PETER SOMMERER, Appellant, v. HER MAJESTY THE QUEEN,, 2011 TCC 212

Docket: 2007-2583(IT)G BETWEEN: PETER SOMMERER, Appellant, and HER MAJESTY THE QUEEN, Respondent . ____________________________________________________________________ Appeals heard on December 6, 7, 8, 9 and 10, 2010, January 25 and 26, 2011, and February 7 and 8, 2011, at Ottawa, Ontario Before: The Honourable Justice Campbell J. Miller Appearances : Counsel for the Appellant: Roger Taylor, Daniel Sandler and Louis Tassé Counsel for the Respondent: Luther P.

Chambers, Q.C. and Ryan Hall ____________________________________________________________________ AMENDED JUDGMENT The appeals from the reassessments made under the Income Tax Act (the " Act ") for the 1996, 1997, 1998, 1999 and 2000 taxation years are allowed and the reassessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the Reasons for Judgment . Costs to the Appellant. Signed at Ottawa , Canada, this 13th day of May 2011. " Campbell J. Miller" C. Miller J.

Citation: 2011 TCC 212 Date: 20110513 Docket: 2007-2583(IT)G BETWEEN: PETER SOMMERER, Appellant, and HER MAJESTY THE QUEEN, Respondent. AMENDED REASONS FOR JUDGMENT C. Miller J. [ 1 ] Mr. Sommerer is one of those energetic individuals whose mind is so full of business ideas, specifically connected to the hi- tech industry, that he cannot seem to actuate them fast enough. He left me with the impression of someone who cannot sit still for long, evidenced by standing throughout his three and a half days of testimony. He sees one project up and going and is on to the next, be it a business venture or a Phd.

With his strong Austrian roots he, with his father, took advantage of the newly minted Private Foundation legislation in Austria, and in 1996, the Sommerer Private Foundation ("SPF") was founded by Mr. Sommerer​s father. It is the tax treatment in Canada of the subsequent gains on the sale of shares held by the SPF, having purchased those shares from Mr. Sommerer at fair market value, that is the issue before me. The Government assessed on the basis there was a trust in Austria and that the attribution rules (subsection 75(2) of the Income Tax Act (the " Act ")) attributed the gains on the sale of shares to Mr.

Sommerer, or to his wife. The Appellant argues that there was no trust, and in any event if there was, subsection 75(2) of the Act was still not applicable. Further, even if subsection 75(2) of the Act was applicable, the Canada-Austria Income Tax Convention (the " Convention ") precluded Canada from taxing the gains on the disposition of the shares. In the alternative, the Respondent argues that the SPF acted as agent for Mr. Sommerer on the disposition of the shares, triggering the tax on the gain from the sale of shares in Mr. Sommerer​s hands.

Finally, there is an issue with respect to the timing of the sale of shares by Mr. Sommerer to the SPF, although this was not the Respondent​s initial assessing position. There is a smorgasbord of issues regarding trusts, corporations, agency, the definition of shares, Treaty

interpretation and Austrian law all flowing into the determination of the correctness of the assessments before me. Facts [ 2 ] Mr. Sommerer grew up in Austria, the oldest of six children. He obtained an engineering designation and in the late 1960s went to work for IT&T in Austria. While working, he studied towards the equivalent of an MBA, which he obtained from the University of World Trade in 1975. In 1974, he married a United Kingdom citizen, who had one child, and together they had two children born in Austria in 1975 and 1977.

The Sommerers lived in an apartment initially but moved to a larger co-op housing arrangement as the family expanded. [ 3 ] While working in Austria with IT&T, Mr. Sommerer heard of Nortel. His interest was piqued in the North American way of business. In 1977, he applied to emigrate to Canada as a Landed Immigrant and, in 1978, the Sommerer family moved to Canada . According to Mr. Sommerer, they sold everything though kept the right to live in the co-op housing in Austria for a year, just in case he was unable to find work in Canada. This right was given up after a year. Mr.

Sommerer kept a bank account in Austria to cover vacation expenses. He also kept his Austrian driver​s licence which is issued for life. Though he retained his Austrian citizenship, Mr. Sommerer took out Canadian citizenship in 1993. [ 4 ] Mr. Sommerer did find work in Kanata working for Mr. Terry Matthews at Mitel. He eventually became project manager of a switching system that skyrocketed Mitel​s fortunes. He was asked to go to Germany to set up a Mitel subsidiary which he did for the

period 1981 to 1984. He kept his home in Ottawa, simply renting it out. During this period of working for Mitel both in Canada and in Germany, Mr. Sommerer would occasionally visit Austria. [ 5 ] On his return to Ottawa in 1984, Mr. Sommerer described the bloom being off the rose for Mitel, and he happily joined Mr. Matthews in a new venture, Newbridge. Again, being in charge of product management, revenues for Newbridge soared. Mr. Sommerer suggested that Newbridge get into internet products in the late 1980s. Upon Newbridge going public it faced some technical issues, and Mr.

Sommerer was put in charge of solving them. He became chief operating officer in 1990. Over the next few years, revenues reached the billion dollar mark. [ 6 ] In the late 1990s, a number of Newbridge affiliated companies were established, one of them being Vienna Systems Corporation (" Vienna "), positioned to operate voice over networks on the internet. It was incorporated in August 1995. Mr. Sommerer acquired 25% of the common shares of Vienna (1,770,000). Mr. Sommerer divided his time between Newbridge and Vienna. He hired a CEO for Vienna. Mr.

Sommerer left Newbridge in 1998 and looked for something new, which he found in another internet type venture, Coventus. [ 7 ] From 2004 to 2007, Mr. Sommerer studied and obtained a Phd from a University in Vienna . He acquired an apartment in Vienna where he would spend time while studying. He also acquired a house in the mountains in Austria in 1995. He owned his Ottawa residence as well as a cottage in Pakenham, Ontario and a MURB in Kingston. He expressed no interest to return to live in Austria. The Sommerer Private Foundation ("SPF") [ 8 ] In 1996, Mr.

Sommerer and his father discussed the establishment of a Private Foundation in Austria. Such foundations had only recently been introduced by the Austrian Private Foundation Act of 1993 ( APFA ). On October 3, 1996, a Foundation Declaration was signed by Mr. Sommerer​s father, Mr. Herbert Sommerer, who paid 1,000,000 Austrian shillings of his own money into a foundation account. The Foundation Declaration is not lengthy and is worth reproducing in its entirety: § 1 Name and Registered Headquarters

(1) The foundation is a private foundation under Austrian law with the name ---- Sommerer Privatstiftung

(2) The foundation​s registered headquarters is located in Mitterbach ----

(3) Founder of the foundation is Mr. Herbert SOMMERER ---- § 2 Purpose, Beneficiaries The purpose of the foundation is to promote the interests of those individuals indicated in the supplementary deed from the income generated by the foundation funds. Engaging in investment activities, in particular the purchase of shares on credit, is also in line with this purpose. Beneficiairies and those who may become beneficiaries based on the purpose of the foundation have no legal claim to grants from the foundation.

