Canada: Daniel LaPlante v. The Queen: Family Trusts And Corporate Transactions Gone Awry

Last Updated: June 12 2019
Article by Marc Weisman and Roberto De Pasquale

Many trustees do not follow the legalities surrounding family trusts in corporate transactions. On a share sale transaction, the trustees (often one or both of the patriarch or matriarch of the business) purport to allocate sale proceeds received by the family trust to its beneficiaries (often children, grandchildren or other close relatives). The beneficiaries, usually with available lifetime capital gains exemption room or at a low tax bracket, will treat the amounts allocated to them as income for income tax purposes and pay no or little tax. The allocated amounts, however, eventually end up in the hands of other individuals, such as the parents, grandparents or other close relatives of the beneficiaries, who are also often the trustees.

During a Canada Revenue Agency ("CRA") audit of a trust, the CRA may examine the flow of funds to determine whether the beneficiary to whom the allocation was made actually received the benefit of the funds. If the CRA finds the funds allocated to beneficiaries for income tax purposes end up in the bank account of someone else (such as a parent, grandparent or other close relative), the CRA may reassess the end recipient of the funds and allocate the distribution of funds to him or her for income tax purposes on the basis that such person really received the benefit of the funds from the family trust.

This happened in Daniel Laplante v. The Queen, 2018 CAF 193 ("Laplante"). The Federal Court of Appeal upheld the decision of the Tax Court of Canada (2017 TCC 118) in its ruling that the distribution and allocation of taxable capital gain among beneficiaries of a family trust (on the sale of qualified small business corporation shares by the trust) and their use of the lifetime capital gains exemption amounted to a sham.

Facts

Daniel Laplante, the taxpayer, was the dominant trustee of Fiducie DL, a family trust. In January 2008, Fiducie DL sold the shares of DTI Software Inc., a qualified small business corporation, and realized a capital gain of approximately $5,852,074. By resolution of the trustees of Fiducie DL, $2,593,412.50 of taxable capital gain was distributed and allocated to beneficiaries of Fiducie DL, who were also all family members to Mr. Laplante. Upon receipt by the beneficiaries of their trust distribution cheques, the beneficiaries endorsed the cheques to Mr. Laplante and executed deeds of gift in his favour. Mr. Laplante also paid their alternative minimum tax and allowed the beneficiaries to keep the subsequent recoveries in future years.

On March 10, 2014, the Minister of National Revenue (the "Minister") reassessed Mr. Laplante and added to his income for the 2008 taxation year the taxable capital gain of $2,593,412.50. Mr. Laplante objected to the Minister's reassessment.

Conclusion

On October 23, 2018, the Federal Court of Appeal upheld the June 23, 2017 decision of the Tax Court of Canada and ruled that the Minister was correct in reassessing Mr. Laplante outside the normal reassessment period and adding to his 2008 income a taxable capital gain of $2,593,412.50.

Analysis

In the Tax Court of Canada, Justice Ouimet found that the purported distribution of the taxable capital gain to the beneficiaries of Fiducie DL amounted to a sham (or, to be more precise, a "simulation" under Art. 1451 of the Quebec Civil Code), stating that the beneficiaries:

all accepted a mandate [e.g., an agency] from Mr. Laplante. The essential elements of the mandate involved receiving a $375,000 allocation from Fiducie DL and then returning this amount to Mr. Laplante. To this end, they all had to use their capital gains exemption, which was also essential. As consideration, they were able to keep the alternative minimum tax recovered in subsequent taxation years.

In affirming this decision, Justice Boivin of the Federal Court of Appeal found that Justice Ouimet did not err in finding a simulation in this case; that Mr. Laplante was the true beneficiary of the amounts distributed by Fiducie DL to the seeming beneficiaries.

Key Takeway

The decision in Laplante highlights the importance of tax advisors advising their clients that the beneficiaries of a family trust should be entitled to keep the distribution funds. Beneficiaries should not merely act as agents to facilitate a tax benefit for the patriarch or matriarch of the business by claiming/multiplying the lifetime capital gains exemption or paying tax at a lower tax rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions