Low v. The Queen, 93 DTC 927, [1993] 2 CTC 2227 (TCC)

Brulé, T.C.C.J.:—This appeal involves an assessment by the Minister of National Revenue (" Minister”) dated July 5, 1990. A capital gain inclusion, by the appellant and a credit of $67,500 were deleted and disallowed respectively, in computing income for the appellant's 1988 taxation year.

Facts

The appellant is a Canadian citizen who has lived and worked outside of Canada for a number of years. In May of 1985, an agreement to purchase a condominium unit, at 55 Prince Arthur Avenue, Toronto, Ontario ("property") for a purchase price of $475,000, was executed between Ilovo Realty Inc. (” llovo"), a non-resident corporation of Canada, formed under the laws of the Republic of Panama ("purchaser") and Prince Arthur-Bedford Developments Ltd. On March 23, 1987, following registration of the condominium, legal title to the property was conveyed by the developer to Ilovo.

On June 8, 1984 an“ "establishment" (a legal entity) was formed in Liechtenstein known as Flascix Establishment ("Flascix"). Its by-laws give the right to the directors to appoint beneficiaries but none were appointed in June of 1984. This was subsequently done in November of 1984 and the new by-law named Mrs. Dalia Low, wife of the appellant, as the only beneficiary.

On or about November 28, 1988, an offer to sell the property, for the price of $700,000, was executed by the appellant, pursuant to a power of attorney, dated August 25, 1988, granted by Ilovo in favour of the appellant.

The sale of the property was completed on December 16, 1988 and the net proceeds due on closing were deposited to the appellant's personal bank account maintained at the Israel Discount Bank in Toronto on December 19, 1988.

Since the property was registered in the name of llovo, a non-resident of Canada, a certificate pursuant to section 116 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), as a condition of completing the sale, was required. Therefore, the solicitors for the purchaser withheld, as a holdback, the sum of $105,000, representing 15 per cent of the sale price of the property, pending production of the certificate. On January 3, 1989, as registered owner of the property, llovo submitted the request for the certificate to Revenue Canada, Taxation. In this regard, Ilovo provided the Department of National Revenue with trust declarations executed on behalf of Ilovo and Flascix dated December 19, 1988 and December 20, 1988, respectively, as evidence of the appellant's beneficial ownership of the property.

Revenue Canada, Taxation, declined to issue the section 116 certificate based on the evidence submitted as to the appellant's beneficial ownership of the property, and required Ilovo to submit a Form T2062, in conjunction with a prepayment of tax in the amount of $67,500, representing 30 per cent of the excess of the sale price over the appellant’s cost of the property as required under paragraph 116(4)(a) of the Act. As a result, the certificate, under subsection 116(4) of the Act was issued in the name of Ilovo on February 22, 1989. Subsequently, a letter, dated September 26, 1989, was sent to Revenue Canada, Taxation, by the appellant's accountant requesting that the payment made to the Receiver General, pursuant to the Act and in the amount of $67,500, be credited to the appellant's 1988 T1 account.

The appellant filed a Canadian income tax return for 1988 and reported the disposition of the property thereon. On filing his 1988 income tax return, the appellant reported a capital loss of $268,682 arising from the disposition of certain shares in a taxable Canadian corporation. The appellant also reported an instalment payment of $67,500 and claimed a refund for such amount. To date, the amount of $67,500, paid by Ilovo to the Receiver General has not been remitted on account of the appellant's tax owing.

In assessing the appellant for the 1988 taxation year, the Minister did not recognize the appellant's beneficial ownership of the property. The Minister's assessment was based on the fact that the property was disposed of by Ilovo and not by the appellant. Furthermore, the assessment did not reflect the prepayment of $67,500 for which a credit had been claimed by the appellant.

In the response to request to admit, dated November 30, 1992, the Minister concedes that the moneys for the purchase of the property in issue came directly from Flascix and never passed through any account belonging to Ilovo. Moreover, the parties agreed that the said purchase moneys were paid to the builder-vendor directly from funds in account number 4831 at Clariden Bank, Switzerland, owned by Flascix. Finally, it was conceded that, during the period in issue, account number 3630 at Clariden Bank, belonged to the appellant.

The result of all this was that it was alleged that a bare trust existed in favour of the appellant and that the property involved should be considered as his principal residence.

Issues

The following issues were set forth in the parties' respective pleadings:

Whether the Tax Court of Canada has jurisdiction to grant the appellant a refund of $67,500 as payment made on his behalf?

Whether the appellant disposed of a property, in the 1988 taxation year, which qualifies as the appellant's "principal residence" for that year?

Appellant's position

At the outset of trial, counsel for the appellant cited the general rule from J.G. Castel, in the text, Canadian Conflict of Laws (Butterworths: Toronto: 1986) that “all questions concerning rights over immovables are governed by the lex situs, namely the law of the place where the immovable is situated”. Counsel submitted that since the condominium unit, being the property in question, was Canadian immovable property, the law of Canada, and specifically the law of Ontario, is applicable in determining whether or not there was in fact a bare trust in the [instant] case. Quoting from the Canadian Encyclopedic Digest, vol. 4, 3d ed. (Ontario: Carswell, 1993) Title 28, “ Conflict of Laws", at page 161, paragraph 275, counsel states:

The general principle of the common law is that the law of the place where immovable property is situate governs exclusively in respect to the rights of the parties, the modes of transfer and the solemnities which accompany them.