§ 3 Assets

(1) Foundation assets at the time the foundation was set up consist of a cash amount of ATS 1,000,000 (one million Austrian shillings). This is recorded as capital in the opening balance of the foundation. The rules of the Companies Act on capital stock apply to these foundation assets. ----

(2) The foundation is authorized to acquire and hold movable and immovable assets and rights of any kind (including securities), both domestically and abroad, to engage in legal transactions of any kind, and to accept any contributions and incur any debt that may be necessary of useful in maintaining or administering the foundation assets. ---- § 4 Corporate Bodies Corporate bodies of the foundation include the: ----

a) Executive Board---------------------------------------------------------------

b) Foundation Auditor-----------------------------------------------------------

c) Advisory Board---------------------------------------------------------------- § 5 Executive Board

(1) The Executive Board shall consist of three members.----

(2) Members of the Executive Board are appointed and dismissed by the founder of the foundation as long as he is alive and capable of conducting business. Otherwise, in the event that a member leaves, the Executive Board decides on his/her successor. Re- appointment is permitted.----

(3) The Executive Board shall conduct the business of the foundation with the due care of a proper and conscientious business manager in accordance with the foundation declaration, any supplementary deeds, and rules of procedure that it decides upon. It represents the foundation externally in all matters; two representatives are authorized to act jointly for representational purposes.----

(4) Members of the Executive Board will leave the Board:---- - once the term of office, to be determined, has expired;---- - due to resignation, which shall be submitted in writing to the Chair of the Board or his/her deputy without requiring any reasons to be stated; - due to death, incapacitation, or bankruptcy; - due to dismissal by the founder or the Executive Board itself; the Executive Board shall decide by secret vote on dismissal for significant cause; the member to be dismissed has not right to vote in this case;---- - due to a decision of the court in accordance with § 27 (paragraph twenty-seven) of the PSG (Private Foundation Act). § 6 Principles of Asset Administration

(1) The corporate bodies of the foundation shall always strive to maintain the value of the foundation assets. The Executive Board, with the consent of the Advisory Board, decides upon the level and allocation of the grants and upon the beneficiaries, with the consent of the Advisory Board.----

(2) Members of the foundation bodies are entitled to compensation commensurate with their activities and in line with foundation income. Moreover, they have a claim to reimbursement of any necessary cash outlays. The foundation auditor is required to provide an opinion on the appropriateness of the compensation annually in his/her report.---- § 7 Accounting, Reporting, and Audit

(1) The Executive Board shall determine the foundation​s fiscal year.----

(2) The Executive Board shall prepare the annual financial statements and the management report and submit them to the foundation auditor within five months of the end of the fiscal year. The Executive Board shall report on the foundation​s performance and beneficiaries, as well as the activities and grants planned for the following year, in the management report.

(4) The foundation auditor is appointed by the court upon recommendation of the Executive Board for a period of three years. Re-appointment is permissible. § 8 Amendments to the Foundation Declaration

(1) The founder is entitled to revoke the foundation during his lifetime and to amend any points in the foundation declaration with the consent of the Advisory Board.----

(2) Upon the death or incapacitation of the foundation founder, the Executive Board is authorized to decide on an amendment of the statutes contingent upon a two-thirds majority and to submit such amendment to the court. An opinion of the Advisory Board shall be obtained in advance.

A change in the original purpose of the foundation is permissible only if, due to a change in circumstances (changed economic or social circumstances or a shift in general moral concepts or a change in the legal situation, particularly related to tax law), the pursuit of the purpose of the foundation without change would no longer reflect the presumed intention of the founder.

An adjustment for the purpose of more advantageous taxation is permissible in the interest of the maintaining the value of the foundation assets.---- § 9 Supplementary Deed The foundation founder may set up a supplementary deed.---- § 10 Term, Liquidation

(1) The foundation is set up for an indefinite period.----

(2) The Executive Board may decide to liquidate the foundation based on a unanimous resolution and an endorsement by the Advisory Board in the event that it can no longer fulfill the foundation​s purpose as intended by the founder, and it does not appear that this purpose can be achieved by means of a change in the foundation declaration.---- [ 9 ] On October 4, 1996, Mr. Herbert Sommerer signed a supplementary deed, also worth producing in its entirety:

§ 1 Allocation of Assets Mr. Herbert SOMMERER established the Sommerer Privatstiftung today by notarial deed.---- § 2 Beneficiaries The beneficiaries are Mr. Peter SOMMERER, his wife, Mrs. Dawn Elizabeth SOMMERER, as well as the children from their marriage, but only as of their eighteenth birthdays and, in the event of their death, their offspring, provided they are resident in Austria.---- § 3 Ultimate Beneficiaries

(1) In case of liquidation under § 34 (paragraph thirty-four) of the Privatstiftungsgesetz (Private Foundation Act), Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are the ultimate beneficiaries as interpreted under § 36 (paragraph thirty-six),

Section 4, (four) of the Private Foundation Act. ----

(2) In all other cases of liquidation, the offspring of Mr. Peter SOMMERER and Mrs. Dawn Elizabeth SOMMERER are the ultimate beneficiaries. In the event of multiple offspring, distribution should occur per head; offspring of still living offspring, however, will not participate. In the event that no children or grandchildren of the founder exist or can be identifies, the remaining assets are to be transferred in equal parts to the communities of St.

Sebastian, Styria, and Wootton Basset, Wiltshire, England, on condition that the transferred assets are utilized to finance infrastructure accessible to the general public.---- § 4 Revocation, Modification of the Supplementary Deed The supplementary deed may be revoked by the Executive Board with unanimous approval by the Advisory Board, and all items may be modified or supplemented.-- § Advisory Board An Advisory Board consisting of three members shall advise the Executive Board in determining grants to beneficiaries and has the right to supervise the activities of the Executive Board.---- Members consist of the oldest two beneficiaries and the founder.---- [ 10 ] In accordance with the terms of the SPF Declaration Mr.

Hebert Sommerer appointed Mr. Ketzer, a colleague of Mr. Peter Sommerer​s from college, Mr. Krammer, who Mr. Peter Sommerer did not know, though expressed confidence in his credentials and Mr. Grossbacher, a banker known well by Mr. Peter Sommerer, as the members of the Executive Board of the SPF. [ 11 ] Mr. Sommerer explained that the reasons the SPF was established were:

a) he agreed fully with the concept of the Private Foundation in that it was to stem the flow of capital out of Austria to other European countries and to attract foreign capital, thus shifting capital stocks (shares of Vienna for example) into Austria;

b) from Mr. Herbert Sommerer​s perspective to establish family ties through the SPF in Austria with the hope that the family might return;

c) to make it easier to leverage financing from Austria;

d) to provide a safe haven for investments;

e) from his perspective, to, in some way, compensate Austria for the education he received, to make capital available for new start- ups, to create something for his children and use the income for charitable purposes. [ 12 ] Coincidentally with the establishment of the SPF, Mr. Sommerer, as Seller, entered into a Sales Agreement with the SPF, as Buyer, dated October 4, 1996. It stipulated in part: 1. Object of the Agreement 1. The Seller owns registered shares in Vienna Systems Corporation, Kanata, Ontario, Canada (hereinafter termed the "Company"). 2.

The Seller hereby sells 1,770,000 of the shares detailed above to the Buyer. It is noted that voting, dividend and any subscription rights will remain to the Seller. 2. Purchase Price 1. The purchase price for the shares covered by this agreement is $1,177,050 CDN. ​ 3. Transfer and Guarantee 1. The Buyer acquires the shares covered by this agreement without voting, dividend and subscription rights. ​ 4. General Terms and Conditions ​ 2. In the event that individual provisions of this contract are or become unenforceable, this does not affect the enforceability of the remaining provisions.

In this event, the parties to the agreement will replace such provision with a new one that reflects the business purpose of the original provision. [ 13 ] The SPF paid Mr. Sommerer cash of $117,705, with the balance of the purchase price of $1,059,345 remaining an amount owing on which interest accrued.

Excerpts of the Vienna Board of Director​s meeting of September 20, 1996, indicate: Upon motion duly made, seconded and carried, the following resolution was passed: Resolved that the transfer of 1,770,001 common shares of the Corporation from Peter Sommerer to Sommerer Privatstiftung be and the same is hereby approved. Further, share certificates were ultimately issued in the name of the SPF, albeit some considerable time after October 1996. [ 14 ] Mr. Sommerer indicated that he wanted to keep the vote to influence the future of Vienna. He believed the shares, without the

voting, dividend, and subscription rights should be valued at half their value of $1.33 per share (the Appellant and Respondent agree that fair market value at that time was $1.33 per share), thus the price worked out to .665 cents per share. Mr. Sommerer had suggested in his examination for discovery that another possible reason to keep the vote was to avoid the possibility of Vienna losing its Canadian control private corporation (CCPC) status, as, if the non-resident SPF and the public company Newbridge held greater than 50% of the shares there was a risk. Mr.

Sommerer​s testimony in this regard is worth reproducing: Q. You also acknowledged that the reasons why you sold the shares to the Foundation back in 1996 without the voting rights as to maintain the status of Vienna Systems as a CCPS? A. I didn​t. Where did I say that? I think I indicated that I wanted to maintain the voting rights in order to continue to have a way when it came down to set the direction of the company. Q. I​ll re-read the passage in the discovery. It​s volume 1 of the transcript. Page 152, you said in answer to question on page 152, line 2: "Q: Private Corporation? A: Private Corporation.

