Sheila Holmes Spousal Trust v Canada (Attorney General), 2013 ABQB 489

Court of Queen ’ s Bench of Alberta Citation: Sheila Holmes Spousal Trust v Canada (Attorney General), 2013 ABQB 489 Date: 20130828 Docket: 1201 10912 Registry: Calgary Between: Dennis L. Nerland in his capacity as Trustee of the Sheila Holmes Spousal Trust Applicant - and - Attorney General of Canada Respondant _ ________________________________________ ______________ Reasons for Judgment of the Honourable Madam Justice K. D. Nixon _________________________________________ ______________ I. Introduction [ 1 ] By deed of settlement dated March 7, 2007 (the “Deed of Settlement”), Mr.

Leslie Holmes (the “Settlor”) purported to settle a trust, the Sheila Holmes Spousal Trust (“the Trust”), naming Mr. Dennis Nerland (“Nerland”), an Alberta lawyer, as Trustee (the “Trustee”). Following an audit of the Trust, the Canada Revenue Agency (the “CRA”) took the position that the Trust was a sham and was not validly constituted. Consequently, the CRA imputed income and capital gains that had been reported by the Trust to the Settlor and issued re-assessments on that basis.

The CRA took the position, in the alternative, that the income and capital gains were taxable in the hands of the Settlor and not in the Trust pursuant to s. 75(2) of the Income Tax Act , RSC 1985, c 1 (5 th Supp) . Further, the CRA, as agent for the Province of Ontario, took the position that, if it was valid, the Trust was resident in Ontario, not Alberta, and thus was

liable to pay Ontario, not Alberta, provincial taxes. [ 2 ] Nerland, in his capacity as Trustee of the Trust, applies by way of Originating Application pursuant to ss. 5(3) (

b) and 11 of the Judicature Act, RSA 2000, c J-2 for a declaration that the Trust was validly constituted on March 7, 2007 with him as the sole Trustee and that the Trust existed under the laws of the Province of Alberta until it was wound up on December 22, 2009. [ 3 ] Section 5(3) (

b) of the Judicature Act gives this Court jurisdiction, inter alia , in all matters relating to trusts.

Section 11 of that statute provides that “[n]o proceeding is open to objection on the ground that a judgment or order sought is declaratory only, and the Court may make binding declarations of right whether or not any consequential relief is or could be claimed.” [ 4 ] It is common ground between the parties that this Court has jurisdiction to make a declaration in relation to trusts. At issue is whether it should exercise that jurisdiction. The Attorney General of Canada (the “AG”) submits that this Court should decline jurisdiction in favour of the statutory tax appeal process created by Parliament.

Alternatively, the AG submits that, if this Court takes jurisdiction, the matter cannot be determined in a

summary fashion by way of Originating Application but should be converted to a full action with discovery and trial as there are material facts in dispute. The Trustee argues that this is a matter ancillary to a tax assessment and, as such, this Court should exercise its jurisdiction to adjudicate on the validity of the Trust. II.

Background [ 5 ] The Deed of Settlement provides that the Settlor wishes to establish a trust to be known as the “Sheila Holmes Spousal Trust” for the benefit of the Settlor’s spouse, Sheila Holmes, and, after her death, for the benefit of the children and issue of the Settlor and Sheila Holmes. The Deed of Settlement names the Settlor as the settlor of the Trust and Nerland as the Trustee. It is stated to be effective March 7, 2007 and it identifies as the settled property certain shares in Gypsum Technologies Inc. (“GTI”).

The Deed of Settlement provides that it is to be interpreted and governed by the law of Alberta. [ 6 ] In his affidavit sworn August 26, 2012 (the “Nerland Affidavit”), Nerland swears that he “exercised full discretion and control” over the Trust’s assets at all times during the existence of the Trust, that he made the decision to sell the Trust’s assets, that he made representations and warranties to third parties in his capacity as Trustee, and that he wound up the Trust on December 22, 2009 and distributed its assets to Sheila Holmes.

Nerland also swears that he prepared and made tax filings for the Trust with the CRA. [ 7 ] The Trust reported on its income tax returns the capital gain on the sale of the GTI shares, as well as investment income and foreign exchange gains and losses on the proceeds of the sale. The Trust reported on the basis of being a resident of Alberta. [ 8 ] During the course of an audit of the Trust (the “Audit”), the Minister of National Revenue (the “Minister”) sought documents from the Trustee, who claimed solicitor-client privilege in respect thereof.

The matter was brought before the Federal Court to determine in respect of which documents Nerland was acting as legal advisor and in respect of which he was purporting to act as Trustee.

The Federal Court issued a compliance order directing the production of certain of the requested documents. [ 9 ] Following production of the documents, the CRA advised the Settlor by letter dated November 8, 2011 (the “Auditor’s Letter”) that, having reviewed the series of transactions carried out by the Trust, it was the CRA’s primary position that the Trust was a sham “intended to deceive the CRA into believing that legal ownership of the [GTI] shares was transferred to the trust for the benefit of Sheila Holmes and that the trustee had been given discretion over the trust assets.” Second, the CRA stated that, in the event that the Trust was not found to be a sham, the Trust was not validly constituted.