In this regard, counsel for the appellant explains that the only competent authority that can determine whether there is a bare trust, in the [instant] case, is Ontario law.

It was said that, in the present case, Flascix and Illovo were formed for the sole purpose of acting as bare trustees. The directors and officers of Flascix and llovo were bound to act upon the instructions of the appellant who was the only true owner of the property in question. The directors and officers of llovo did not, at any time, have the authority to exercise any independent discretion but merely acted on the instructions from Flascix who, in turn, acted upon the appellant's instructions. Moreover, counsel for the appellant stressed that the oral testimony of the appellant’s spouse, Mrs. Low, further supported the fact that the property was in essence that of the appellant.

It was also suggested that under the Act, where property is transferred into a bare trust, the beneficiary of the trust will be treated as the owner of the property. In this respect, counsel cites the following passage from the Corporate Management Tax Conference 1989: “ Creative Tax Planning for Real Estate Transactions — Beyond Tax Reform and Into the 1990s" (Canadian Tax Foundation, 1989), at page 8:1:

Although a bare trust is not defined in the Income Tax Act, Revenue Canada generally views this to be a trust under common law where the trustee has no significant powers or responsibilities, and can take no action regarding the property held by the trust without instructions from the settlor. Normally the trustee's only function is to hold legal title to the property. Furthermore, the settlor is also the sole beneficiary and can cause the property to revert to him at any time. Thus a bare trust does not include a blind trust or other trusts in which the trustee has established powers and responsibilities.

Furthermore, at page 8:6:

In other words, until we complete this process, where property is transferred to a bare trust as described earlier, for all income tax purposes the settlor will be considered the owner of the property.

With respect to the costs associated with the property, counsel submitted that the necessary funds relating to the acquisition, maintenance and subsequent disposition of the property were incurred by the appellant as owner. These included, among others, maintenance, municipal and provincial tax payments. All of which were addressed and paid by the appellant, as owner. As a result, any proceeds of disposition and any interest on the various deposits relating to the property were placed in the appellant's bank account. Moreover, the appellant registered all title documents so as not to deceive taxing authorities. In this respect, the appellant argues that there was no disguise or attempt to deceive Revenue Canada, Taxation, and that the trust relationship had never been disclosed to the Department given that there had never been an occasion to do so until the disposition of the property.

Counsel for the appellant contended that the independent third party documentary evidence, namely the declaration of Alain Burnand (senior officer with the Clariden Bank) and the declaration signed by Dr. Rolf Santo-Passo (a senior lawyer in a Liechtenstein firm) supports the position that the appellant was the beneficial owner of the property in question. Moreover, the appellant notes that the above declarations and the sworn testimony of the appellant and his spouse were not contradicted by the Department of National Revenue by way of evidence to show that the statements made were false. In this regard, counsel relies on the case, in Nielson v. M.N.R. (1933), 33 Tax A.B.C. 257, 63 D.T.C. 811, wherein the Tax Appeal Board held that there was no reason to question the credibility of the testimony of the taxpayer and his spouse with respect to the circumstances of their financial arrangements. Furthermore, the Board noted that, although not required to do so, no witnesses were brought forward, by the Minister, to contradict the appellant's documentary evidence and oral testimony. Moreover, the appellant relies on Article 6 of Liechtenstein Law Concerning Persons and Companies which provides that:

Where the law does not otherwise provide, the party who seeks to derive rights or to defend against a claim by an opponent by virtue of the existence of an alleged and contested fact must prove the same.

Public registers and public deeds represent complete proof of the facts or circumstances thereby certified to, provided that the incorrectness of the contents thereof has not been proven.

Proof of such incorrectness is not required to adhere to any form.

In light of the above, counsel argued that a person alleging to be the beneficial owner of property held by an establishment would be allowed to prove his ownership claim by submitting documents in any form or by oral testimony.

In reply to the Minister's submissions, the appellant argued that although financial statements were not submitted as evidence, the bank balance statements of Israel Discount Bank provides ample evidence of the transactions. The appellant said that, under Liechtenstein Law, the beneficial ownership in the property is recognized by the fact that the moneys used to pay the purchase price came from the appellant's personal bank account and the declaration of Flascix. In addition, the Revenue Canada, Taxation statements, the property taxes and invoices directed to the appellant, the correspondence showing the appellant as owner and the acknowledgement, by the appellant's spouse, in August of 1985, approving the disbursement of funds for the purchase of the property provide substantial evidence of the existence of a trust relationship as described by the appellant. With respect to the respondent's reference to the Statute of Frauds, R.S.O. 1990, c. 5.19, counsel stated that what is required in the transfer of property is some note or memorandum sufficient to establish a trust. However, the statute does not void a trust in the absence of such a note or memorandum. Finally, the appellant submits that pursuant to subsection 62(1) of the Land Titles Act, an express, implied or constructive trust is not required to be entered on the register or received for registration in Land Titles and therefore, the appellant did not register the above trust. Furthermore, under Liechtenstein law, the appellant was not required to sign the relevant documents, at the time the property was acquired, so as to establish a beneficial interest in the property of an establishment.