Yes, Vienna Systems was a private corporation. Q: But you acknowledge certain tax advantages flow from that? A: Clearly, I am aware of the tax advantages of CCPC status. Q: Which you did not want to lose? A: Definitely, the company would not want to lose them, given the R&D. Q: Yes. Is this the reason why you wanted to retain the voting rights to the shares? A: That could very well have been one of the reasons." This is the answer you gave us? A. It says it could have been one of the reasons. Q. But it wasn​t now? A. Pardon? Q. It wasn​t?

A. In 1996, no. [ 15 ] On Canadian professional advice that it was not possible to split the rights in shares, Mr. Sommerer and the SPF entered an Addendum, dated March 3, 1997 that stated: Addendum to the Purchase Agreement dated October 4, 1996 Based on a purchase agreement dated October 4, 1996, Sommerer Privatstiftung, Waldrandsiedlung 5, 3224 Mitterbach, has acquired 1,770,000 shares of Vienna Systems Corporation from Mr. Peter Sommerer, 8 Murphy Court, Kanata, Ontario, Canada, without voting, dividend, or subscription rights.

Both contracting parties hereby agree that the aforementioned rights have in principle been transferred. The Sommerer Privatstiftung explicitly transfers all of these rights (voting, dividend, and subscription rights) to Mr. Peter Sommerer. Mr. Peter Sommerer grants the Sommerer Privatstiftung the right to transfer the voting, dividend, and subscription rights against payment of a consideration of CAD 0.66 per share.

Vienna, March 3, 1997 [ 16 ] It is unclear why this document is dated the 3rd of March 1997 as Minutes of the Executive Board of the SPF suggest that it was sometime after June 1998 and, perhaps, even as late as November 1998 that this Addendum was finally put in place. Indeed, the Minutes of the meeting of November 27, 1998 indicated a couple of things: 5. Voting, Dividend, and Subscription Rights of the Vienna Shares Mr.

Krammer explained that an amendment of the agreement regarding the purchase of shares in Vienna Systems Corporation has not yet been implemented and noted that he will soon send a respective suggestion for an agreement amendment to Mr. Peter Sommerer for signing. ​ 10. Vienna Systems Takeover Offer Mr. Sommerer informed the attendees that the company Nokia has approached the company Vienna in order to purchase all of the outstanding shares of the company Vienna.

He gave the Executive Board a copy of a decision from the Advisory Board to recommend to the Executive Board that it comply with a possible offer from Nokia and offer for sale all of the shares in Vienna Systems that are in the possession of the Foundation, provided the price per share is approximately CAD 9 (Attachment G). The Executive Board unanimously agreed to comply with this recommendation.

Mr. Peter Sommerer further explained that it is anticipated that Nokia will request a signed sales offer from the Executive Board of the Private Foundation before December 18 in order to complete the purchase before year-end 1998. The Executive Board further unanimously agreed to buy back the voting, dividend, and subscription rights of the Vienna Systems shares still remaining with Mr. Peter Sommerer if Nokia accepts the sales offer. [ 17 ] The parties are agreed that the fair market value of the Vienna shares in October 1996 was $1.33 per share. [ 18 ] In April 1997, Mr.

Sommerer, as a member of the Advisory Board of the SPF recommended to the Executive Board to sell 150,000 Vienna shares, but the Executive Board determined not to do so at that point, as Mr. Krammer believed, according to the Executive Board minutes that the shares "still have price increase potential". In December 1997, the Executive Board, again on recommendation of Mr. Sommerer as a member of the Advisory Board, resolved to sell 150,000 Vienna shares to Mr. Mikutta, 33,333 to Mr. Jenkins and 33,333 to Mr. Madsen at a price of $4.50 Cdn per share. It is interesting to note Mr.

Sommerer​s correspondence of November 30, 1997 to Mr. Jenkins in connection with this sale of Vienna shares: I will transfer to you upon issuance of the share certificate in your name any dividend and share allocation rights. Only the voting rights for these shares shall remain with me. These voting rights shall extend to any shares obtained by you through any share dividends, share splits and to any shares acquired subject to any pro rata allocation rights for newly issued shares.

Immediately prior to an initial public offering, I will transfer to you the voting rights for any shares owned by you for which I hold the voting rights. [ 19 ] On November 23, 1998, the directors of Vienna considered a proposal from Nokia to purchase Vienna for $134,000,000. Four days later, the Advisory Board of the SPF recommended to the Executive Board that the Nokia proposal be accepted at $9.00 Cdn per share. (see excerpt of Minutes in paragraph 16 of these Reasons) The Share Sale Agreement with Nokia was signed by Mr. Grossbacher on behalf of the SPF on December 18, 1998. [ 20 ] Mr.

Sommerer had, on December 21, 1998, responded to the SPF​s request for the transfer-back of the voting, dividend, and subscription rights to the 1,770,000 Vienna shares, by assigning such rights back to the SPF effective immediately at .665 cents per share. This appears to be in accord with the last paragraph in the Addendum of October 4, 1996. Cambrian Shares [ 21 ] With respect to the Cambrian Systems shares, on September 30, 1997, Mr.

Sommerer entered into a written Subscription Agreement with Cambrian Systems Corporation for the purchase of 57,143 common shares of that company for $100,000. [ 22 ] In a letter dated March 26, 1998, from Mr. Grossbacher, the chairman of the Executive Board of the SPF, to Mr. Sommerer, Mr. Grossbacher stated: I am sending you a decision that indicates we have followed the request of the Advisory Board to acquire 57,143 pieces of the company Cambrian Systems Corp. at a price of Cdn $100,000.

I request that you initiate the following: - Establishment of the Acquisition Contract; - Definition of the account number into which the money shall be transferred.

Mr. Sommerer delivered the stock certificate for the 57,143 shares of Cambrian Systems Corp. on April 5, 1998, to Mr. Grossbacher. [ 23 ] Notwithstanding an earlier position of the Appellant, the Appellant conceded at trial that there was a transfer of the Cambrian shares from Mr. Sommerer to the SPF in 1998. [ 24 ] On December 4, 1998, Nortel made an offer to the shareholders of Cambrian to acquire their shares at $14.97 US per share at closing with an additional $4.12 per share if certain milestones were met in 1999.

The SPF received two cheques in the amounts of $316,584 and $539,007 in connection with this sale. Changes to the SPF [ 25 ] There were a number of changes to the SPF after 1998. Although these are not applicable to the relevant time period in the case before me, it does show a subsequent history that gives some insight into the individuals​ intentions and purpose of the SPF. I am, therefore, going to go over some of these changes briefly. [ 26 ] At the June 17, 1998, meeting of the Executive Board of the SPF, attended by all three members of the Advisory Board, being Mr. Sommerer, Mr. Herbert Sommerer and Mrs.

Sommerer, changes to the Supplementary Deed were discussed. The minutes indicate: 8. Amendment of the Supplementary Foundation Deed Mr. Krammer expressed his willingness to work out a suggestion for an amended Supplementary Foundation Deed, present it to the Advisory Board and Executive Board as soon as possible for approval, and implement the necessary notary revision.

It was agreed that a new Supplementary Foundation Deed (STD) should include the following changes: • Adding of nonprofit organizations as beneficiaries in § 2 of the STD as unanimously suggested by the Advisory Board • Changing the condition of an Austrian place of residence in § 2 of the STD to a condition of a place of residence in a country to be designated by the Advisory Board, with the designation of Canada as such a country being irrevocably excluded • Adding the same domicile condition in Para. 1 and Para. 2 of § 3 of the STD in order to apply them analogously for the determination of the final beneficiaries • Eliminating the explicit right of the Advisory Board expressed in the first paragraph of § 5 of the STD to monitor the activities of the Executive Board. [ 27 ] On January 22, 1999, the Supplemental Deed was in fact amended to accomplish this.

