Today’s blog was written by Katie Ionson.
The Tax Court of Canada’s decision in Brent Kern Family Trust v. R was released on October 17, 2013. Brent Kern is the first reported case to apply the watershed decision of the Federal Court of Appeal (the “FCA”) in R. v. Sommerer, which was released in 2012. The case is unusual in that the normal positions of the parties were reversed: the Minister of National Revenue (the “Minister”) took the position that subsection 75(2) of the Income Tax Act (Canada) (the “Act”) did not apply to the Appellant. The Appellant argued that 75(2) did apply.
The advisors of the Brent Kern Family Trust had based their planning on the CRA’s pre-Sommerer position that subsection 75(2) applied regardless of whether the trust acquired property from a beneficiary by way of gift or by sale. The CRA initially agreed with this position but argued that GAAR applied to prevent the attribution of income.
Unfortunately for the taxpayer, 23 days following the end of the initial hearing and in the midst of the Court’s deliberations, the FCA released its decision in Sommerer. The Court in Brent Kern agreed to hear further submissions from the parties on the applicability of subsection 75(2) in light of Sommerer.
The Appellant attempted, ultimately unsuccessfully, to argue that Sommerer was not applicable to the facts of the case or, in the alternative, was wrongly decided. The Appellant submitted that: (i) Sommerer’s factual complexity made it an exceptional case; (ii) the courts in Sommerer were unduly focussed on the spectre of double taxation, which was not an issue in Brent Kern; (iii) the statements of the FCA that subsection 75(2) does not apply in circumstances where property is acquired for fair market value were obiter dicta; and (iv) the pleadings in Sommerer were deficient and did not provide the courts with the opportunity to fully consider the historical and purposive context of subsection 75(2).
The Court disagreed with all four arguments and declined to find that Sommerer was wrongly decided, stating: “The Tax Court of Canada is not a review court for unequivocal decisions of the Federal Court of Appeal”.
The TCC’s decision in Brent Kern is the first application of the FCA’s ratio in Sommerer to a subsequent reported decision. In this regard, it is significant that Bocock J. refers to the FCA’s decision in Sommerer as “unequivocal” and upholds without qualification the FCA’s determination that subsection 75(2) does not apply to property acquired by a trust through a genuine sale transaction.
Brent Kern is also interesting because it raises the question of whether it is necessary that property be transferred to the trust for fair market value consideration to avoid the application of subsection 75(2). In Brent Kern, the decision references the fact that the property was transferred for “valuable consideration” (not necessarily fair market value consideration).