Executive Summary: Key Legal and Evidentiary Issues

• Interpretation of the deductibility of trust distributions under section 104(6) of the Income Tax Act.

• Application of the Civil Code of Québec regarding the powers and obligations of trustees.

• Assessment of whether the trust agreement unlawfully delegated trustee powers to beneficiaries.

• Evaluation of the factual conduct of trustees versus the terms of the trust agreement.

• Determination of the legality of dividend payments made to a trust beneficiary.

• Review of the lower court’s factual and legal findings on the administration of the trust.

Facts and outcome of the case

Background and facts

Sa Majesté le Roi (the Crown) appealed a decision involving Fiducie Historia, a discretionary civil law trust. In 2013 and 2015, Fiducie Historia received dividend income, which it distributed to one of its beneficiaries, referred to as the “Bénéficiaire Père.” The trust included these dividends in its tax returns and claimed deductions under section 104(6) of the Income Tax Act, which allows a trust to deduct amounts that become payable to a beneficiary during the year.

The Minister of National Revenue denied the deductions, arguing that the amounts paid to the beneficiary were not legally “payable” as defined by the Act and that the trust’s arrangement violated both the trust deed and the Civil Code of Québec. The Minister’s position was based on an agreement between the trustees and the beneficiary’s sons, which required the trustees to act according to the sons’ instructions and not make decisions without their prior approval. The Minister concluded that this arrangement effectively transferred trustee powers to the sons, contravening article 1275 of the Civil Code of Québec, and rendered the payments to the beneficiary illegal and non-deductible.

The trust agreement, however, also stated that the trustees’ obligation to seek the sons’ approval did not relieve them of their fiduciary duties or constitute a delegation of their powers. The Tax Court of Canada examined the parties’ intentions and conduct, ultimately finding that the trustees continued to exercise their powers in accordance with the Civil Code and that the sons did not act as de facto trustees.

Outcome of the case

The court reviewed the Crown’s arguments, which alleged errors in the interpretation of the Civil Code and in the assessment of the facts by the Tax Court. The court found no manifest or determinative error in the lower court’s evaluation of the evidence. Even if the sons had acted as trustees, the court noted that the Civil Code only required them to act jointly with the other trustees, which the evidence showed they had done.

The court concluded that the payments made by Fiducie Historia to the beneficiary were not illegal and that the trust had not breached the relevant provisions of the Civil Code or the trust deed. As a result, the appeal by Sa Majesté le Roi was dismissed, and Fiducie Historia prevailed. The court awarded costs to Fiducie Historia, but no specific amount was stated, and no damages were awarded.