Third, the CRA took the position that if the Trust was valid, s. 75(2) of the Income Tax Act would apply with the result that the income in the Trust would be attributed to the Settlor.

Last, it was the CRA’s position that if the Trust was valid, it was resident in Ontario, not in Alberta, as the management and control of the trust was in Ontario with the result that the Trust was liable to pay provincial taxes in Ontario, not in Alberta. [ 10 ] The Auditor’s Letter stated that “[t]he purpose of the trust was to ensure that the capital gains realized on the sale of the GTI shares would be taxed at the lower principal rate within Alberta, rather than in Ontario, which is where the corporation, all shareholders, [the Settlor] and the beneficiary reside. . . contrary to the stated purpose of establishing a trust for the benefit of Sheila and upon her death, for her children.” [ 11 ] The Auditor’s Letter indicated that the Trust was not validly constituted on the basis that the Trustee was “...required to implement the pre-determined steps of the tax plan without fault and without question”, that the Trustee was not involved in the decisions regarding the Trust’s property and had no discretion with respect to the Trust’s property, that the GTI shares were not actually transferred to the Trust with the result that certainty of subject matter was not met and that certainty of objects was not met as “the only reason [the funds] were distributed to Sheila’s account was to avoid a ‘tax issue’.” [ 12 ] On May 7, 2012, as a result of the Audit, the Minister reassessed the Settlor and included in his income certain capital gains, investment income and foreign exchange gains that had been reported by the Trust.

The Minister also levied penalties against the Settlor for gross negligence. [ 13 ] On August 2, 2012, Nerland’s law firm, Shea Nerland Calnan LLP, wrote to the CRA Appeals Branch as legal counsel for the Settlor, filing a Notice of Objection to the reassessments and setting out arguments in support of the Settlor’s position that the Trust was validly constituted and was not a sham and, further, that s. 75(2) of the Income Tax Act did not apply. [ 14 ] A Notice of Objection triggers a review by the Appeals Branch of the CRA (which is separate from the Audit Division), following which the Minister may vacate, vary or confirm the assessment.

If 90 days have elapsed since a Notice of Objection was filed and the Minister has not vacated, varied or confirmed the reassessment, the taxpayer has the right, pursuant to s. 169 of the Income Tax Act , to file a Notice of Appeal to the Tax Court of Canada, whether or not the Appeals Branch has completed its review. No appeal has been filed by the Settlor, though he has the right to do so.

[15] On March 21, 2012, the Minister, as agent for the Government of Ontario, issued alternative reassessments (“the ProtectiveReassessments”) in respect of the Trust’s Ontario provincial tax liability on the basis of the alternative conclusion that the Trust, if valid,was taxable in Ontario, not Alberta. On May 7, 2012, the Trustee filed a Notice of Objection to the Protective Reassessments as well. Asthe Minister did not vacate, vary, or confirm the Protective Reassessments within 90 days of that Notice of Objection, the Trustee has theright, pursuant to s. 125 of the Ontario Taxation Act, SO 2007, c 11,

Schedule A, to file a Notice of Appeal to the Ontario Superior Courtof Justice. [16] In her affidavit sworn January 30, 2013 (the “Auditor’s Affidavit”), Tammy Grant, the CRA Auditor, states that if theMinister (on review of the Settlor’s Notice of Objection) or the Tax Court of Canada determines that the Trust was not a sham and wasvalidly created, the reassessments of the Settlor will be vacated and she believes that the Minister or the Ontario Superior Court ofJustice will determine if the Trust was resident in Ontario.

Alternatively, she states that if the Minister or the Tax Court of Canadadetermines that the Trust was a sham or was not validly established, the Protective Reassessments will be vacated. [17] Thus, once the validity of the Trust is determined, it will be known which taxpayer the CRA is dealing with - the Settlor orthe Trust. III. Relief Sought [18] The Trustee seeks a declaration of this Court that the Trust was validly established on March 7, 2007 with Nerland as the soletrustee and that it was validly constituted and existing under the laws of the Province of Alberta until it was wound up on December 22,2009.

IV. Issues [19] There are two issues before the Court: 1) should this Court decline jurisdiction to adjudicate on the validity of the Trust; and 2) if this Court takes jurisdiction, should the validity of the Trust be determined on this motion based on the affidavit evidencepresently before the Court or whether the matter should be directed to proceed by a full action with discovery and trial. V. The Law [20] Declaratory relief granted by this Court pursuant to the Judicature Act is binding on the Minister and on the Tax Court: Dalev. Minister of National Revenue (1997) (FCA), 2 CTC 286 (Fed CA).

Therefore, while the assessment of tax is notbefore this Court, a declaration by this Court that the Trust is or is not a sham and is or is not valid would be binding on the Minister andwould directly impact the primary basis upon which the Trust and the Settlor could be assessed. However, in the event this Court were todeclare the Trust valid, the alternative basis for the reassessment of the Settlor, being s. 75(2) of the Income Tax Act, would not beaffected. [21] The adjudication of the validity of tax assessments falls within the exclusive jurisdiction of the Tax Court of Canada.

