person, firm or company that may be given, bequeathed or paid by them as an addition or with the intention to add to the trust hereby constituted and whether any such addition consists of stocks, shares, moneys, movable or immovable property and any addition so accepted and acquired shall be deemed to form part of the trust and shall be administered and dealt with subject to the terms of this deed of trust. Any additions to the trust so received by the trustees may be retained by them in the form in which they are received and such retention shall be a sufficient compliance with the power to invest herein contained.
16.12 To receive on deposit any funds from the beneficiaries, including but not limited to any income paid to any beneficiary in terms hereof and to pay interest on such deposit.
16.14 Without prejudice to the generality of any of the provisions of this trust, any income or capital which the trustees of this trust are required or may decide to pay to or on behalf of any donee may be paid or transferred to the trustees of any trust, settlement, disposition or other instrument (wherever the same may be executed or administered) under which such beneficiary is beneficially interested or which, in the opinion of the trustees is for the benefit of such donee. Under no circumstances shall any benefits accrue to any body corporate.
29.2 Subject to sub-clause 29.3 hereunder until the termination of the trust, the trustees shall apply all or so much of the net income of the trust as they may deem fit for the benefit of one or more of the following beneficiaries and if more than one, in such shares and in such proportions as the trustees may from time to time in their sole and absolute discretion determine, provided that if at any time the income of the trust is insufficient for the vocational training and all reasonable pleasures of any beneficiary, the trustees may utilize and apply so much of the capital of the trust for these purposes as they may from time to time deem fit;
29.2.1 the donees;
29.2.2 any dependant or any spouse or former spouse of any of the donees whom the trustees may select for the purposes hereof whether directly or indirectly;
Without in any way limiting the generality of the trustee's rights to pay or apply net income of the trust as hereinbefore set out, they shall be entitled to utilize and apply such income for the maintenance, education, support, vocational training and/or reasonable pleasures and generally for such purposes as may in their sole and absolute discretion be considered to be in the interests of the donees or other beneficiaries concerned.
[7] The second result of Mr. Howson's instructions to his advisors in South Africa was a loan agreement dated June 11, 1997. Mr. Howson testified the plan from the Canadian advisors included documenting a loan by the Howsons of monies that went into the Howson Family Trust. The South African advisors, however, did not get around to this aspect of the transaction. Mr. Howson hired a new firm of accountants in 1996 who did arrange for the loan documents, which were ultimately signed in June 1997. That loan agreement stated - and I am going to read a few parts of that loan agreement:[2]
A. On or about June 11, 1994, Howson lent and advanced the sum of 4 433 329 Rand to the Howson Family Trust in terms of an oral agreement between the parties hereto and upon the terms and conditions herein set out.
B. The parties hereto wish to record their agreement in writing.
Further on, 1.1.3 defines capital:
"the capital" shall mean the sum of 4 433 329 Rand to be lent and actually advanced by Howson to the Trust in terms hereof or any balance thereof from time to time owed by the Trust to Howson.
Later, in paragraph 2:
Howson hereby agrees to lend and actually advance the capital to the Trust and the Trust hereby agrees to borrow the capital from Howson.
3.1 If so required by Howson, the capital shall bear interest at a rate equal to the call rate on similar sums of money from time to time paid by First National Bank of Southern Africa Limited or such higher rate of interest as the parties may from time to time agree upon in writing, or alternatively, be free of interest for such period as Howson may deem fit;
And finally:
4.1 The capital shall be repaid on three calendar months' notice given by Howson to the Trust at any time, provided that the capital and the accumulated interest (if any) shall be repaid in full within 10 years from the date on which the capital was advanced.
So those are the terms that were put in writing. Both Mr. and Ms. Howson testified that the oral agreement referred to in what I just read was simply their agreement to lend money to the Trust. Ms. Howson had no involvement in the arrangements and could shed no light on the terms for interest or pre-payment, other than she was adamant it was a loan of the proceeds from the sale of the house in South Africa, which was in her name, and that she insisted that it was to be repaid. This was her only asset of substance and she in no way was prepared to jeopardize that equity.
[8] Mr. Howson, being more hands-on with the professional advisors, confirmed that the written agreement reflected his understanding of the terms of the loan back in 1994 when the funds were actually put into the Howson Family Trust.
[9] The third result of Mr. Howson's instructions to his advisors was the Stirling Income Trust, a Declaration of Discretionary Trust with Protector by Heritage Trust Limited. This establishes something called the Sterling Trust with a £ 100 settlement, indicating that the Howson family is the beneficiary. The trustees of the Howson Family Trust were named as the first protector of the Trust.
[10] Finally, the fourth result of Mr. Howson's instructions was a Deed of Donation dated July 1994 between the Howson family as the donor and Heritage Trust Limited, a Guernsey company, on behalf of the Stirling Trust (donee). In this document, the Howsons donate to, or settle on, the Stirling Trust: firstly, the loans receivable from the Howson Family Trust, including the approximate 748,000 Rand loan receivable to Jean Howson, and secondly, their beneficial interest in the Howson Family Trust.
