A discretionary family trust, whose beneficiaries included the family patriarch (LR) and his two sons (the Rémillard Brothers), was a shareholder of a family corporation (Maybach) along with LR and the Rémillard Brothers. The proceeds of an asset sale were used by Maybach to redeem the shares held by LR and the Rémillard Brothers. However, two of the three trustees of the trust already were non-family individuals and LR, the third trustee (who purportedly had become a Barbados resident) resigned and was replaced by a third independent trustee. In order for the share redemption to not result (by virtue of the exception in s. 256(7)(a)(ii)) in an acquisition of control of Maybach-group companies so as to preserve net capital losses, the trustees entered into an agreement with the Rémillard Brothers providing (in clauses 2.1 and 2,2 thereof):
The Trustees hereby undertake to exercise their powers … according to the directives provided by the Brothers and to make no decision regarding the Historia Trust without first obtaining the agreement of the Rémillard Brothers. The Trustees acknowledge that this commitment … does not constitute a delegation of their fiduciary powers. …
If the Trustees or any of them disagree with the directives received from the Rémillard Brothers, they must then resign … .
The trust then paid distributions of over $50 million to LR that were authorized by the Rémillard Brothers.
Article 1275 of the Civil Code of Quebec (the CCQ) provided:
The … beneficiary may be a trustee but he shall act jointly with a trustee who is neither the settlor nor a beneficiary.
CRA considered that the above agreement had the effect of constituting the Rémillard Brothers as de facto trustees of the trust, contrary to the trust deed (which accorded discretion only on the titular trustees) and Art. 1275, so that the determinations to make the distributions pursuant to such unlawful agreement were a nullity, with the result that the distribution amounts were not “payable” as required by s. 104(6).
After referring to the deeming rule in s. 104(24), Smith J stated (at para. 67, TaxInterpretations translation):
[T]he Court rejects the appellant's claim that the amounts “became payable” and can therefore be deducted pursuant to subsection 104(6) of the ITA solely because they were paid to the beneficiary, regardless of any potential violation of the trust deed, the CCQ, or other federal or provincial laws.
However, he went on to find (at paras. 83, 104), in light of the testimony that the independent trustees, although consulting with the Rémillard Brothers, had in fact been making the trust decisions:
Even if clauses 2.1 and 2.2 of the Agreement were contrary to the trust deed and Article 1275 of the CCQ … the Court concludes based on the preponderance of the evidence submitted that the Rémillard brothers did not act as trustees or “de facto trustees.” …
[D]espite the Agreement, the Rémillard brothers did not, in fact, usurp the trustees' powers.
Smith J went on to find that, even if there had been a contravention of Art. 1275, this rendered the distributions only voidable (“nullité relative”) and not void, so that the Minister had no standing to challenge their validity.
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