Inaddition, the Tax Court has jurisdiction to make necessary and incidental findings of provincial law in the process of adjudicating on taxmatters if a court of competent jurisdiction has not already decided the issue: GLP NT Corp v Canada (Attorney General) (2003), (ON SC), 65 OR (3d) 840, DTC 5654 (Ont SCJ) at paras 12-15. This proposition was also stated in Roper v The Queen (TCC), 2000 DTC 2213 (TCC) at para 10: When a taxpayer appeals to this Court from an assessment under the Income Tax Act, the Court has jurisdiction to consider and decide allissues which are collateral to the appeal itself.

In this appeal, the presiding judge may have to decide whether a certain liability of theAppellant has been extinguished under the Bankruptcy and Insolvency Act if that precise question has not already been decided by a courthaving jurisdiction in bankruptcy matters. [22] In this case, the Tax Court would have jurisdiction to determine matters in issue in the reassessments of the Settlor and theTrust, namely the validity and residency of the Trust: see Antle v Canada, 2009 TCC 465, DTC 1305, aff’d 2010 FCA 280, DTC 5172and Fundy Settlement v Canada 2012 SCC 14, 1 SCR 520.

In Antle, the matter before the Tax Court was whether the taxpayer intendedto use a trust to avoid tax and never intended to lose control of certain shares. The Federal Court of Appeal held that the Tax Court couldlook at the surrounding circumstances to determine if there was a failure of certainty of intention despite the clarity of the trust deed.

InFundy, the question was whether the Minister was correct in his position that a trust was resident in Canada and taxable as such. [23] Conversely, the parties provided a number of cases in which provincial courts addressed their jurisdiction to determinematters ancillary to tax assessments. [24] In Re PetroMines Acquisitions Ltd., 2001 ABQB 568, 295 AR 377, the Court held that it had jurisdiction to determinewhether an Alberta corporation, which had been revived in order to be subject to a tax assessment, had been properly revived.PetroMines Acquisitions Ltd. (“PetroMines”) had been dissolved by Notice of Dissolution filed with the Alberta Corporate Registry.Unsuccessful attempts were made to revive PetroMines through the Registrar of Corporations by the Canada Customs and RevenueAgency (“CCRA”), being the predecessor to the CRA) in order to be able to assess it for transactions that had occurred prior to itsdissolution.

A successor to PetroMines knew of the proposed re-assessments and executed a waiver of the normal re-asssessment period. The CCRA then applied to the court for a revival order which was granted. The successor company, which was not given notice of theapplication to revive, commenced an action before the Tax Court to appeal the CCRA’s assessment of PetroMines and applied to the

Alberta Court to set aside the revival order. As noted by the Court, presumably, if the revival order was void ab initio, there was no onefor the Minister to assess. [25] The Minister argued that the application was a challenge to his authority to assess and that the validity of the assessment andall matters incidental to it must be appealed pursuant to the Income Tax Act. The Court held that it had jurisdiction, noting that it was notaddressing the assessment or reassessment of tax but rather whether an Alberta corporation was effectively revived pursuant to theBusiness Corporations Act (Alberta).

The Court further noted that, as established in Dale, the Minister is bound by an order issued by asuperior court which has its origins in the

interpretation and application of the provisions of a provincial statute. Finally, the Court citedthe general rule from R v Wilson, [1982] 2 SCR 594 that an order of a superior court cannot be attacked collaterally unless lawfully setaside. [26] In GLP, supra, the Minister had assessed a corporation (“GLP”) with a special dividend tax, taking the position that GLP hadlost its exemption from the tax by virtue of a retraction and redemption of shares. GLP sought a declaration relating to the status of theshares, a corporate law question under the Business Corporations Act (Ontario).

The parties agreed that the Ontario Superior Court ofJustice had jurisdiction; at issue was whether it should decline jurisdiction. GLP had filed a Notice of Objection to the Minister’sassessments and, upon the Minister’s confirmation thereof, filed an appeal to the Tax Court.

The parties were proceeding to discovery inthe Tax Court action. [27] The Ontario Superior Court declined to take jurisdiction, stating at para. 17 that the application involved issues that werealready before the Tax Court and that, even if it were to assume jurisdiction, its jurisdiction did not extend to all matters in dispute.Regardless of the outcome before the Ontario Court, the tax appeal would still need to proceed.

Further, the Ontario Court was notcertain that the issues in the application before it were discrete and separate from the valuation issues that were to be dealt with by theTax Court. [28] The Ontario Court concluded as follows at para. 18, citing Felsen Foundation v Jabs Construction Ltd [1998] 98 DTC 6454at para 7: In my opinion, the only real purpose in bringing this Application is to influence or upset the hearing before the TCC.

The Applicant, ineffect, seeks an opinion of this Court under the guise of a declaratory order in order to place that opinion before the TCC in the taxappeal hearing. [29] It was also noted by the Ontario Court at para. 19 that it would be simpler and more efficient to have one court determine thematter to avoid parallel proceedings when the Tax Court could deal with all issues.