In conclusion, the appellant's position is that the agreement of purchase and sale for the property was executed on his behalf by llovo. Moreover, the legal title to the property was held, at all relevant times, by llovo, as bare nominee, without beneficial interest, in trust for Flascix which in turn held its interest as a bare nominee, without beneficial interest, and as agent for the appellant, who was at all times the sole beneficial owner of the property. Consequently, the appellant contends that, at all material times, both llovo and Flascix, through their respective directors and officers, acted solely pursuant to the control and direction of the appellant; were fully accountable to the appellant with respect to dealings with the property; ana were ready to convey and otherwise deal with the property at the appellant's direction.

It is submitted that, during the period of beneficial ownership, the property was used solely by the appellant as a "principal residence" and not for any other purpose. Counsel emphasized that all costs, related to the property, were incurred by the appellant and paid out of his personal funds. These costs included: the occupancy fees required prior to the registration of the condominium; all funds required to complete the acquisition of the property; and all carrying costs associated with the property.

In light of the above evidence, the appellant requests a refund in the amount of $67,500 representing a prepayment of tax paid out of moneys held in escrow by the purchaser's solicitors as part of the sale proceeds of the property and which were submitted by llovo on behalf of the appellant. Counsel for the appellant suggests that since the appellant was a resident in Canada in 1988 and since the property qualifies as the appellant's "principal residence”, the gain on the disposition of the property should be determined in accordance with paragraph 40(2)(b) of the Act, thereby resulting in a refund of $67,500 to the appellant.

Respondent's position

Counsel for the respondent commenced by addressing the preliminary jurisdictional issue. In this regard, it was submitted that the Tax Court of Canada does not have the jurisdiction to order that an amount paid by a party, who is not a party to the proceedings, be credited to the tax liability or to the tax payable of another taxpayer who is the subject of this appeal.

The respondent set out that Ilovo disposed of the property, in question, pursuant to subsection 116(3) of the Act and, as a result, paid the Receiver General $67,500 in accordance with paragraph 116(4)(a). Subsequently, the Minister issued a certificate, under subsection 116(4) of the Act. In this regard, the respondent explained that a payment under section 116 is deemed to have been paid by a non-resident as an instalment of tax on the first day on which he was required to pay an instalment of tax for that year. Ilovo was, therefore, taxed under subsection 2(3) of the Act as a non-resident and since it had disposed of taxable Canadian property, the resulting taxable income would be determined in accordance with the provisions of section 115 of the Act which deals with taxable income of a non-resident including gains from the disposition of property in Canada.

Counsel emphasized that, in this case, the proper course of action would have been for Ilovo, as a non-resident corporation, to file a tax return under paragraph 115(1)(a) of the Act and an estimate of tax payable, under section 151 or a Claim of overpayment of tax remitted, in subsection 116(4) would have been made. In this regard, counsel cited the case of King v. M.N.R., [1991] 1 C.T.C. 2421, 91 D.T.C. 651 (T.C.C.) for the proposition that a non-resident corporation can and should file an income tax return in order to claim a refund of taxes.

Following this, the Minister would have assessed Ilovo and then, pursuant to section 152 of the Act, Ilovo could have objected and appealed the matter on the basis that it was not the beneficial owner of the property in question. However, since this was not done, the respondent argued that this Court lacks the jurisdictional authority to order that an amount paid by Ilovo, who is not a party to this appeal, be credited to the tax amount or tax payable of the appellant herein. The powers of the Court are strictly prescribed under subsection 171(1) of the Act and clearly those powers do not include the ability to order that a payment made by another taxpayer be credited towards the tax liability of another party.

The respondent, in addressing the substantive issue under appeal, reiterated the overall relationships between the various entities as evidenced by the documentation submitted. Counsel stated that Flascix and Ilovo were set up in 1984. According to the statutes of Flascix dated June 8, 1984, the residence of Flascix was Liechtenstein and the founder was Establishment Domar. The respondent explains that the contract of mandate, executed June 15,1984 by the appellant's spouse, identifies Mrs. Low as the principal of Flascix. In addition, the respondent submits that Drs. Marxer and Santo-Passo are listed as agents and members of the board of directors of Flascix. In addition, the contract indicates that the directors could only act upon the instruction of the principal namely, the appellant’s spouse. As a result, counsel for the Minister argued that the documents submitted by the appellant do not suggest, in any way, that the appellant, at the time the first contract of mandate was prepared, had any interest in the Flascix or Ilovo entities. The respondent contends that the second contract of mandate, dated January 8, 1988, further confirms that the appellant had no interest in Flascix and that the appellant's spouse was the sole beneficiary of Flascix.

