Tax Planning For 21st Anniversary Of A Trust Goes Awry

• Published date: 12 November 2020
• Law Firm: Goldman Sloan Nash & Haber LLP
• Author: Kelsey Horning and Brian Nichols

Mandel v. 1909975 Ontario Inc.: Tax Planning for 21st Anniversary of a Trust Goes Awry

The Canada Revenue Agency ('CRA') gave each of Robert Mandel and his business partner, Ellen Pike, a very nasty surprise. It reassessed each of them and added $15,000,000 to each of their taxable incomes. The CRA did not like the tax planning they had done in anticipation of the 21^st anniversary of their trusts. Not surprisingly, Mandel and Pike retained lawyers. Part of their story is explained in the recent decision of the Ontario Superior Court of Justice in Robert Mandel et al. v. 1909975 Ontario Inc. et al.2020 ONSC 5343. The tax community may wonder why the taxpayers sought relief in the Ontario Superior Court of Justice (the 'OSCJ') rather than the Tax Court of Canada.

The judge who decided the application was not experienced in tax matters. Unfortunately, the judge's decision does not clearly state the tax issues. Accordingly, it is necessary for us to go on a journey and to make some assumptions in order to figure out what was going on and what we can learn from it.

Introduction to 21^st Anniversary Tax Planning

We can begin our journey by reviewing some of the issues facing a taxpayer who used a trust to effect an estate freeze in 1990 and who had to do 21^st anniversary tax planning in 2010 (before the expansion of the Tax On Split Income ('TOSI') rules).

Mr. Mandel and Ms. Pike carried out their tax planning for the 21^st anniversry of the settlement of their trusts before the TOSI rules were expanded. In 2020, tax planning for the 21^st anniversary of the settlement of a trust would include consideration of the expanded TOSI rules in addition to consideration of the issues discussed below.

First, we will consider a hypothetical situation.

Suppose that in November 1990, Mr. A owned all of the shares of a corporation ('Profitco') which carried on a successful business. At that time, Mr. A had three young children, Sandra, David and Michael. Mr. A effected a 'Plain Jane' estate freeze in which he exchanged his existing shares of Profitco for freeze shares and 'thin' or 'skinny' voting shares (typically not entitled to dividends, non-participating and redeemable and therefore having no or nominal value). A discretionary trust subscribed for new common shares of Profitco. Mr. A's three children were the discretionary beneficiaries of the family trust.

At all times, each of Mr. Aand his three children were Canadian residents. They are not residents of any other jurisdiction. They were not US citizens or holders of green cards.

Mr. A and his tax advisor ('Tax Advisor') had the following discussion early in 2010:

Mr. A: You asked me to speak to you about my trust. Is anything wrong?

Tax Advisor: You settled the trust in November 1990. Unless we take some steps, in November 2011, the trust will be deemed to have disposed of each of its assets for an amount equal to its fair market value. If shares of Profitco held by the trust have appreciated, the trust may face a significant tax bill.

Mr. A: What can I do?

Tax Advisor: The standard...