There was no longer any mention of the supervisory role of the Advisory Board. [ 28 ] On December 6, 1999, after having received some professional advice, and having been contacted by the Canada Revenue Agency (CRA) with respect to his 1998 returns, Mr. Sommerer wrote to Mr. Krammer as follows: The changes are targeted to avoid any specific names of beneficiaries. The new addendum certificate should only consist of three paragraphs:

§ 1. Benefited persons must be not-for-profit organizations determined by the Advisory Board. § 2. This addendum certificate can be revoked by the Executive Board and unanimous approval by the Advisory Board, and can be changed and amended on all points. § 3. An Advisory Board herewith assigned consists of three members and must advise the Executive Board for the determination of donations to the beneficiaries. At any given time, the membership consists of the oldest of the following persons: the founder, Mrs. Dawn E. Sommerer, Mr. Peter Sommerer, and the children and grandchildren of Peter Sommerer and Dawn E.

Sommerer. [ 29 ] This resulted in a further Amended Supplemental Deed dated January 7, 2000. In particular, I note: Second: The beneficiaries are specific charitable organizations; Third: 1. In case of liquidation under § 34 of the Privatstiftungsgesetz (Private Foundation Act), Mrs. Dawn Elizabeth SOMMERER is the ultimate beneficiary as interpreted under § 36,

Section 4, of the Private Foundation Act, provided she resides in one of the countries named by the Advisory Board, with the exclusion of Canada. The residence clause is irrevocable. [ 30 ] Later in 2000, Mr. Sommerer felt that given the issues arising surrounding the Foundation Declaration and Supplemental Deed, and how the SPF conducted its business, he drafted some rules of procedure for both the Executive Board and the Advisory Board.

This also led to some changes to the Foundation Declaration, which were effective July 24, 2000, primarily to add a provision that the SPF "shall promote the establishment or expansion of companies of individuals who may be considered for the function of members of the Advisory Board​". [ 31 ] The Supplemental Deed was also amended at the same time to make a number of changes:

a) beneficiaries to be appointed by the Executive Board now included charitable organizations as well as groups of persons considered for the Advisory Board, provided there will be no such appointment if it would "give rise to a fiscal (taxable) position for the Private Foundation or such persons without contributions having been made".

b) With respect to the ultimate beneficiaries, this too was changed to persons being considered as members of the Advisory Board​in equal shares, again subject to a residency requirement. [ 32 ] The provision dealing with the Advisory Board underwent a substantial overhaul providing more of a complete code for the Advisory Board. The Advisory Board​s purpose remained "to advise the Executive Board in certain matters and/or approve of certain decisions of the Executive Board or deny such approvals". [ 33 ] There were further amendments in 2007, when Dr. Torggler became involved.

This is long past the relevant time period and is of no consequence. Executive Board ​ Advisory Board interactions [ 34 ] Both parties spent considerable time reviewing the minutes of the Executive Board to give me a flavour of where control of the

SPF rested. I do not intend to go through this in extensive detail but simply make a number of observations:

a) Apart from the minutes of February 22, 2000, where it was indicated Mr. Sommerer was contacted by phone, he attended all 25 Executive Board meetings, for which minutes were presented at trial; in many cases all members of the Advisory Board attended.

b) Mr. Sommerer acted as secretary of the Executive Board at the meetings and prepared the minutes.

c) Mr. Sommerer frequently presented investment strategies and recommendations. A good example are the minutes of the meeting of November 27, 1998, of the Executive Board where Mr. Sommerer recommended the acquisition of the Bridgewater stock options, as well as the sale to Nokia of the Vienna shares. The Board agreed unanimously with both recommendations.

d) Especially after the SPF came into funds from the sale of the Vienna shares, the Executive Board needed guidance on investments. For example, the Advisory Board communicated the following decision to the Executive Board in the fall of 1999: Decision by the Advisory Board of the Sommerer Private Foundation relative to the Management of the Foundation Assets The Advisory Board herewith communicates its concept relative to the management of the assets of the Sommerer Private Foundation as follows: 1.

All proceeds earned from the sale of Foundation assets in the course of the year, including possible profits from speculation, must be reinvested as soon as possible while respecting the planned structure of the Foundation assets. 2. All interest or cash dividend earnings received in the course of the year must be kept as short-term cash assets. The total amount received from interest and dividends must be determined within three months after the end of a fiscal year. 3.

The Executive Board shall, in coordination with the Advisory Board, put aside from this total amount a corresponding amount as cash reserve for payment of obligations of any type (taxes, other costs). 4. The remaining amount is to be paid to the beneficiaries in coordination with the Advisory Board. 5. A possible remaining amount must be reinvested in a way that it corresponds as closely as possible to the target structure of the Foundation assets. 6.

The Advisory Board shall inform the Executive Board before the beginning of each fiscal year of the target structure of the Foundation assets and, if necessary or desired, propose any restructuring of specific investments.

e) It was the Advisory Board that proposed the distributions. Mr. Sommerer indicated he would value the Foundation​s capital each year to bring to the Executive Board​s attention the amounts available for distributions. This was in fact a two-prong test looking at both income and the inflationary value of the SPFs assets.

f) The Executive Board minutes indicate that the Executive Board, in conjunction with the Erste Bank, was involved in managing the portfolio investment. Experts

[ 35 ] Before reviewing the testimony of the two experts, Dr. Torggler and Dr. Plesser, it is important to keep in mind the relevant provisions of the APFA , as published in October 1993. This legislation can be found in Appendix A to these Reasons. [ 36 ] There are a number of elements of APFA that I wish to specifically note:

a) The Private Foundation is a legal entity;

b) The Foundation Declaration in the form of Deed must be recorded in the Register of Corporations;

c) A supplementary document need not be registered though the dates of the Deed and amendments must be;

d) Beneficiaries may be named in the Foundation Declaration or by a person or institution (Stelle) named for this purpose by the founder, or, if no Stelle, by the board of directors (Executive Board);

e) Ultimate beneficiaries are entitled to all assets remaining on dissolution;

f) There is provision for a supervisory board in specific circumstances (these circumstances are not met in the case before me);

g) The Foundation Declaration can provide for other Foundation organs;

h) The Executive Board ensures the purpose of the Foundation is achieved and must perform its duties frugally and prudently;

i) The founder may reserve the right to change the Foundation Declaration or revoke it; the founder in this case did reserve the right to revoke;

j) The beneficiaries have rights to information and inspection. [ 37 ] Both Dr. Torggler and Dr. Plesser were well qualified to assist me in understanding the Austrian laws regarding the Austrian Private Foundation. [ 38 ] Dr. Torggler not only acted as an expert witness, but he had also been retained by the SPF in 2007 to revise the Foundation Declaration. Before commenting specifically on the SPF, he opined as follows:

a) The Private Foundation is a "person";

b) The Executive Board owes a duty only to the Private Foundation and no fiduciary duty to the beneficiaries, unless provided in the Foundation Declaration;

c) An Advisory Board which is an additional organ cannot, according to the Austrian Superior Court, be dominated by beneficiaries if the rights and duties of such organ are similar to a supervisory board;

d) The legislation distinguishes between beneficiaries and ultimate beneficiaries. Austrian Courts have also distinguished actual from

potential beneficiaries. Beneficiaries are considered actual beneficiaries only from the time of entitlement to endowments. Ultimate beneficiaries are considered actual beneficiaries only from the time of adoption of a resolution by the Executive Board to dissolve the Private Foundation;

e) An Austrian Private Foundation is subject to Austrian corporate income tax as a separate legal person, including a speculation tax on the disposition of shares held for less than a year. [ 39 ] Dr. Plesser agreed with the above comments. [ 40 ] With respect to the SPF, Dr. Torggler opined:

a) Peter Sommerer (and his wife and children) were potential beneficiaries only as they were not residents of Austria and there was no resolution to dissolve the Foundation. Dr. Plesser agrees.

b) Mr. Sommerer had no rights of a beneficiary under sections 29, 30 or 31 of the APFA , given he was only a potential beneficiary, but would have rights under subsection 35(3) and (4) regarding the dissolution of the Foundation. Dr. Plesser agrees.

c) Mr. Sommerer had no ownership rights in the SPF property. Dr. Plesser agrees.

d) Mr. Sommerer cannot transfer his position as a beneficiary to another person. Dr. Plesser agrees.

e) The SPF had no supervisory board as an organ.

f) The Advisory Board was not validly established in 1998 and had therefore no powers, as it was not provided for in the Foundation Declaration, only mentioned; only after a later amendment was it validly established and constituted.

g) Distributions from the SPF related to income from the property only and not the capital of the property. Although there was some considerable discussion in this regard, I conclude that distributions were income distributions. [ 41 ] Dr. Plesser​s major disagreement with Dr. Torggler surrounded the powers of the Advisory Board. While he agreed it was not established as an organ as such of the SPF, he opined that it could either be a Stelle (authority named for the purpose of naming beneficiaries found in

section 5 of the APFA ), though only in conjunction with the Executive Board, or it could be a person to be given special responsibilities, in accordance with subsection 9(2) and (4) of the APFA . [ 42 ] Dr.

