A Trust in Disguise is set aside

The recent focus on Sham Trusts, the alter ego “doctrine”, and some other “doctrines” can deflect the focus of attention away from a much more fundamental question.  Does a “Trust” satisfy the “three certainties”?

The case of Antle v The Queen, (2009) TCC 465 shows how a Court can look through the trappings of a Trust and see that it is form without substance.  The Judge – C. Miller J of the Tax Court of Canada - held that the Trust lacked two of the three certainties.  First, there was no certainty of intention to create a Trust.  Second, the Trust property had never vested in the trustee.

Dealing with the first certainty, the Trust was good in form.  The trustee was a young lawyer who provided “a standard Trust Deed [that] he has created in cookie-cutter fashion ….” 

The Judge held that when looking to see if there was certainty of intention, he would “scrape the surface” to see what lay beneath.

Having done this, he held that the trustee “was a young pawn in a masterful game of chess [played] by some experienced chess masters and that the settlor did not truly intend to settle shares in Trust with him.  [The settlor] simply signed documents on the advice of his professional advisers with the expectation the result would avoid tax …. [h]e never intended to lose control of the shares or the money resulting from the sale.  He knew when he purported to settle the Trust that nothing could or would derail the steps in the strategy.  This is not indicative of an intention to settle a discretionary Trust.”

The “Trust” was part of a scheme to avoid capital gains tax in Canada.  Assets were transferred to an overseas Trust where they were used in a “capital property step-up strategy”.

The naivety of the young lawyer trustee was expressed in simple terms:  “Mr Truss had done research into the law of Trusts and satisfied himself that he could avoid any potential liability by ensuring that all decisions he made were in the best interests of the beneficiary.  Consequently, if he had the beneficiaries’ consent to a decision, he was satisfied he had mitigated any risk ….  He confirmed that he had every intent to act as trustee and would not engage in any fake or sham arrangement.  He acknowledged that a goal of the Trust was to obtain a tax benefit, though he never quite understood what the advantage was …”

He “did not fully appreciate what a Trust even was, as evidenced by his question two years after the Trust had been dissolved as to whether it was still in place to be used.”

So far as the first certainty was concerned, the Judge held that the settlor “never intended Mr Truss to have discretion to deal with the shares, but rather intended to use the Trust as a conduit to avoid tax.  This is somewhat circuitous as the arrangement was only effective to avoid tax if it was a valid Trust.  [The settlor] certainly intended a Trust for the purpose of accomplishing his goal of avoiding tax.”

The Judge analysed the settlor’s true intentions by reference to several of his actions.  He held that the trustee was “effectively strip[ed] of discretion” and concluded “I reach the inevitable conclusion that [the settlor] did not truly intend to settle shares in Trust with Mr Truss.  He simply signed documents on the advice of his professional advisers with the expectation the result would avoid tax in Canada.  I find that … he never intended to lose control of the shares or the money resulting from the sale.  He knew when he purported to settle the Trust that nothing could or would derail the steps in his strategy.  This is not indicative of an intention to settle a discretionary Trust.”

The Judge went on to conclude that the second certainty did not exist, namely that Trust property had ever vested in the trustee.  When he analysed the various documents that were signed – out of sequence and in a contradictory manner – he held that: “if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution”.  The sequence in which the documents had been signed showed that the Trust property had never vested in the trustee.

One of the Revenue’s fall-back arguments was that if the three certainties existed, the Trust was a sham.  This argument failed because of the great difficulty that exists in proving that there was “intentional deceit by [both] the settlor and the trustee”.  In this case, the trustee had no intention to deceive anyone. 

Until the test for proving the existence of a Sham Trust is loosened considerably, it will always be extremely difficult to establish the existence of Sham Trusts.

This case shows a better way to attack Trusts where a compliant trustee will follow the bidding of another. 

I suspect there are many Trusts where, if the Court should scrape the surface, it will see that the settlor “never intended to lose control” of assets that have been settled on a Trust.