In respect of the by-laws of Flascix, dated November 28, 1984, the respondent submitted that this document further demonstrated that the appellant's spouse was the beneficiary of the funds and assets of Flascix. In other words, neither the agents nor the directors of Flascix could proceed without the prior written approval of the appellant’s spouse. Moreover, counsel explained that the by-laws contained certain contingencies to deal with the eventuality of Mrs. Low's death such that upon the death of the appellant's spouse, the assets and income of Flascix would be distributed according to her last will and testament. These contingencies did not relate, in any way, to the possible death of the appellant. Furthermore, the by-laws were to survive in the case that the appellant's spouse was to change her will. The respondent notes once again that no mention was made to the appellant's will. Finally, according to the by-laws, only Mrs. Low could alter the powers of the beneficiaries with respect to Flascix and nowhere in the relevant documents, relating to llovo, is reference made to the appellant.

Dr. Gerard Batliner, prominent lawyer of a Liechtenstein firm and expert in Liechtenstein law, provided a legal opinion by letter dated January 28, 1993 on behalf of the Crown. His comments are exclusively based on the legal structure exemplified according to the various written documents executed and submitted by the various entities relating to Flascix. Furthermore, Dr. Batliner assumed, in his opinion letter, that llovo did hold the property in trust in favour of Flascix.

In his opinion, Flascix was organized as an establishment pursuant to the Liechtenstein Civil and Companies Act. As an establishment it was required by law to be entered into the public register and financial statements were required to be filed annually in the public register. In the expert's opinion, Flascix, as a legal entity, was the legal owner of its assets, however, the beneficial interest was vested in the appellant's spouse in light of the by-laws dated November 28, 1984 during her lifetime such that any administration or distributions of Flascix assets required her prior approval. The first contract of mandate vested solely the appellant’s spouse with the authority to instruct the directors of Flascix. Moreover, the second contract of mandate did not transfer any of Mrs. Low's interest to the appellant but merely authorized the directors of Flascix to take instructions from the appellant in addition to the appellant's spouse. Upon the death of the appellant's spouse, any discretion of the board of directors respecting distribution would cease and the assets would be distributed to the then surviving heirs of the appellant's spouse in accordance with the provisions of her last will.

Furthermore, the Crown's expert expressed the view that, if Flascix held certain assets in trust for a mandator such as the appellant, a fiduciary trust agreement, a declaration of trust or at least a balance sheet or financial statement would have to be produced to demonstrate the distinction between Flascix assets and trust assets.

With respect to the declarations filed by the appellant, the expert was of the view that the Flascix declaration dated December 20, 1988, was inconsistent with the letter signed by Dr. Santo-Passo wherein it was confirmed that Flascix was the legal owner of its assets but that the beneficial interest was vested in other individuals.

The respondent emphasized that the documentary evidence suggests that the estate plan created essentially shows that everything in Flascix was for the benefit of the appellant's spouse. In addition, the respondent contended that the absence of financial statements casts a significant degree of doubt as to whether Flascix was in fact holding assets in trust. On this point, counsel explained that under Liechtenstein law, public financial statements must be filed and are considered an essential factor when dealing with an establishment, so that a clear segregation in writing of the assets of the establishment and the assets held in trust, as bare nominee, is evident.

Moreover, the respondent made note of the fact that the statements contained in the various declarations were made by representatives and advisers of the appellant and therefore should be regarded as self-serving. These documents were prepared after the fact, once the negative tax consequences had been recognized by the legal advisers. Counsel for the Minister emphasized that, given the absence of the persons who made the statements contained in the respective documents, cross-examination could not be undertaken, and therefore, the weight to be given to their written testimony and declarations should be limited.

In the case at bar, the respondent argued that the appellant’s declarations were created in an attempt to escape the adverse tax consequences of having a non-resident corporation hold the property and that the appellant cannot use these documents so as to alter the parties’ true state of affairs by giving the documents a retrospective effect. Clear and unequivocal answers respecting the details of a trust are non-existent.

The respondent made reference to the following authorities in support of his arguments. Some of these are discussed below:

Thibodeau Family Trust v. The Queen, [1978] C.T.C. 539, 78 D.T.C. 6376 (F.C.T.D.);

Rose v. M.N.R., [1973] C.T.C. 74, 73 D.T.C. 5083 (F.C.A.);

The Queen v. Neudorf, [1975] C.T.C. 192, 75 D.T.C. 5213 (F.C.T.D.);

Atinco Paper Products Ltd. v. The Queen, [1978] C.T.C. 566, 78 D.T.C. 6387 (F.C.A.);

Bomag (Canada) Ltd. v. The Queen, [1984] C.T.C. 378, 84 D.T.C. 6363 (F.C.A.);

Baldassarra v. M.N.R., [1991] 1 C.T.C. 2085, 91 D.T.C. 289 (T.C.C.);

Mikulic v. M.N.R., [1990] 2 C.T.C. 2443, 90 D.T.C. 1829 (T.C.C.);

Pazner Scrap Metals Co. v. M.N.R., [1991] 2 C.T.C. 2295, 91 D.T.C. 1153 (T.C.C.);

Dixon v. M.N.R., [1992] 1 C.T.C. 2468, 92 D.T.C. 1456 (T.C.C.);

Friedberg v. M.N.R., [1992] 1 C.T.C. 1, 92 D.T.C. 6031 (F.C.A.);

Pelletiers. M.N.R., [1992] 1 C.T.C. 2270, 92 D.T.C. 1279 (T.C.C.);

The Queen v. Capitol Life Insurance Co., [1986] 1 C.T.C. 388, 86 D.T.C. 6164 (F.C.A.).