Plesser opined that the powers of the Advisory Board were as follows: - its consent was required for determining the amount of grants and the beneficiaries (section 6 of the Foundation Declaration). - its consent was required for a Founder to revoke or amend (section 8(1) of the Foundation Declaration). - its opinion was required for amendments in event of the death of the founder (section 8(2) of the Foundation Declaration). - its endorsement was required for liquidation (section 10 of the Foundation Declaration).

[ 43 ] Dr. Plesser also suggested, based on a 2002 Austrian Superior Court decision, there can exist an Advisory Board, though not an organ, that could have influence. In that case, the Superior Court stated: [1] ​ As such, the grantors established a "secret" board that is not subject to any organizational status with respect to § 14

Section 2 PSG. A board established by the grantors (such as the Advisory Board), at any rate, is not a body of the foundation with respect to § 14

Section 2 PSG if the foundation deed, as in this case, merely contains the reserve for the establishment of further bodies and due to the total lack of information regarding the organizational structure and tasks of the board there are no points of reference that a body should be established for the protection of the purpose of the foundation. As such, the grantors have created a board in the present case that can influence the board of the foundation within the scope of the approval authorization; however, this board is not granted a status as a body ​ [ 44 ] Dr.

Torggler, while denying the Advisory Board was an organ, or part of a Stelle, or an authority with special tasks, did agree there could be a non-organ Advisory Board with approval or consent functions, which he differentiated from rights of determination. I accept Dr. Torggler​s position that the SPF Advisory Board is neither the Stelle or part of a Stelle, nor is it an authority appointed with special tasks. I conclude it is simply an Advisory Board that does not have the status of an organ, though has influence.

Reassessments [ 45 ] Without going into detail for each of the five years under assessment, it is clear that the Appellant​s taxable position hinges on the treatment of the disposition of the Vienna and Cambrian shares in 1998. The Respondent reassessed Mr. Sommerer on the basis that subsection 75(2) of the Act applied, on the assumption there was a trust in Austria . In the Reply to the Notice of Appeal, the Minister raised a new primary argument that Mr.

Sommerer did not sell his shares in Vienna to the SPF until shortly before the sale on to Nokia in 1998, consequently realizing a gain on the basis of a non-arm​s length disposition at fair market value (being the value Nokia was prepared to pay). The Respondent acknowledged this approach would lead to a greater tax burden on Mr. Sommerer, but that the Respondent was limited to the result of the assessment based on subsection 75(2) of the Act . [ 46 ] Issues 1. When were the Vienna shares sold by Mr. Sommerer to the SPF ​ 1996 or 1998? 2. Can the arrangement whereby Mr.

Herbert Sommerer endowed the SPF with funds for the purpose set forth in the SPF Deeds be viewed as a trust for purposes of the application of the Income Tax Act ? I note both parties framed this issue as whether the SPF was a corporation or a trust. I suggest this is an inappropriate way of framing it. The SPF is a separate legal entity: a trust under Canadian law is not; it is a relationship describing how property is held. The SPF could be a trustee. The question is simply whether a trust existed, not whether the SPF is a trust or a corporation.

Further, notwithstanding argument as to the characterization of the SPF as a corporation, this is not an issue. If I find there is a trust, it is immaterial to determine whether the SPF is a corporation. If I find there is no trust, the parties are agreed the SPF can be viewed as a corporation, although they disagree on the application of the Foreign Accrual Property Income ( FAPI ) regime. 3. If a trust existed, does subsection 75(2) of the Act apply to attribute the gains on the disposition shares of Vienna and Cambrian by the SPF to Mr. Sommerer? 4.

If there is a trust and subsection 75(2) of the Act applies, do the provisions of the Convention prevent the Respondent from taxing capital gains realized by the SPF on the disposition of the Vienna and Cambrian shares? 5. Was the SPF Mr. Sommerer​s agent for disposing of the Vienna and Cambrian shares? 1. When were the Vienna shares sold by Mr. Sommerer to SPF ? [ 47 ] The Respondent argues that because it is not legally possible to split the rights attached to the common shares, that the October

1996 agreement between Mr. Sommerer and the SPF was made under a common mistake, which went to the very essence of the agreement and the agreement is, therefore, void. The shares were not, according to the Respondent, transferred by Mr. Sommerer to the SPF until December 1998, at the time of the sale by the SPF to Nokia, as only then did Mr. Sommerer transfer all his inseparable rights constituting shares to the SPF.

As this was a non-arm​s length transfer, it took place at fair market value which was established by the price offered and paid by Nokia. [ 48 ] The Appellant, also relying on the Supreme Court of Canada​s comments in the case of Sparling v. Québec (Caisse de depot et placement du Québec) , [2] agrees about the inseparability of the rights constituting shares, in that it is not legally possible to transfer shares excluding certain rights that attach to those shares, but argues that the contract can be interpreted in a way that does not offend the inseparability concept.

Also, relying on the concept of severance, and the intention of the parties as set out in the severance clause in the October 1996 agreement itself, the Appellant suggests I should sever the offside elements of the agreement (the exclusion of the dividend, voting, and subscription rights) and leave in the place the agreement for the sale of shares. [ 49 ] In the original Sale Agreement of October 1996, the severance clause invites the parties to amend, in writing, unenforceable parts of the agreement. I find this is exactly what they attempted to do in the Addendum dated March 21, 1997.

Notwithstanding it was actually signed sometime after that date, the fact is, a written Addendum was signed making it clear that the October 1996 agreement was an agreement for the sale of shares. It then clumsily attempts to still get the voting, dividend, and subscription rights back to Mr. Sommerer, but now it is in the context of the shares having passed to the SPF, rather than trying to pass shares with less than all their rights to the SPF. The problem is now SPF​s attempt to pass the voting, dividend, and subscription rights back to Mr. Sommerer, without transferring shares.

This is more easily interpreted. Nothing precludes a shareholder, while retaining ownership in shares, to have someone else vote its shares or to assign the dividend income it receives from the shares. I agree with the Federal Court of Appeal​s view in this regard expressed as follows in Sedona Networks Corporation v The Queen : [3] ​ I see no reason why the same principle should not apply where the owner of voting shares enters into a contract with another person that grants that person a contractual right to vote the shares but not the other incidents of share ownership.

This is the only sensible and legally comprehensible way to interpret the Addendum dated March 21, 1997. This approach is also in accord with the concept expressed by the Ontario Court of Appeal in Maschinenfabrik Seydelmann K-G v. Presswood Brothers Ltd. : [4] ​ With much deference to the opinion of the learned trial Judge who decided against the plaintiff with some reluctance, he had failed to take into account the well-settled presumption of law in favour of the legality of a contract; that if a contract can be reasonably susceptible of two meanings or modes of performance, one legal and the other not, that

interpretation is to be put upon it which will support it and give it operation. When interpreting the October 1996 Sale Agreement and Addendum dated March 21, 1999 together, there is a clear and legal

interpretation that fully accords with the intention of the parties to the agreement to transfer the shares. [ 50 ] The Respondent argues that the facts do not support this

interpretation, given Mr. Sommerer​s evidence regarding voting the shares. In the examination for discovery, there was the following exchange, which Mr. Sommerer confirmed at trial: Q. The meeting was advised that the company was required (that is Vienna Systems Corporation) under the

Canada Business Corporations Act to hold an annual meeting of its shareholders before February 14, 1997. Did such a meeting in fact take place before February 14, 1997? A. I do not know but I assume that such meetings took place. Q. Yes. And at that meeting, I presume that you voted the shares of the Foundation that were acquired from you in your own right? A. I would assume so. [ 51 ] Two things to note about this exchange. First, Mr. Sommerer only assumes he voted the shares in his own right. He is not a

lawyer and cannot be expected to unravel the legal niceties of ownership of shares. Second, what else was he to assume in February 1997, given how the Sale Agreement was written: Mr. Sommerer​s assumption that he voted the shares in his own right is of little weight in my determination of who owned the shares. Further, I view this evidence in light of many other statements made by Mr.

