Federal Appeal


Taxation

INCOME TAX
Taxpayer had not endowed foundation with any money or property

This was appeal of judge’s decision allowing taxpayer’s appeal. Taxpayer was reassessed under Income Tax Act (Can.), for years 1996 to 2000 to include in income, pursuant to s. 75(2), taxable portion of capital gains realized by Austrian private foundation on sale of corporate shares it purchased from taxpayer. In 1996, taxpayer and father established private foundation in Austria. Father executed founding deed and paid 1 million Austrian shillings into foundation account. Taxpayer sold shares in company to foundation for $1.177 million. Foundation paid taxpayer $117,705 with balance remaining owing on which interest accrued. In 1998, foundation sold shares to another company. Minister reassessed taxpayer on basis of s. 75(2) of act on assumption that foundation was trust, that taxpayer did not sell shares to foundation until shortly before sale to other company in 1998 and consequently realized gain on basis on non-arm’s length disposition at fair market value. Taxpayer appealed. Appeal was allowed. Judge found that s. 75(2) of act did not apply to facts of case. Appeal dismissed. Section 75(2) of act was intended to ensure that taxpayer could not avoid income tax consequences of use of disposition of property by transferring it in trust to another person while retaining right of reversion in respect of property or property for which it may be substituted or retaining right to direct disposition of property or substituted property. Nothing in documents of foundation or law of Austria supported conclusion that right of foundation to deal with its property was constrained by any legal or equitable obligation analogous to those of common law trustee. Nothing gave taxpayer legal or equitable claim to corporate property that was different from that of shareholder or member of corporation. Section 75(2) of act must be interpreted and applied to give effect to its language, read in proper context and with view to giving effect to its intended purpose. Section 75(2) of act did not apply to beneficiary of trust who transferred property to trust by means of genuine sale. Foundation purchased shares from taxpayer using money from original endowment from father. Taxpayer had not endowed foundation with any other money or property. Section 75(2) of act could not apply to attribute any income or gains of foundation to taxpayer.

Sommerer v. Canada (July 13, 2012, F.C.A., Blais C.J., Letourneau and Sharlow JJ.A., File No. A-188-11) Decision at 204 A.C.W.S. (3d) 674 was affirmed. 219 A.C.W.S. (3d) 226 (29 pp.).

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