At the outset may I say that there are a few matters in this appeal which I find most unusual, First of all, why would the appellant who is a graduate lawyer in Ontario go to the trouble of purchasing property, located in Ontario, in a foreign company controlled by another foreign trust and claiming such as his principal residence while he was a resident of Canada? He could have owned and claimed the exemption personally. This arrangement leads one to believe that there must have been some other undisclosed reason involved. For example the death of the appellant with the property being controlled by a Liechtenstein establishment would perhaps avoid any tax problems if the wife were the beneficiary in the establishment and she resided in Israel as was the case.

I find it most unusual to allow expert evidence by mail and posing questions on this correspondence. This was agreed to by counsel for both parties and approved at an earlier court hearing. Counsel for the appellant questioned the competency of the respondent's expert in argument but the Court was unable to give any credence to this not having the witness qualified before the Court.

Finally, the appellant claiming residency in Canada in 1988 filed an income tax return indicating only two capital transactions, the residence and a stock sale, plus a small amount of interest. No other world income was declared and while this may be possible, evidence disclosed he owned foreign bank accounts and there were fees payable in the establishment.

Dealing now with the issues in this appeal. As to the claim by the appellant that the Tax Court has jurisdiction to grant a refund of $67,500 as payment allegedly made on his behalf, I do not intend to dwell on this. The respondent's counsel properly set out why this was not possible and I accept that argument. The jurisdiction of this Court hearing an appeal is governed by section 171 of the Act and this claim does not fall within the provisions of that section. As a result this issue and claim is dismissed.

Now, dealing with the trust and the claim by the appellant that he was the beneficial owner through the trust of the property involved, and therefore entitled to claim the property as his principal residence in the year involved. This is the subject of the second issue, and a little background is probably helpful.

Liechtenstein is a civil law jurisdiction such that all business affairs are strictly governed by various provisions of the Civil Code. Under Liechtenstein law, trusteeship arises when a trustor or settlor entrusts movable or immovable property or a right of any kind whatsoever in a trust property to someone else who may be an individual, a firm, or an association of persons and which is known as the trustee. The trustee administers the property, in his own name as an independent legal entity, in favour of one or more third parties known as the beneficiaries. This is similar to common-law trusts.

The trust relationship, as here, is where an "establishment" is created such that one party can hold assets on behalf of and for the benefit of another party. An “establishment” is an autonomous body created under the Liechtenstein Civil Code. There are no shareholders. An“ establishment” consists of one or more founders and beneficiaries. The founders of an "establishment" may be natural persons or juridical entities with their residence in Liechtenstein or abroad. In order to create an "establishment", the founder must draw up and sign articles in written form containing the name of the entity and certain formalities. The founder's rights are those rights acquired by law through the articles of the "establishment". These rights can be assigned, transferred or inherited and include the powers of appointment of the Board of Directors, determination of signing powers, approval of the financial statements, etc. The bearer of the founder's rights constitutes the supreme body of the "establishment". The beneficiaries, persons to whom the profit and the benefit of the “establishment” accrue and who are entitled to the income of the individual assets and the eventual liquidation proceeds, are appointed by the supreme body through the internal by-laws. (In this case none were prepared at the outset.) Moreover, the by-laws contain the nature, extent and duration of the beneficial interest. If a beneficiary is not nominated, the law assumes that the bearer of the founder's rights is the beneficiary. Finally, an "establishment" is created when it is entered into the public register. The additional by-laws are usually not entered so that the identity of the persons behind the trust, especially the beneficiaries, do not become known publicly.

Turning to the jurisprudence as contained in the respondent's book of authorities, counsel began with the case of Thibodeau Family Trust, supra, which explains the facts considered in determining the location or domicile of a trust such as the residence and duties of the trustees. The respondent submitted that the mere belief of the existence of a trust is insufficient especially when third parties are being held to the trust relationship and agreement. In this respect, reference was made to the case in Rose, supra. In other words, the parties must act as if a trust relationship is in fact in place. The respondent argued that since the purpose of registration is to give notice to third parties of special arrangements, the appellant's failure to register at least the internal by-laws of the purported trust, leads to a question of doubt as to whether or not an actual trust existed in favour of the appellant. The case of Atinco Paper Products Ltd., supra, sets out that clear and unequivocal answers respecting the details of a trust are essential when parties are attempting to establish the validity of a trust that the parties themselves have allegedly created.