Lastly, the Ontario Court gave the followingadditional reason for declining jurisdiction: I also agree with Justice Dielschneider’s reasoning in Cook at paras. 17-19 that there are two other good reasons to defer to the TCC inthis matter, namely, “respect for the laws of Canada” and the TCC’s expertise in tax-related matters. [30] In Canada (Customs and Revenue) v Aboriginal Federated Alliance Inc, 2002 ABCA 104, 303 AR 304, the issue was thejurisdiction of an Alberta court to determine the disposition of funds paid into court following demands made by the Alberta Worker’sCompensation Board, the Alberta Director of Employment Standards and the CCRA.

The Court of Appeal made these comments atparas. 18-19: Despite the Tax Court’s exclusive jurisdiction to determine the validity of an assessment, provincial superior courts may determinematters that are ancillary to an assessment. For example, the Court of Queen’s Bench has jurisdiction to determine whether a third partyis liable to pay a tax debtor within the meaning of the ITA: Montreal Trust v. Tottrup (1990), (AB KB), 82 Alta. L.R.(2d) 340 (Q.B.).

That Court may also determine whether a company has been revived and is therefore subject to income tax assessment:Re PetroMines Acquisitions (2001), 2001 ABQB 568 , 94 Alta. L.R. (3d) 309 (Q.B.). In this case, the chambers judge assumed jurisdiction to decide the validity of the very assessments on which CCRA based its claims.Unlike Montreal Trust and PetroMines, there was no matter ancillary to the assessment that could provide a basis for the exercise of hisjurisdiction.

He erred in concluding that he had the jurisdiction to determine what amounts were payable to CCRA simply because hewas considering a motion seeking the

summary determination of entitlement to funds paid into court on interpleader. He purported todecide a matter that is within the exclusive jurisdiction of the Tax Court. [31] In Felsen Foundation, supra, the British Columbia Supreme Court declined to exercise its jurisdiction to issue a declaration asto whether a transfer was a gift at common law. Felsen Foundation was a charitable foundation created by the principal of JabsConstruction, who was also a director and “guiding force” (as the court described him) of the foundation.

Revenue Canada (anotherpredecessor to the CRA) determined that a transfer of property from Jabs Construction Ltd. (“Jabs”) to the Felsen Foundation was not agift under the Income Tax Act with with the result that Jabs was denied tax benefits in respect to the purported gift. Jabs filed a Notice ofObjection with the Minister who confirmed the assessment. As at the time of the application by Felsen Foundation, Jabs had notappealed to the Tax Court. [32] Felsen Foundation sought a declaration in the B.C.

Supreme Court that the transfer from Jabs was a gift under common law.Jabs was a party to the application and accepted the position of Felsen Foundation. The Court declined to take jurisdiction, commentingat para. 7: The only place there is an issue is in the Income Tax Act proceedings. In my opinion, this court either does not have jurisdiction todetermine whether there was a gift or it should decline jurisdiction. The petitioner does not seek a legal remedy in these proceedings.Rather, it seeks an opinion of the court under the guise of a declaratory order.

The sole use of that opinion would be for JabsConstruction to place it before the Tax Court of Canada and argue that the gift issue has been determined by a court of competentjurisdiction contrary to the rulings already made under the Income Tax Act proceedings. Determination of the gift issue by this courtwould be merely hypothetical. This court is not in the business of deciding issues solely for the purpose of instructing other courts.

[ 33 ] The Court did not accept the Felsen Foundation’s argument that it needed a determination of whether there was a gift because it had no status in the appeal under the Income Tax Act . The Court noted that the Felsen Foundation could be granted intervenor status by the Tax Court.

Further, the Court noted that, although the Felsen Foundation would not have status on any appeal to the Federal Court from the Tax Court ruling, given the common management of the parties, such an appeal would be made with the interests and goals of the Felsen Foundation in mind. [ 34 ] On an application for judicial review of the Minister’s assessment of tax, the Supreme Court of Canada in Addison & Leyen Ltd v Canada, 2007 SCC 33 , 2 SCR 793 gave this caution at para. 11: The integrity and efficacy of the system of tax assessments and appeals should be preserved.

Parliament has set up a complex structure to deal with a multitude of tax-related claims and this structure relies on an independent and specialized court, the Tax Court of Canada. Judicial review should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court.

Judicial review should remain a remedy of last resort in this context. [ 35 ] In Addison, the Supreme Court of Canada reversed the Federal Court of Appeal and struck out the application for judicial review of the Minister’s decision to reassess certain taxpayers. Some fifteen years earlier, the Minister had reassessed a corporation, but subsequently determined that the tax could not be collected. Several years later, the Minister reassessed the taxpayers, who had held shares in the corporation, pursuant to s. 160 of the Income Tax Act .

The taxpayers had filed notices of objection, but the Minister had not responded and the taxpayers never appealed to the Tax Court.

Four years thereafter, the taxpayers applied to the Federal Court for judicial review of the Crown’s decision to use its discretion to assess them under s.160 of the Income Tax Act, alleging the long delay was abusive, prevented them from mounting a proper challenge to the validity of the assessment and deprived them of the possibility of indemnification by the primary taxpayer. [ 36 ] The Supreme Court of Canada held at para. 8 that the Federal Court had jurisdiction to review the Minister’s discretion, provided the matter was not otherwise appealable or to control abuses of power.