[11] It is not difficult to understand at this stage why Ms. Howson stated in evidence that the details of the arrangement were above her head. I doubt she is alone. The Howson Family Trust earned income in 1996, 1997 and 1998. Ms. Howson did not report any interest income or any other income from the Howson Family Trust in those years.
[12] In the year 2000, Ms. Howson received approximately C$157,000, representing 748,000 Rand, being the amount that Ms. Howson had lent to the Howson Family Trust. The financial statements from the Howson Family Trust for 1996, 1997 and 1998 record the amounts from the Howsons as loans. Such financial statements were prepared shortly after the February 28 yearends of each year in issue. Ms. Howson's amount of 748,000 Rand was included in such amounts reported as loans. That is my recap of the facts.
Issue
[13] While the issue can be framed generally as to whether subsection 75(2) of the Income Tax Act applies to these circumstances, so as to attribute trust income to Ms. Howson, the Respondent has narrowed the issue to a question of whether the 748,000 Rand put into the trust by Ms. Howson was, in law, a loan. If I find on balance Ms. Howson lent the 748,000 Rand to the Howson Family Trust, then the Respondent concedes that subsection 75(2) does not apply.
Analysis
[14] I will start by reading subsection 75(2):
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 section 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..., any taxable capital gain or allowable capital loss from the disposition of the property..., shall, during the lifetime of the person while the person is resident in Canada, be deemed to be income or a loss,... or a taxable capital gain or allowable capital loss, as the case may be, of the person.
Interestingly, the provision makes no reference to a loan, but is written in terms of "by the Trust property is held on condition it may revert", etc.
[15] It stands to reason that a bona fide loan is, on its face, not subject to reversion by the terms of the Trust. It returns to the lender by operation of the loan itself and the law of creditor rights. The Respondent did suggest that there may be circumstances where an arrangement that may look like a loan could be caught by this condition of reversion. The Respondent did stress, however, that this was not one of those cases. This was simply a case of there not being a loan, but that the 748,000 Rand on balance represented a contribution to the corpus or capital of the Trust. With respect, I disagree.
[16] The preponderance of evidence points to a finding there was intended to be a loan and in fact there was a loan created in 1994. Specifically, I refer to the following to support my finding that a loan was created in 1994. First, Mr. Howson, who was actively involved with the professional advisors in setting up the arrangement, testified that the amount put into the Trust by Ms. Howson was a loan to be repaid within ten years on terms that were later incorporated into the written document.
[17] Second, Ms. Howson, in her testimony, was adamant that, as her sole asset was the house, that she wanted to ensure she preserved that equity and insisted on repayment. She testified she would not have gone along with the structure had it been anything but a loan.
[18] Third, the written agreement itself, albeit three years after the fact, clearly set forth the arrangement as a loan. The Respondent argues that the tardiness of the written agreement is consistent with the Howsons' self-serving alteration of the arrangement after the fact. I find no evidence at all to support that interpretation.
[19] Fourth, the financial statements prepared in 1996, 1997 and 1998 reflect that the monies in the Trust were a loan payable to Ms. Howson.
[20] Fifth, the advice and planning were detailed and complex. Somebody knew what they were doing and it is extremely unlikely, and certainly there is no evidence to support a position, that Ms. Howson should have done anything other than lend the money to the Trust.
[21] The Respondent argues that the fact that no interest was paid on the alleged loan, that no security was provided, and that no written agreement was entered contemporaneously, shifts the balance to a finding that this was not a loan. A finding of a loan does not require interest nor security. Further, it makes little commercial sense that a trust where the only beneficiaries are the Howsons themselves should be providing security to Ms. Howson.
[22] I do not find the Respondent's argument persuasive. Indeed, I find the evidence overwhelmingly supports the Appellant's position that she loaned 748,000 Rand to the Howson Family Trust in 1994. Having reached that conclusion, I find subsection 75(2) does not come into play. There is no income to be attributed to Ms. Howson for 1996, 1997 and 1998. I therefore allow the appeals and refer the matter back to the Minister for reassessment on the basis subsection 75(2) does not apply. Costs to the Appellants.
Signed at Ottawa, Canada, this 27th day of November 2006.
COURT FILE NO.: 2004-3174(IT)G
STYLE OF CAUSE: Jean Howson and Her Majesty The Queen
PLACE OF HEARING: Vancouver, British Columbia
DATE OF HEARING: November 6, 2006
REASONS FOR JUDGMENT BY: The Honourable Justice Campbell J. Miller
DATE OF JUDGMENT: November 15, 2006
APPEARANCES:
COUNSEL OF RECORD:
Firm: Thorsteinssons
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Canada