With respect to the documentation submitted by the appellant, his counsel stated that the declaration dated December 20, 1988, and issued by Flascix clearly demonstrates that Flascix held an interest in the property only as bare nominee without beneficial interest and as agent for the appellant. Moreover, he accordingly submitted that Liechtenstein law, recognizes that a declaration, per se, is a valid acknowledgement of the appellant's beneficial ownership of the property in question. In this regard, counsel further submitted that to be the opinion of the appellant's expert, Dr. Friedrich Wohlmacher, who examined the various written documents in this transaction, and provided a legal opinion in a letter dated March 31, 1993. Dr. Wohlmacher was of the view that a trust agreement between Flascix and the appellant, as trustee and trustor respectively, had been executed on or before December 20, 1988, and that the declarations submitted by the appellant were evidential proof in support of the existence of such an agreement. In his opinion, Flascix was an establishment according to articles 534-551 of Liechtenstein company law and as such, it was a legal entity recognized under Liechtenstein law. He submitted that a trust agreement, under Liechtenstein law, does not require written form and is therefore valid when orally made. In addition, the appellant's expert stated that the trust agreement need not be registered. He explained that a trust agreement is a contract and must be distinguished from a trust enterprise or a common-law trust. The agreement provides that the trustee will hold assets in the trustee's name but for the trustor's account. Moreover, the trustee is required to dispose of the trust assets according to the instructions of the trustor.

Therefore, the appellant's expert stated that Flascix held the property in trust and as agent for the appellant. With respect to the distributions of capital or income of Flascix, Dr. Wohlmacher explained that, pursuant to the two contracts of mandate dated June 15,1984 and January 8, 1988, only the appellant's spouse had authority to instruct the board of directors to execute any distributions. Furthermore, the latter contract of mandate indicated that the appellant's spouse provided written confirmation of the appellant's authority to act on her behalf. He points out that the appellant had no power to revoke his spouse's authority.

While I agree that the mandate of January 8, 1988, gave certain powers to the appellant to act so as to give instructions to the agents it does not provide that distribution of the assets of Flascix shall be other than contemplated, only power to deal with them. This may have given the appellant the right to give orders to the agents regarding the sale of the property but did not make him the beneficiary. In his declaration of December 12,1988, the appellant sets out that Flascix is holding the property in trust for him. This may have been his genuine belief but there is no evidence to this effect. On December 20, 1988, a declaration by one of the directors of Flascix, Dr. Santo-Passo set out that the property was always held for the beneficial interest of the appellant. This is not true from what was presented to the Court and was prepared after the sale took place by deed dated December 16,1988. Also, a letter of October 18, 1991, by Dr. Santo-Passo reiterated that the property was held on behalf of the appellant. On December 17,1991 the same writer set out in correspondence as follows:

. . . I wish to confirm that Flascix establishment as a legal entity in connection with the condominium cited above was merely acting as Mr. Arthur Low's nominee subjected to his complete and exclusive control and direction.

The Court asks if Mr. Low, the appellant, was the true beneficial owner, why did it take some four years after the creation of Flascix to appear in any documentation regarding the establishment?

The respondent emphasized that documents designed after the fact are self-serving and of no probative value. In light of the decision, in Bomag (Canada) Ltd., supra, the respondent explained that the true nature of the transaction can be derived from the valid documentation adduced at the time and prior to the acquisition of the property. Pursuant to Baldassarra, supra, the Tax Court of Canada held that the desire to avoid taxes is not sufficient to conjure up a trust at a precise point in time so as to achieve the desired tax result. Nor is it evidence of a declaration of a trust.

With respect to Mikulic, supra, the respondent submitted that the viva voce evidence as to the fact that the property was held by Ilovo, as bare nominee for Flascix which held it as nominee for the appellant, should not be accepted by the Court since it clearly contradicts the clear and unequivocal manner in which the establishment was created.

In Pazner Scrap Metals Co., supra, and Dixon, supra, the Tax Court addressed the situation where arrangements were made between non-arm's length parties and which held that agreements, in these cases, were often reduced to writing because third parties may be affected by the relationship created. In the case at bar, the agreement of purchase and sale, the occupancy agreement and the notice registered on title, all indicate that Ilovo owned the property unequivocally. However, since the appellant testified that llovo and Flascix were allegedly controlled by the appellant, the parties were therefore, not in an arm's length arrangement and such an agreement cannot bind third parties including the Minister unless established in written form. Therefore, the purported trust relationship was between related persons in a non-arm's length transaction, which cannot bind the third party, Minister.

The respondent emphasized the tremendous importance of form in tax matters and quoted the following passage from Friedberg, supra, at pages 2-3 (D.T.C. 6032):

In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways,enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax. . . . If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to” correct” documents which clearly point in a particular direction.

Assuming the appellant's subjective intention, at the time of acquisition, was for Ilovo to hold the property as bare nominee for Flascix, which held it as bare nominee for the appellant in light of the decision in Friedberg, supra, a subjective intention is insufficient to alter the characterization of the transaction. The appellant's affairs were structured in such a way so that the appellant appeared to have no interest in the property and therefore, the appellant cannot now change that position in order to avoid the proper application of tax law to the facts as they were.

Counsel relied on Pelletier, supra, for the proposition that, in the case at bar, there is insufficient evidence to support the existence of a purported trust relationship as explained by the appellant.

Counsel explained that according to the Statute of Frauds, supra, a trust and any transfers of property must be in written form. In the present case, the respondent argued that the purported trust was not evidenced in writing.