The Supreme Court held, however, that judicial review was not available on the facts of that case as the Minister had discretion to reassess a taxpayer at any time. It was also noted that there was no reason disclosed as to why it would be impossible to deal with the tax liability issues through the regular appeal process. [ 37 ] In Stephkan Holdings Inc v Canada Revenue Agency, 2013 QCCS 643 , the taxpayers asked the Quebec Superior Court to homologate a settlement agreement between themselves and the CRA relating to a tax obligation.

The Court declined to hear the matter, citing Addison and noting that although the case before it did not concern judicial review of a tax assessment, it was closely analogous. The taxpayers acknowledged that they intended to use the settlement agreement as a defence against execution proceedings by the CRA. The Court held at paras. 14 and 15 that by seeking to have the settlement agreement homologated, the taxpayers were, in effect, circumventing the Tax Court’s appeal process. It found that the real litigation was the validity of the impugned assessments in light of the settlement agreement.

The Court also found that it could hear only the homologation argument whereas the Tax Court had the necessary jurisdiction to hear the whole matter, including the effect of the settlement agreement on the impugned assessments. VI. Position of the Trustee [ 38 ] What the Trustee seeks from this Court is a declaration on a

summary basis based on the Deed of Settlement and his assertions in the Nerland Affidavit, including his assertion that he had control of the Trust’s assets. [ 39 ] The Trustee makes various arguments in support of this Court taking jurisdiction. His primary argument is that the issue of whether or not the Trust was validly created and whether or not it is a sham are matters ancillary to the tax re-assessments, similar to the issue of revival of a corporation in PetroMines .

The Trustee says he is not asking this Court to determine the assessment or re- assessment of tax in these matters as they are within the exclusive jurisdiction of the Tax Court. Further, it is asserted by the Trustee that this Court should take jurisdiction as the Trust Deed provides that it should be interpreted in accordance with the law of Alberta. [ 40 ] The Trustee makes other arguments in support of this Court taking jurisdiction.

He argues that a declaration by this Court will not necessarily result in any particular outcome in the tax assessment nor restrict the Tax Court’s authority over the tax reassessments as the CRA also reassessed the Trust on alternative grounds, namely that if the Trust is valid, it is resident in Ontario, not Alberta. Further, he argues that this Court would not be encroaching on the jurisdiction of any other court because no appeals from the tax assessments have been filed with the Tax Court or any other court nor has any decision been made to do so.

The Trustee also asserts that he has his own rights, and as he can only appeal the Protective Reassessments that the CRA issued on the basis that the Trust is valid but resident in Ontario, the “real question” is whether Alberta or Ontario is the proper jurisdiction to hear his application. He asserts that there is no reason the Alberta Court should defer to the Ontario Court. [ 41 ] The Trustee also argues that he cannot get an expeditious hearing before the Tax Court on the discrete issues before this Court.

He has no means to bring the matter of the validity of the Trust before the Tax Court as it is the Settlor to whom the income of the Trust has been imputed on the basis that the Trust is a sham or is invalid.

He argues further that his ability to obtain status as an intervenor in an appeal by the Settlor before the Tax Court is a poor substitute for being a party to those proceedings as there is no right of appeal for an intervenor. [ 42 ] The Trustee says there is urgency in resolving this matter as the assessment of the Trust creates uncertainty whether he can appeal the Protective Reassessments given the uncertainty as to whether he is in fact a trustee. [ 43 ] Trustee says he made representations and warranties to third party buyers that he had authority to sell the Trust’s assets and asserts that there is now “significant uncertainty surrounding such representations and warranties.” The Trustee says he is exposed to claims from the Settlor, the beneficiaries of the Trust, and the purchaser of the Trust’s assets.

He asserts that he is entitled to resolve the uncertainty as soon as possible “before he suffers real damage” and it is imperative to the practice of trust and estate planning that trusts created by professional trustees “...have expeditious access to the courts when such presumptions are put into question.” He states that his reputation is in issue because of the position taken by the CRA and, thus, he has a legitimate right to resolve the validity of the Trust

as soon as possible. [Quotes are from the Nerland Affidavit.] VII. Position of the Attorney General of Canada [44] The AG asks this Court to decline jurisdiction in favour of the statutory tax appeal process. He argues that a declaration bythis Court would interfere with the review of the Notices to Objection by the Appeals Branch and with the jurisdiction of the Tax Courtto make findings of fact and law in the course of considering the re-assessments of the Settlor.

If this Court were to determine that theTrust was validly constituted and not a sham, the tax appeal process would become academic insofar as an appeal of the reassessmentson that basis was concerned. [45] The application before this Court, in the submission of the AG, is an inefficient use of judicial resources.

If the Ministerconfirms the reassessments, the Settlor must appeal to the Tax Court if he wishes to dispute his tax liability regardless of any decision bythis Court as the Tax Court would be required to address whether s. 75(2) of the Income Tax Act applies. [46] Further, the AG points to the expertise of the Tax Court in tax matters. The Appeals Branch of the CRA is reviewing thereassessments of the Settlor and the Protective Reassessments and may determine that the Trust was validly established.