Sommerer at trial; for example: ​ What I, in essence, did in my part of the deal in terms of selling the shares to the foundation was to give away the prospect of personal benefit if those shares would become of some value. [ 52 ] The Respondent also points to a list of shareholders of Vienna dated December 31, 1996, which shows the shares still in the name of Mr. Sommerer. Yet, this should be weighed against the following:

a) the SPF​s financial statements indicating the shares were acquired by the SPF in 1996;

b) share certificates issued in the name of the SPF;

c) Director​s Resolution of the directors of Vienna of September 20, 1996 approving the transfer of 1,770,000 shares from Mr. Sommerer to the SPF;

d) an undated Vienna shareholders​ register indicating SPF acquired the shares on October 4, 1996. [ 53 ] Based on these facts and the terms of the October 4, 1996 agreement, along with the March 1997 Addendum, I find as a fact that the Vienna shares were transferred from Mr. Sommerer to the SPF on October 4, 1996, at $1.33 per share. I reach this conclusion without the need to rely on the concept of severance argued by the Appellant. Mr.

Sommerer and the SPF, in accordance with the terms of the October 4, 1996 agreement, amended that agreement in writing to clarify there was a transfer of the ownership of shares. The directors of Vienna had already approved the transfer and share certificates were issued. That is sufficient. [ 54 ] Although having reached this conclusion on the

interpretation of the Sale Agreement, I still wish to address the Respondent​s approach that the Sale Agreement is void because there is such a fundamental mutual mistake by the parties as to the nature of the asset being transferred. This ignores the contractual right to amend embedded in the October 4, 1996 agreement, and Mr. Sommerer​s and the SPF​s reliance on that to amend the agreement by the Addendum of March 21, 1997.

The Respondent invites me to simply brush that aside and concentrate only on the October 4, 1996 agreement and, specifically, that shares without voting, dividend, or subscription rights are non-existent ​ there simply cannot be such a thing, and, therefore, either on the basis of common mistake, or on the basis of failure to meet a condition precedent (the existence of the assets), the contract is void. What is interesting in this case is that neither party to the contract seeks to void the contract, in fact quite the opposite. It is the Government who has asked that the Court void the contract.

The Government argues the asset about which the parties are contracting does not exist. Yet, there are the Vienna common shares. This is quite different from cases cited by the Respondent of goods not actually existing (see for example Courturier v Hastie [5] ) or an endorsement of an insurance policy that had already been cancelled (see Re Judgment Recovery (N.S.) Ltd. and Dominion Insurance Corp [6] ), or sale of land from a vendor to a purchaser where the same land had already been sold to another purchaser ( see Centurion Investments Ltd. v N.M. Skalbania Ltd. [7] ).

These are not analogous, as in none of those cases could either party retrieve the subject matter so that it could effectively be transferred to the transferee. With respect to the Vienna shares, there was no mistake that Mr. Sommerer owned the Vienna shares, and that he could transfer them; he simply could not carve out certain rights. But the parties could easily rectify the situation, which they did. The shares existed and ownership in the shares could be transferred.

It was then open to the new owner of the shares, the SPF, to privately assign certain of its rights, without relinquishing its ownership of the shares. This was a misunderstanding of the law, perhaps, but that is not the same as non-existent subject matter, or a failure to meet a condition precedent. In McLeod et al v. The Queen , [8] Justice Bowie of this Court adopted the approach of Justice Steyn in Associated Japanese Bank v. Crédit du Nord , [9] who was commenting on the originator of the doctrine of mistake, Bell v.

Lever Brothers Ltd : [10] The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Second, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Third, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourth, and this is the point established by Bell v.

Lever Bros Ltd , the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. ​

Applying this criteria confirms my view that the doctrine of mistake is not applicable, as: 1. The contract is capable of being upheld; 2. There are no exceptional or unexpected circumstances; and 3. The subject matter is shares, which did exist and were owned by Mr. Sommerer. The Respondent​s argument has not dissuaded me from a practical, legally acceptable view of what transpired. [ 55 ] I also wish to address the Respondent​s argument that Mr. Sommerer did not simply want to vote the Vienna shares in place of the SPF, but he wanted to be seen as controlling or owning the shares to ensure that Vienna did not lose its status as a CCPC, and, therefore, an

interpretation of the contracts concluding that he transferred ownership of the shares in October 1996 is incorrect. I disagree with the Respondent​s view of the facts. The Respondent based this argument on the passage from Mr. Sommerer​s testimony reproduced at paragraph 14 of these Reasons. My understanding of Mr.

Sommerer​s testimony is that in October 1996, in transferring the shares to the SPF, and attempting to hang on to the vote, he was not motivated by the CCPC issue. [ 56 ] Even if I concluded otherwise, that he wanted to somehow "own" the shares for maintaining CCPC status, that does not impact my finding that the legal effect of the October 4, 1996, plus the March 1997 Addendum, was to transfer the shares on October 1996 to the SPF. He explicitly, in the Addendum, agreed that the voting, dividend, and subscription rights had been transferred from him to the SPF: the intent is clear.

He will simply have to accept the consequence of that as far as Vienna​s CCPC status is concerned. If his object was to maintain CCPC status, he may have failed in that regard. [ 57 ] Finally, the Respondent argued that finding there was a sale of the Vienna shares by Mr. Sommerer to the SPF in 1996 is such a fundamental departure from the parties​ intention, that it is not open to me to reach that conclusion. I disagree. Indeed, it would be far more drastic and contrary to the parties​ intention to adopt the Respondent​s position that the contract was void, that the SPF agreed to pay over $1,000,000 for nothing.

No, a finding that shares were sold, with an awkward assignment back of some rights, is far closer to maintaining the integrity of the deal struck than to suggest there was no deal at all. 2. Can the arrangement whereby Mr. Herbert Sommerer endowed the SPF with funds for the purpose set forth in the SPF Deeds be viewed as a trust for purposes of the application of the Income Tax Act ? [ 58 ] As already indicated, I reframed the issue in a manner that is more readily open to analysis.

This should not be an issue of whether an Austrian Private Foundation under the APFA is a trust, let alone whether the SPF is a trust. That is the wrong question. The Appellant says it is a company: the Respondent says it is a trust.

I have concluded that, depending on the terms of the Foundation Declaration and Supplemental Declaration, an Austrian Private Foundation could be considered a trust company, acting as a trustee, and with respect to the SPF, I find that that is as good a label as can be attached, when looking at it through the eyes of Canadian laws. [ 59 ] What needs to be analyzed, however, is not what the SPF is, but what relationship exists amongst the SPF (a separate legal person), Mr. Herbert Sommerer, and Mr. Peter Sommerer and the Sommerer family. Is there a trust relationship? Can Mr. Herbert Sommerer be seen as a settlor?

Can the SPF be seen as a trustee, perhaps a corporate trustee? Can Mr. Sommerer be seen as a beneficiary? Do the three certainties, certainty of intention, certainty of subject matter, and certainty of objects exist? Are there any other characteristics of the Canadian trust that are missing in the Sommerer arrangement? [ 60 ] I agree with the Appellant​s suggestion that, in characterizing a foreign arrangement, I rely on the Supreme Court of Canada​s comments in Backman v.

The Queen [11] to look at the private law in Canada to determine the essential elements of a trust, and then compare the elements of the foreign arrangement to determine if it can be treated as its correlate under Canadian law. So, what are the essential elements of a trust under Canada law? I note, with some concern, Professor Waters​ opening comments in this regard in his

article " The Concept Called "the Trust" : [12] It is agreed among text writers of the common law tradition ​ an opinion adopted by the Courts ​ that "the trust" cannot be defined. It can

only be described.

That means you can point to its characteristics or elements, but you cannot put into a sentence what it is. [ 61 ] The Appellant​s counsel referred me to a number of comments from authorities such as Oosterhoff on Trusts [13] and Waters Law of Trusts in Canada . [14] Notwithstanding Professor Waters​ heads-up, I have found the following excerpts helpful: From Oosterhoff : An equitable obligation, binding a person (called a trustee) to deal with property (called trust property) owned by him as a separate fund, distinct from his own property, for the benefit of persons (called beneficiaries or, in all cases, cestuis que trust ) of whom he may himself be one, and anyone of whom may enforce the obligation.