Interestingly, the Crown took no issue with the fact that a valid establishment named Flascix was created by statute, on June 8, 1984 and was registered and later deregistered. The respondent also admitted that the founder of Flascix was another establishment named Domar and that Domar held the founder's rights in Flascix. Domar could decide, at the outset, who the beneficiary of Flascix was in accordance with Liechtenstein law. However, in the case of Flascix, counsel for the Minister contends that the evidence shows that no specific beneficiaries were nominated at the time Flascix was created. In light of the legal opinion of the Crown's expert, the respondent submits that, according to the statute of Flascix, the beneficiaries are outlined in the Flascix by-laws and indicate that, originally at least, only the appellant's spouse was a beneficiary. Consequently, the board of directors could deal with the assets and the income of the establishment as long as she provided prior consent. In other words, a distribution of funds by Flascix to the appellant could only be made with prior approval of the appellant’s spouse. The appellant could authorize no actions unilaterally unless he had the approval and authorization of his spouse and further, that any instructions given by the appellant, were as a result of the mandate of January 8, 1988, giving him power to direct the agent. The appellant had no capacity as a beneficiary and merely acted as an agent or authorized person for the appellant's spouse.

In order that a property may be characterized as a“ "principal residence", there are specific criteria, relating to use and ownership of the subject property, which must be present in a given case. The fact that a person, here the appellant, believing he was the beneficial owner of the property and paid all the costs thereto is of little significance. Paying accounts of a property are not unusual if living there, all of which may be akin to paying rent.

It is suggested that a principal residence must be ordinarily inhabited by the person and this is determined on the facts in each case.

Paragraph 40(2)(b) of the Act suggests that a taxpayer must be an individual in order to claim the principal residence exemption. An individual, not resident in Canada, may claim the exemption although he must have been a resident Canadian during each year that is designated as an exempt year.

Another of the criteria is that the property must be owned by the taxpayer. The term "ownership" is not defined in the Act but it would appear that a beneficial owner of a trust will be able to claim the principal residence exemption as "owner" of the property where it can be shown that he has control over the trust such that the property can be sold, mortgaged and the trust may be wound up only on his instructions and at his will.

As to the ownership by a trust, the Canadian Real Estate Income Tax Guide, (Canada; C.C.H. Canadian Ltd., 1991) sets out certain rules. The trust must designate one property as its principal residence respecting a specified beneficiary. That beneficiary must have the right of possession and use of the property and control over the trust such that the property can be sold or mortgaged only on his instructions. Such prerequisites are not present in this case.

Conclusion

The preliminary question that needs to be considered, in the present appeal, is essentially based on a determination of fact as to whether or not a valid and true bare trust existed such that the appellant was the beneficial owner of the property in question. There is no express statutory provision on point however. The treatment of trusts, under the Act is premised on the fact that such trusts must be valid. This question of validity is a question of law. (See L.I.U.N.A. Local 527 Members’ Training Trust Fund v. The Queen, [1992] 2 C.T.C. 2410, 92 D.T.C.2365 (T.C.C.).

As the appellant correctly pointed out in his submissions, the law of Ontario is the proper authority for determining whether there was, in the instant case, a bare trust. A beneficial owner of a trust must establish that he has the authority to mortgage and/or sell the property and further, must have the power to wind up the trust upon his instruction and at his will. Moreover, it appears that dispositions of property, held in trust, occurring after May 9, 1985 and before 1991, as is the case at bar, require that a beneficial owner of a trust must clearly show the above-noted authority. (See the Canadian Real Estate Income Tax Guide, supra, at paragraph 60-660.) Where the taxpayer cannot establish the control over the trust and the property contained therein, then no principal residence exemption may be claimed unless the trust is a"qualifying spousal trust”. In our case, this latter type of trust is not applicable.

Looking at the evidence put before the Court, Dr. Batliner, the expert put forward by the respondent, said in his written reply to a question by the appellant's counsel:

A fiduciary contract must be clearly distinguished from the trust. . . as it is known in Anglo-Saxon common law. The fiduciary (trust) contract is not based on trust law but on the laws of mandate. Usually the creation of a mandate does not require a special form. Paragraph 883 of the Liechtenstein Civil Code does explicitly confirm that a contract may be oral or in written form. If, however, a special form iS prescribed for the underlying transaction, it is recommended to keep to this form also when drafting a fiduciary trust agreement. Contracts dealing with real estate require insofar written form as according to law only contents of written contracts may be registered in the land register. As mentioned above my opinion is restricted to the legal structure given according to the written documents submitted to me.

In my assessment of the documentary evidence, relatin to Flascix, I find that the evidence does not in any way establish that llovo held the property, in trust and without beneficial interest and as agent of the appellant. In addition, the evidence does not show that Flascix was acting as the bare nominee on behalf of the appellant. The analysis of the Crown's expert on the statutes of Flascix, the two contracts of mandate and the by-laws of Flascix, makes it abundantly clear that neither the directors and the officers of Ilovo or Flascix, nor the appellant, himself, could take any procedure, with respect to the administration and distribution of the trust assets and funds, without the prior approval of the appellant's spouse. The appellant places a great deal of reliance on two declarations made by Alain Burnand and Dr. Santo-Passo. These documents appear to be self-serving since they were created after the fact. Moreover, given the absence of the parties, who made the statements contained therein, cross-examination is not possible and therefore the weight to be given to these documents is minimal.