If unsatisfiedwith the Minister’s response to their Notices of Objection, the Settlor can appeal to the Tax Court (where the Trustee can seek intervenorstatus) and the Trustee can appeal to the Ontario Superior Court of Justice. If the Minister confirms the reassessments, the validity of theTrust can be determined by the Tax Court on appeal, as can the Trust’s residency if the parties ask the Tax Court to make thatdetermination.

The validity and residence of trusts are incidental and ancillary findings commonly made by the Tax Court in adjudicatingincome tax appeals. [47] The AG submits that this application is “an attempt to circumvent the statutory appeal process under the guise of seekingdeclaratory relief...[which], if granted, would interfere with the Appeals Branch’s review of the filed Notices of Objection, andsubsequently with the jurisdiction of the Tax Court to make essential findings of fact and law in the course of considering the correctnessof the Holmes Reassessments.” [48] Further, the AG asserts that there is no evidence of prejudice to the Trustee because of delay should this Court decline toexercise jurisdiction.

The Settlor and the Trustee have had the right since August 2012 to file appeals and bring the matter before the TaxCourt and the Ontario Superior Court of Justice. [49] Alternatively, the AG argues that if this Court takes jurisdiction, the application should be converted to a full action pursuantto Rule 3.12 of the Alberta Rules of Court and decided following trial. In support of his position, the AG cites Oracle Resources Ltd vDome Petroleum Ltd (1988), (AB KB), 86 AR 281 (QB) and Manville Canada Inc v Montreal Trust Co of Canada(1993), (AB KB), 142 AR 37 (QB).

In those cases, this Court addressed the appropriateness of determining matters bysummary proceeding commenced by way of Originating Notice. [50] In Oracle, the Court noted at para. 35 that making

summary determinations of the rights of parties is a discretion to beexercised with restraint.

There must be no material facts in dispute and the Court must “...endeavour to make a practical determination asto whether there is a sufficient likelihood of relevant evidence being admitted at a trial which will significantly assist the court ininterpreting the words of the document or documents to warrant the expense and delay of the full trial process.” [51] Likewise, in Manville, the question was whether an Originating Notice procedure was appropriate to determine whether therespondents had any right to a pension surplus by way of a constructive trust.

The applicants argued that the rights of the parties were tobe determined based on the construction of a written instrument and that there were no material facts in dispute. The Court again notedthat Rule 410(

e) was a discretionary rule to be exercised with restraint. The Court held that the main issue for determination was whetherthe rights of the parties should be determined with respect only to the documents or whether there were rights that arose as a result of aconstructive trust. This was not, in the Court’s view, a matter that could be determined in a

summary proceeding. Wachowich ACJ, as hethen was, held as follows at para. 12: To prove that the employee groups have reason for that deprivation will require discovery and examination of documents and witnesses.The question of rights to pension fund surpluses is a matter of some concern to the courts of this country. I, therefore, find thatrespondents should be given the opportunity to advance their position.

Clearly the procedure afforded by the Originating Notice isinadequate for that purpose. [52] The AG points out that the reassessments were based on the CRA Auditor’s factual conclusions, as outlined in the Auditor’sLetter.

Those factual conclusions, namely that legal ownership of the GTI shares was not transferred, that Nerland had no discretion overthe Trust’s property, and that the series of transactions was preordained with Nerland taking instructions from the Settlor, are contrary toNerland’s assertion in the Nerland Affidavit that he exercised full discretion and control over the Trust’s assets at all times and took thedecision to sell the Trust’s assets.

In addition, the Auditor’s Letter references various documents upon which the CRA Auditor relied inher determination that the Trust was invalid, including emails between individuals involved in tax planning for the Settlor. None of thesedocuments is in evidence on this application and, with the exception of Nerland, none of those individuals, including the Settlor, hasprovided affidavits. The AG notes that if the matter were to proceed to a discovery process and trial, much of this evidence is likely to bepresented. VIII.

Analysis and Conclusion [53] I will address first the issue whether, if this Court were to take jurisdiction, the matter is appropriate for determination onOriginating Application based on the Nerland Affidavit or whether it should be converted to a full action subject to the discovery andtrial process. I agree with the AG that even if Court were to take jurisdiction, this is not a matter appropriately addressed by

Originating Application. [54] The Trustee argues that the validity of the Trust should be determined on the basis of the Deed of Settlement and hisassertions in Nerland Affidavit. In evidence, however, is the Auditor’s letter setting out various communications upon which the re-assessment of was based.

The Minister relies upon these communications in support of the conclusion that the Trust was a sham and notproperly constituted, despite what is stated on the face of the Deed of Settlement. [55] The cases of Oracle Resources, supra, and Manville Canada, supra, cited by the AG were decided under the old Rules ofCourt, specifically Rule 409 and Rule 410(e). The Court’s discretion over originating applications under the old Rules appears to havebeen preserved in the more generally worded provisions of Rule 3.2 and Rule 3.12 in the current Rules.