From Waters : The hallmarks, the essential characteristics of the common law trust, are heavily reflective of a peculiar legal history. The foremost of these is the fiduciary relationship which exists between trustee and beneficiary. The following elements are surely essential.

From the moment of the creation of the trust, there must be an ability of the beneficiary to secure an accounting or, to put it another way, a power in the beneficiary to enforce the discharge of its duties by the trustee. [ 62 ] The Respondent, in his argument, puts the essential features more generally: In broad terms, a trust is a means of managing wealth for the benefit of one or more persons.

The essential features of a trust are specified property, a person or persons as the objects of the trust with the exclusive right to its enjoyment or dedication, and person holding title to the property and administering it on behalf of the objects.

In simplified terms, a trust is an arrangement whereby a person who holds title to property is under an obligation to administer it for the benefit of another person or persons. [ 63 ] There is no disagreement as to the need for the three certainties to create a trust, though in a somewhat circuitous, though logical, fashion, the Appellant argues that if an essential element is missing for the arrangement to be considered a trust, then there cannot have been the requisite intention to create a trust.

The missing element in the SPF arrangement, according to the Appellant, is the lack of the right of the beneficiaries to enforce an obligation owed to them by the trustee. Professor Waters​ attempts to address this when he states: As necessary conditions, if any of the three certainties are not present, the courts will not recognize the existence of a trust.

The presence of the three certainties are not, however, sufficient conditions to the creation of a trust; they are evidentiary in nature and represent the factual threshold at which the law will recognize as enforceable the obligations of a trustee towards the beneficiary with respect to the designated trust property. [ 64 ] This is something of a chicken and egg statement: do the beneficiaries​ rights of enforcement arise in law because there is a trust, or must the beneficiaries​ rights of enforcement exist by the Trust Deed, for example, for there to be considered a trust.

The Appellant suggests the latter. [ 65 ] It is this element of accountability owed by the trustee to the beneficiaries, enforceable by the beneficiaries, that is at the crux of the dispute between the parties on this issue; in essence, the nature and extent of the required fiduciary obligation. [ 66 ] In

summary, the essential ingredients of a trust under Canadian law that I wish to address are:

a) segregated property;

b) owned by a person (trustee) having control of the property;

c) for the benefit of persons (beneficiaries);

d) to whom the trustee has a fiduciary duty enforceable by the beneficiaries. If I find these essential features in the arrangement by which the SPF held the Vienna shares, then I will have no difficulty finding the three certainties were met to create the trust. It is absolutely clear to me that there is certainty of subject matter and objects, and if the essential features of a trust are evident, then the intention of Mr. Herbert Sommerer to create a trust can be gleaned from the Foundation Declaration, the Supplementary Deed and the application of APFA .

All to say, the analysis does not hinge on the three certainties. [ 67 ] Turning then to the SPF and its holding of the Vienna shares, I readily find that the first two essential features are apparent in this arrangement. The property, the Vienna shares, substituted for the initial endowment to the SPF from Mr. Herbert Sommerer, was subject to the provisions of the APFA , which at the very outset in

section 1, refer to "an endowment for achieving a permissible purpose determined by the founder". No purpose was for the SPF to use the endowment to its own account. Secondly, the property was owned by the SPF, which, as a legal person, held title to the Vienna shares, and held control over the property. [ 68 ] Third, was the property held for the benefit of persons? In this regard, the experts testified that Austrian law distinguishes between actual and potential beneficiaries. There is also the distinction under the APFA between beneficiaries and ultimate beneficiaries.

The Foundation Declaration and Supplementary Declaration are not expansive in their descriptions of the beneficiaries, but I take from the experts​ views that the beneficiaries (Mr. Peter Sommerer, Mrs. Dawn Sommerer and children and their offspring, provided they are resident of Austria) are income beneficiaries only, and even then only potential beneficiaries, as none were resident in Austria and none were named to receive any grant. Similarly, Mr. & Mrs.

Sommerer, in the event of the founders​ revocation, are ultimate capital beneficiaries, though, again only potential beneficiaries until there is a revocation. This classification of actual versus potential beneficiary is of no consequence in answering the question of whether the property was held for the benefit of persons. Of course it was; that was the raison d​être of the SPF.

The difference between actual and potential beneficiaries becomes a factor only when considering the fiduciary duty of the SPF. [ 69 ] With respect to the income beneficiaries, the class of beneficiary was clear; it was also clear from the Foundation documents how it was to be determined who within the class might receive a grant from the SPF. The potential beneficiaries are clearly ascertainable. [ 70 ] With respect to the ultimate beneficiaries, it is even clearer. If Mr. Herbert Sommerer decides to revoke the SPF, Mr. Peter Sommerer and Mrs. Dawn Sommerer receive the capital. They are persons who will benefit.

The third essential ingredient exists. [ 71 ] So, the penultimate question is whether the SPF had any fiduciary obligations to any of these beneficiaries, enforceable by the beneficiaries. [ 72 ] The Appellant points to several factors in support of his position that the beneficiaries had no enforceable right to call the SPF to account. I will deal with those items, but first want to make an overriding observation regarding this essential feature. The right of the beneficiary is the flip side of the fiduciary duty of the trustee; in this case, the duty of the SPF, if any, is at issue.

If there is no duty enforceable by the beneficiaries, is the SPF simply under some moral obligation and the Sommerers simply hopeful they might get something from the SPF? This would more resemble a power of appointment. My impression is that the SPF was not founded on the shifting sands of moral obligation: there were no beneficiaries other than the Sommerers; there were no ultimate beneficiaries in the case of revocation other than Mr. & Mrs. Sommerer; there are no ultimate beneficiaries in any other case other than those set out in 3.2 of the Supplementary Deed.

This is not designed for the SPF to exercise any moral obligation. So, in the context of attempting to determine whether an arrangement in Austria, whose laws do not contemplate the concept of a North American trust, is akin to a trust under Canadian law, it is my overriding view that there is something well beyond moral obligation going on here.

And certainly close enough to the Canadian fiduciary duty to find this final essential element for a trust exists in the SPF arrangement. [ 73 ] I will now address those factors raised by the Appellant to suggest my impression is misplaced. [ 74 ] First, the Appellant relies on Dr. Torggler​s evidence that there is no fiduciary duty owed by the Executive Board to the

beneficiaries or by the SPF itself. This, though, must be viewed in the context of Dr. Torggler​s opinion that, in Austrian law, there is no literal translation of the fiduciary duty. He testified, in answer to the question whether there are any duties owed to beneficiaries as follows: [15] Not from the outset, but at the moment a beneficiary has been appointed an endowment, usually the beneficiaries have been resolved upon and from that point in time, there was obligation on the part of the Board to fulfil this commitment.

He also stated: [16] There is a provision that the Board of Directors​ owes fulfillment of the purpose of the Foundation, and as the purpose of the Foundation, generally, is in favour of the beneficiaries, in that respect indirectly there is a duty , but there is no direct duty prescribed in the law. [ 75 ] These opinions do not go as far as the Appellant suggests. The Foundation itself is implicitly obliged to fulfill the purpose for which it is established.

Further, one of its primary organs, the Executive Board, "must perform his/her responsibilities frugally and with the prudence of a conscientious manager" (section 17(2) APFA ). Also, the Executive Board must keep the books (section 18 APFA ). If there is any disagreement between the auditor and the Executive Board, regarding the application of the Foundation Declaration, the Court shall decide (section 21(4) APFA ). Every member of the Executive Board is liable for damages as a result of negligent neglect of duties (section 29(1) APFA ).

For a jurisdiction that does not recognize a fiduciary duty concept, what is to be made of the above? What I make of it is that Austria has legislated obligations, and when combined with a requirement to fulfill the purposes of the Foundation, which with respect to the SPF is to benefit the Sommerer family, I conclude Dr. Torggler​s opinion of no fiduciary duty is overstated.

