So often, I see tax strategies fall short, not due to faulty planning, but faulty execution. It is so easy to fall into complacency with regard to documentation. But I’m not going to ask you to take my word for it. I’ll let you read a great excerpt from the Tax Court of Canada in the case of Antle (2009 TCC 465). This case, by the way is one of the two recent “Barbados trust” cases involving the use of offshore trusts to escape tax on large capital gains.
Parenthetically, the other case, Garron Family Trust, (2009 TCC 465) calls into question the long-standing notion that a trust is resident in the jurisdiction where the majority of the trustees reside. This absolute certainty, like the shape of our globe, once considered to be flat, has given way to the reality that the residence of a trust should be determined based on the set of circumstances in question, and that the place where management and control takes place is now the overriding factor.
But I digress. I want to get to this great quotation, because the lawyers involved in this case must be pulling out their hair. When Mr. Antle was about to sell his shares, he decided he could avoid the capital gains tax by following a few simple tax planning steps, as follows:
Step 1: Set up a spouse trust with a trustee resident in Barbados.
Step 2: Transfer shares to a spouse trust (tax free under Canadian law)
Step 3: Trust sells shares to Mrs. Antle (tax-free under Barbados law and Canadian-Barbados tax treaty)
Step 4: Mrs. Antle sells shares with stepped-up cost base
Forget the fact that GAAR also applies to this transaction. The court, in fact made another fun statement in this regard, calling the strategy “a classic law school model of what GAAR was intended to capture”.
But again, I digress. The point is, don’t lose your case for a client before it gets out of the starting block through sloppy paperwork and poor execution. In Antle, the court stated:
“With certainty of intention and certainty of subject matter in question and, more significantly, no actual transfer of shares, there is no properly constituted trust: the Trust never came into existence. This conclusion emphasizes how important it is, in implementing strategies with no purpose other than avoidance of tax, that meticulous and scrupulous regard be had to timing and execution. Backdating of documents, fuzzy intentions, lack of transfer documents, lack of discretion, lack of commercial purpose, delivery of signed documents distributing capital from the trust prior to its purported settlement, all frankly miss the mark — by a long shot. They leave an impression of elaborate window dressing. In short, if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution.”
So true. Both the Garron and Antle cases are being appealed.