In a recent judgment that dealtwith an Originating Notice filed under the old Rules of Court, Justice Park discussed the continuity between Rule 410(

e) and Rule 3.2(2),noting that “[i]n both the old Rules and the current Rules it is common ground an Originating Notice should not be used to commence alegal action where there is a substantial factual dispute between the parties”: Shell Canada Products v. Sunterra Beef Ltd. 2013 ABQB193 at para 53. In light of the foregoing, the cases decided under the old Rules cited by the AG remain relevant. [56] In Antle, the Federal Court of Appeal held that a finding of whether a trust has been created was to be made on the facts of thecase, as evidenced by both the documents and the actions of the parties.

The Court stated at para. 12 that “A test that requires one to lookat all of the circumstances, and not just the words of the trust deed, is an approach that appears to have been adopted by Canadian courtsgenerally.” [57] The Supreme Court of Canada in M.N.R. v. Cameron (SCC), 72 DTC 6325 at 6328 referred to the classicdefinition of “sham” stated by Lord Diplock in Snook v.

London & West Riding Investments Ltd. [1967] 1 All E.R. 518 at 528 as follows: [I]t means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to thecourt the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (ifany) which the parties intend to create. [F]or acts or documents to be a “sham”, with whatever legal consequences follow from this, all parties thereto must have a commonintention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.

Nounexpressed intentions of a “shammer” affect the rights of a party whom he deceived.” [58] In accordance with Antle, supra, and Cameron, supra, determination of whether the Trust was or was not validly constitutedor was or was not a sham intended by the parties to give the appearance of creating legal rights and obligations different from the actuallegal rights and obligations, if any, they intended to create would require this Court to consider evidence beyond just the Deed ofSettlement and the assertions in the Nerland Affidavit and examine the conduct of the parties. [59] As noted in Oracle, this Court should exercise its jurisdiction to make important declarations of rights on a

summary basiswith restraint and with “great care and caution.” The validity of the Trust is a matter of significant importance which has been the subjectof dispute between the CRA and the Trustee, as evidenced by the correspondence between them. The Trustee submitted to the CRA thatthere was no common intention of the parties to give a false impression on the part of the Settlor and Trustee and, thus, there is no sham.However, the Auditor’s Letter refers to a large number of emails related to the parties’ actions that would seem to give a differentimpression.

For this Court to determine whether the three certainties necessary to the creation of a trust were met and whether the actionsof the parties were a deceit, a fulsome examination of the facts based on a complete evidentiary record is required.

The Trustee’soriginating application is not adequate to the task. [60] As to the matter of jurisdiction, I am of the view that this Court should decline jurisdiction in favour of the statutory taxappeal process. [61] As stated by the Supreme Court of Canada in Addison, supra, ‘[t]he integrity and efficacy of the system of tax assessment andappeals should be preserved.” In matters involving taxation, for which the Parliament of Canada has established a specific system,Provincial superior courts should take jurisdiction only in cases that are ancillary to a tax assessment. [62] The instant case is distinguishable from PetroMines.

There, the issue was whether an order of the Alberta court reviving acorporation ought to have been granted in the absence of notice to the successor company. The determination of whether the revivalorder, granted by that very court, was void ab initio was properly before it. The Court’s decision was ancillary to a tax issue in that itaffected whether there was a corporate entity that could be assessed tax. If there was no corporation in existence, there was no one toassess.

The validity of the assessment itself was not before the court. [63] The real dispute here is with respect to the validity of the tax re-assessments. At issue is who, the Settlor or the Trust, isproperly assessed tax in respect of the sale of the GTI shares. The validity of the Trust is fundamental, not ancillary, to the taxassessment. [64] I agree with the AG that the purpose of this application is to upset or interfere with the statutory appeal process.

The Trustee’sapplication is similar to that in Felsen Foundation, supra, GLP, supra, where the courts held that the only real purpose of theapplications was to seek the Court’s opinion for the purpose of using it in the tax proceedings. [65] The Trustee raises the spectre of potential litigation in respect to the Trust as a basis upon which this Court should takejurisdiction. He expresses a concern about uncertainty regarding his authority to sell the Trust’s assets and the possibility that he couldbe sued by the Settlor or beneficiaries.

The transactions between the Trustee and purchasers of the Trust’s assets have not been put inissue. There is no evidence of litigation between the third parties and the Trustee. Likewise, there is no evidence of litigation between theTrustee and Settlor with respect to the validity of the Trust. [66] As was the case in Felsen Foundation, supra (where the giftor, Jabs, and the giftee, the foundation, were in agreement withregard to the validity of the gift), there was no dispute other than the one between Jabs and the CRA. Likewise in this case. The only

dispute with respect to the validity of the Trust is with the CRA in relation to the payment of tax. [67] With respect to the use of declaratory judgments, the comments of Dickson, J. in Operation Dismantle v. The Queen, (SCC), 18 D.L.R. (4th) 481, speaking for the majority of the Supreme Court of Canada at p. 492 are instructive: The reluctance of courts to provide remedies where the causal link between an action and the future harm alleged to flow from it cannotbe proven is exemplified by the principles with respect to declaratory relief.

According to Fager, The Declaratory Judgment Action(1971), at p. 5: ‘The remedy [of declaratory relief] is not generally available where the controversy is not presently existing but merely possible orremote; the action is not maintainable to settle disputes which are contingent upon the happening of some future event which may nevertake place.