It is interesting to note the comment made by Adrian Keane when dealing with expert evidence, in his text The Modern Law of Evidence, (England: Professional Books Ltd., 1985). At page 377, he said of opinion evidence:

The danger is particularly acute in the case of opinions expressed by expert witnesses, of whom it has been said, not without some sarcasm,"it is often quite surprising to see with what facility and to what extent, their views can be made to correspond with the wishes or the interests of the parties who call them.

In the case of Whitehouse v. Jordan, [1981] 1 W.L.R. 246 (H.L.) at page 256, Lord Wilberforce said:

. . . expert evidence presented to the court should be, and should be seen to be, the independent product of the expert, uninfluenced as to form or content by the exigencies of litigation.

I have not been unmindful of the impact of these quotations and of the associations of the expert witnesses presented to the Court. As set out above, the manner in which this evidence was presented is to my thinking less than satisfactory.

No documents were submitted with respect to Ilovo that might establish, for a fact, that it was vested with bare nominee status and as agent for the appellant. Conversely, we have ample information regarding Flascix. Clearly, Flascix was an establishment and its directors and officers did not, at any time, have the authority to exercise independent discretion but merely acted upon the instructions of the appellant's spouse. In addition, with respect to Flascix, no financial statements were submitted and the Court only has the bank balance statements of Israel Discount Bank which are helpful but not determinative of the matter. Although the evidence may be satisfactory under Liechtenstein law to establish the beneficial ownership of the appellant, this is not sufficient in the law of Ontario. More cogent evidence was required which was not forthcoming by the appellant.

Dr. Batliner in his opinion letter said:

I may add that I have not seen a financial statement of Etablissement Flascix wherein the difference between “legal owner of its assets" and "bare nominee without beneficial interest" would become evident. This is insofar essential as we are dealing with an establishment and not with a common law trust where we distinguish between legal ownership and beneficial ownership. With an establishment owned assets are entered in the balance sheet as assets, assets held as bare nominee are entered below the line or equivalent as trust assets and trust liabilities. If an establishment holds assets as bare nominee professionals would recommend to make this very clear in any respect in order to avoid that such assets become "liability" assets of the establishment. The way the directors of Flascix did exercise its powers is governed by the contract of mandate. This contract of mandate confirms that the "purpose of the enterprise is solely (a) the administration of its own assets" but does not make any further references to any fiduciary trust agreement. The contract of mandate dated January 8, 1988 confers on Mr. Low the authority to instruct the directors of Flascix Establishment. No other mandate has been shown to me which conferred further rights or powers on Mr. Low.

An overall examination of the transactions in question casts a certain degree of doubt as to what in fact the intention of the appellant was at the time of the purchase of the property. Although, in the instant case, if there did exist a bare trust, and although llovo held only legal title to the property, beneficial ownership was vested in another party, namely Mrs. Low and not the appellant.

In this particular case, the notice given to third parties was that Ilovo owned the property. The agreement of purchase and sale, the occupancy agreement, the notice which was registered on title all indicated that llovo, a non-resident of Canada, owned the property unequivocally. Title search would disclose that the president of Ilovo, swearing an affidavit, that the corporation was a transferee [sic]. The place available for trustees to indicate that it was being held in trust was not indicated as being applicable. The taxpayer testified that there was an arrangement between himself, llovo and Flascix, which he states he controlled and, accordingly, that would be a non-arm's length party, but, of course, this was nowhere disclosed.

In the recent case of Dixon, supra, the Court said at page 2469 (D.T.C. 1457), when dealing with oral testimony:

When the Court looks at non-arm's length transactions, it must balance the oral testimony carefully against the written documentation. It is incumbent upon a taxpayer to have the written documentation to a non-arm's length transaction in clear unequivocal form to back up the oral statements. Where there is a conflict between the written documentation and the oral testimony, the Court will normally not accept the oral statements.

To summarize, the Court would refer to the words of Walsh, J., in the case of Lakeview Gardens Corp. v. M.N.R., [1973] C.T.C. 586, 73 D.T.C. 5437, at page 591 (D.T.C. 5440) wherein it was set out:

. . . as has been frequently pointed out, it is not what the taxpayer might have done to minimize taxation that determines the issue but the taxpayer must abide by the position which it has taken. This principle was set out in the frequently cited judgment of Lord Simon in Commissioners of Inland Revenue v. Wesleyan and General Assurance Society, 30 T.C. 11, when he said at page 25:

It may be well to repeat two propositions which are well established in the application of the law relating to income tax . . .

Secondly, a transaction which, on its true construction, is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax. As the Master of the Rolls said in the present case: “In dealing with income tax questions it frequently happens that there are two methods at least of achieving a particular financial result. If one of those methods is adopted tax will be payable. If the other method is adopted, tax will not be payable. . . .The net result from the financial point of view is precisely the same in each case, but one method of achieving it attracts tax and the other method does not. . . .

Here the appellant took the route of dealing with the residence that attracts tax. He may have avoided the element of tax had he bought and sold the property in his own name when it would have been considered as his principal residence.

This was not done with the result that the appeal on both issues is dismissed, with costs to the Minister.

Appeal dismissed.