There are sufficient parallels between the Canadian concept of fiduciary duty and the combination of the provisions of the APFA and the wording of the Foundation Declaration to find that some requisite duty exists. [ 76 ] Second, the Appellant argues the rights of a beneficiary under the APFA are limited to

section 30 rights, and in very limited circumstances, section 35(3) rights (application by a beneficiary or ultimate beneficiary for dissolution). With respect to the

section 30 right of the beneficiary to information, the Appellant also argues that because Mr. Sommerer was only a potential beneficiary (as he was not an Austrian resident nor had been chosen for a grant) and potential ultimate beneficiary (as there had been no call by the founder to revoke the Foundation), he is not entitled to the

section 30 rights for information. Dr. Torggler testified that there has been a court decision in Austria that

section 30 is only available to actual beneficiaries. This raises the interesting situation where the SPF is established to benefit the Sommerer family, and no one else, yet they cannot be considered actual beneficiaries until certain conditions are met: in effect there are no beneficiaries. When the condition is met, certain rights kick in. Mr. Taylor acknowledged that only at that point might there be a trust. Presumably, following that reasoning, if Mr.

Sommerer became an Austrian resident and the Executive Board determined to make a grant to him, at that point there would be a trust, yet after the grant is paid, Mr. Sommerer goes back to being a potential beneficiary only and there is again no trust. This cements my view, apparently shared by eminent authors on this subject, that the definition of a trust is illusory. But it also suggests to me that this essential feature of enforcing a fiduciary duty should not be viewed in isolation, nor rigidly adopted.

Clearly, these rights could arise, and will arise, in the very situation that the founder contemplated of benefiting the Sommerer family. How different is this from the Canadian trust where property is held for a minor until the age of majority when he/she is entitled to a distribution of capital. What right does the minor have to enforce the trustee to pay out before attaining the age of majority? [ 77 ] Also, it is noteworthy that the founder, Mr. Herbert Sommerer, provided that the Advisory Board was to be made up of Mr. & Mrs. Sommerer, the ultimate beneficiaries.

Further, he provides the Advisory Board was to play an important role in the SPF including supervisory tasks. This confirms to me an explicit right to information given by the founder to beneficiaries, notwithstanding the provisions of the APFA . [ 78 ] With respect to what the Appellant calls the limited rights found in section 35(3) of the APFA , of the ultimate beneficiary to apply to the court if the Executive Board does not pass a resolution to dissolve, once the founder has sought revocation, I view this as a significant right. This goes to the distribution of all of the capital of the SPF to the Sommerers.

This is no limited right. Mr. H erbert Sommerer decides to revoke and Mr. & Mrs Sommerer take all: if the Executive Board does not pass the requisite resolution to put this distribution into effect, the Sommerers can apply to court.

I find this right alone is sufficient to meet the requirement for an enforceable right of beneficiaries to have the trustee, the SPF, act in their best interests. [ 79 ] The Appellant goes on to argue that the potential beneficiaries have no right in the property of the SPF, as would all the beneficiaries of a common law discretionary trust, who could call for the property by invoking the rule in Saunders v. Vautier . [17] Again, Dr. Torggler opined that even an actual beneficiary does not have a property right in the Private Foundation property.

I am concerned that because common law treatment is not afforded the Austrian Private Foundation that it fails to match the essential features of the common law trust. It is important to keep in mind what process is being engaged here. The essential features of a common law trust have been identified, and now the establishment of the SPF and transfer of property into it for the benefit of the Sommerer family is

being examined to determine if it can be viewed as a common law trust, notwithstanding its jurisdiction does not have such a concept. It should be no surprise that the concept of beneficial ownership of property is not apparent. I do not find that the lack of such right of beneficial ownership is fatal. [ 80 ] Finally, the Appellant relies on the wording of the Foundation document itself to suggest the income beneficiaries have no legal claim.

The Foundation Declaration states: "Beneficiaries and those who may become beneficiaries based on the purpose of the Foundation have no legal claim to grants from the Foundation". Firstly, I interpret this provision to be dealing with income beneficiaries only, not the ultimate beneficiaries. This simply makes clear the discretionary nature of income grants. They can only be to the Sommerer family, but no individual family member can come knocking on the SPF​s door asking to be paid a grant.

This evidence is no more than that, and is not sufficient to strip away the character of a discretionary trust. [ 81 ] On balance, I have not been convinced that there is no fiduciary duty enforceable by the Sommerer family.

Certainly, the rights may not be as extensive as one might find in many common law trusts, but for purposes of trying to determine if an arrangement involving an Austrian Private Foundation has the elements of a common law trust, it is unnecessary to find every possible right of a beneficiary against a trustee, but more appropriately the question should be, are there sufficient rights that reasonably resemble those found in the Canadian trust? I conclude there are. [ 82 ] It should be clear that in reaching this conclusion, I am not finding the SPF is a trust: I am finding the relationship between Mr.

Herbert Sommerer, the SPF and the beneficiaries constitutes a trust, with the SPF as the trustee. Further, I do not make this finding in any way as a generalization that all relationships involving an Austrian Private Foundation are trust relationships. There may well be a Foundation Declaration that is found to be more akin to a power of appointment, for example, by stripping away any rights of enforceability a beneficiary might have. Here, on balance, there are sufficient indices of the essential features of a trust to find the arrangement can be considered a trust.

Given that conclusion, it is unnecessary for me to review the Quebec Civil Code concepts, as well explained to me by Me Tassé, to determine if the Austrian arrangement falls within any of the Quebec concepts of trust. 3. If a trust existed, does subsection 75(2) of the Act apply to attribute to Mr. Sommerer the gains on the disposition of the Vienna and Cambrian shares by the SPF ? [ 83 ] Subsection 75(2) of the Act provides: Where, by a trust created in any manner whatever since 1934, property is held on condition (

a) that it or property substituted therefor may (

i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this subsection referred to as "the person "), or (ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust , or (

b) that, during the existence of the person , the property shall not be disposed of except with the person 's consent or in accordance with the person 's direction, any income or loss from the property or from property substituted for the property , and any taxable capital gain or allowable capital loss from the disposition of the property or of property substituted for the property , shall, during the existence of the person while the person is resident in Canada , be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss , as the case may be, of the person . [ 84 ] A number of issues flow from the application of this provision to the facts before me:

(

i) can the defined "person" in 75(2)( a )(

i) apply to a beneficiary vendor who sells property to the trust at fair market value (i.e. Mr. P. Sommerer); (ii) if so, can such property revert to Mr. Sommerer? (iii) if not, can such property pass to such persons determined by Mr. Sommerer? (see subparagraph 75(2)( a )(ii) of the Act ) (iv) if not, can such property only be disposed of with Mr. Sommerer​s consent or in accordance with his direction? (see paragraph 75(2)(

b) of the Act ) (

i) Who is the "person" as defined in subparagraph 75(2)( a )(

i) of the Act ? [ 85 ] The Respondent argues there is no requirement that the "person" be the settlor, but that it could be any person, including a beneficiary vendor of property sold to the trust at fair market value. The Respondent relies on IT369 which indicates that it is the department​s view that a person, other than the settlor, may transfer property to a trust and become subject to the attribution rules.

With respect, I disagree with the Respondent​s view of the definition of person. [ 86 ] It is well established that income tax legislation is to be interpreted in a textual, contextual and purposive manner. It is meant as no unkindness to the drafters of income tax legislation, but they have at times made this task exceedingly difficult: subsection 75(2) of the Act is an example of (trying to put this fairly) awkward language. Textual

interpretation [ 87 ] The opening words are significant - "by a trust created​property is held on condition". In this case, one could insert the date and have the opening words: "where, by a trust created on October 3, 1996, property is held on condition". The provision does not say "where property is held in trust or in a trust on condition". It specifically refers to a trust created and a time at which the trust is created. I suggest it invites an

interpretation to look at the conditions on the creation of the trust, the creation in this case by Mr. Herbert Sommerer, the settlor. The nature of the trust, and whether it is of a type contemplated by subsection 75(2) of the Act , is to be discerned at the time of creation. On the creation of the trust by a settlor, there can only be one person from whom property is received ​ the settlor. There is no other person.

This does not however preclude the possibility of another person settling property in trust with the same trustee and on the same terms, but in such a case, I would suggest there is another trust created. In effect, by the opening words of subsection 75(2) of the Act only a settlor, or a contributor akin to a settlor is contemplated as being the defined person. [ 88 ] This inter

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