Conjectural or speculative issues, or feigned disputes or one-sided contentions are not the proper subjects for declaratory relief.’ Similarly, Sarna has said, ‘The court does not deal with unripe claims, nor does it entertain proceedings with the sole purpose ofremedying only possible conflicts. (The Law of Declaratory Judgments (1978) at p. 179) None of this is to deny the preventative role of the declaratory judgment.

As madame Justice Wilson points out in her judgment, Borchard, Declaratory Judgments, 2nd ed. (1941), at p. 27, states that: ‘...no “injury” or “wrong” need have been actually committed or threatened in order to enable the plaintiff to invoke the judicial process;he need merely show that some legal interest or right of his has been placed in jeopardy or grave uncertainty...’ None the less, the preventative function of the declaratory judgment must be based on more than mere hypothetical consequences; theremust be a cognizable threat to a legal interest before the courts will entertain the use of its process as a preventative measure.

As thiscourt stated in Solosky v. The Queen (1979), (SCC), 105 D.L.R.(3d) 745, 50 CCC(2d) 495, [1980] 1 S.C.R. 821, adeclaration could issue to affect future rights, but not where the dispute in issue was merely speculative.” [68] Also raised by the Trustee are possible implications for the Trustee’s reputation of the CRA’s challenge to the validity of theTrust.

Whether the reputation of the Trustee may be affected by the outcome of the tax dispute is not a basis upon which this Courtshould take jurisdiction to adjudicate on a matter that has arises in that tax dispute thereby interfering in the tax process for whichParliament has established a specific process. [69] That there is currently no action before the Tax Court, and hence no need for this Court to give deference to the Tax Court, isnot a persuasive reason for this Court to take jurisdiction.

As in Felsen Foundation, supra, (where the giftee sought a declaration beforethe taxpayer, Jabs, filed any appeal of the assessment), making the application before an appeal is filed with the Tax Court does notchange the fact that the only current dispute is with respect to the position of the CRA Auditor in respect of tax. The Trustee isnevertheless seeking a declaration that would serve to interfere with the tax assessment process. [70] Should the Appeals Branch uphold the Auditor’s conclusion and this matter proceed before the Tax Court, the Trustee wouldnot be prejudiced by being limited to intervenor status.

Inasmuch as the Trustee and Settlor’s interests are aligned, the fact that theTrustee is limited to intervenor status at the Tax Court, is not a reason for this Court to take jurisdiction.

Similar to Felsen Foundation, the Trustee’s inability to have full status before the Tax Court does not disadvantage him. [71] Likewise, I find unpersuasive the argument of the Trustee that there is no need for this Court to defer to the jurisdiction of theTax Court because the Trustee can only appeal the issue of the Trust’s residence in respect to the alternative assessments of Ontario tax.The Trustee seeks a declaration that the Trust is valid not a declaration with respect to the Trust’s residence.

The issue of theappropriate jurisdiction to determine whether the Trust, if valid, is resident in Alberta or in Ontario is not the issue before this Court. [72] That the Minister has assessed tax against the Settlor on an alternative basis under s. 75(2) of the Income Tax Act, a matterwithin the exclusive jurisdiction of the Tax Court, is an argument against this Court taking jurisdiction. If this Court were to grant theTrustee the remedy he seeks, i.e., that the Trust is valid and not a sham, this Court cannot adjudicate on the application of s. 75(2) of theIncome Tax Act.

If the Settlor wishes to dispute the CRA’s position on that issue, he must appeal to the Tax Court. I agree with the AGthat proceedings in both this Court and the Tax Court is not an efficient use of judicial resources.

The Tax Court has jurisdiction to dealwith all issues, whether the Trust is valid, whether s. 75(2) applies and, if the parties put the issue before the court, the residency of theTrust, should the Trust be found to be valid. [73] Lastly, the Trustee’s arguments that he requires a declaration because it is uncertain whether he has status to appeal the re-assessment of the Trust and the fact the trust deed provides that it is to be interpreted and governed by the law of Alberta are notjustifications for this Court to take jurisdiction.

The Trustee has filed a Notice of Objection with the CRA and there is no suggestion bythe CRA that he does not have status to do so. The primary issue is the validity of the trust for tax purposes and thus, the potentialapplication of Alberta law in the

interpretation of the trust deed, is not a compelling reason for this Court to take jurisdiction in what isessentially a tax dispute. In any event, any application of Alberta law, is within the competence of the Tax Court. [74] In

summary, this is essentially a tax dispute for which Parliament has established a specific process which the Supreme Courtof Canada in Addison, supra, stated should not be circumvented by incidental litigation. There is no evidence to conclude that theTrustee will be prejudiced by the issues being determined through the tax process as compared to the litigation process before theAlberta Courts. [75] For these reasons, I decline to exercise this Court’s jurisdiction to make any declaration respecting the Trust.

Heard on the 8th day of March, 2013. Dated at the City of Calgary, Alberta this 28 th day of August, 2013. K. D. Nixon J.C.Q.B.A. Appearances: Matthew Clark Shea Nerland Calnan LLP for the Applicant Adam Gotfried Department of Justice Canada for the Respondent