With the collaboration of Philip Hazeltine
In recent years, many trusts have been created for tax planning purposes. A trust is a patrimony created by an individual who donates property (the settlor). When a trust is constituted, one or several trustees are appointed to administer the affairs of the trust and hold its assets. Quite often, a professional will agree to act as a trustee of a trust created for their client. The involvement of this professional trustee in the day-to-day business of the trust is sometimes limited, which can have serious consequences for the professional trustee.
In a recent criminal case, Sous-ministre du revenu du Québec c. Roy Gordon Harris, Mr. Harris was charged with at least 18 counts of fraud by the sous-ministre du revenu du Québec, under the Tax Administration Act ("TAA"), for having willfully fail to file the returns of several trusts. Mr. Harris acted as the trustee of these various trusts (the "Harris Trustee") and it is in this capacity that he was charged by the Attorney General of Québec.
In summary, the tax avoidance scheme in which the Harris Trustee appears to have played a role consisted of a first transfer of real property between beneficiaries and trustees followed not long after by a second transfer of property between the trustees involved and a third party. Subsequently, the proceeds from the sale, after the second transfer, was distributed between the beneficiary or beneficiaries of the trust and the Harris Trustee.
It would seem that no tax returns were filed by the trusts involved in the scheme and that, consequently, the proceeds of the sale of property were not reported to the Agence du revenu du Québec (the "ARQ"), as provided for in Quebec's applicable tax laws. In addition, searches were conducted by the ARQ in the offices of the notaries implicated in these transfers of property. On February 22, 2012, Mr. Harris pleaded guilty to only one count of fraud and was fined $37,218 as a result. All other counts were dropped for unknown reasons, possibly after an agreement was reached between the parties.
In this particular case, the Harris Trustee appears to have been closely involved in the affairs of the trust. What would happen if a professional was in fact a silent trustee and the tax return preparer of this trust? Could that professional be subject to legal action for the trust's tax debts or be criminally charged for negligence? What is the extent of a professional trustee's tax liability?
We increasingly recommend that trustees set up an internal control system for the trust, similar to the one that currently applies to business corporations. However, it is preferable that a trustee regularly monitors the affairs of a trust, so as to avoid any future problem with tax authorities.
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.
