Recovery of Personal Tax Debt from Trustee
1. Introduction
Canada (National Revenue) v Shaker[1] should never have been placed before the court. It betrays a complete misunderstanding of basic trust law principles on the part of the Canada Revenue Agency. Fortunately, the court frustrated the CRA’s attempt to recover a trustee’s personal tax debt from property the title to which was held in trust by the taxpayer and others. Perhaps, faute de mieux, the reasons be helpful to inform lawyers who may never have taken a trusts course about these basic principles.
2. Facts
In January 2022, the CRA registered a certificate with the court against the taxpayer, Mr Shaker, in which it claimed a tax debt in excess of $4.7 million plus interest under s 223 of the Income Tax Act.[2] It also claimed a writ of execution and filed it in Ottawa and Toronto. In February 2022, the Respondents (the Department of Justice on behalf of Her Majesty the Queen in Right of Canada and the CRA) brought an ex parte motion to obtain an interim charge to secure payment of the tax debt against Shaker’s interest in certain property in Toronto. They asserted that Shaker had a legal interest in the property as trustee and therefore had an interest in the property within the meaning of Rule 458 of the Federal Court Rules.[3] The order was granted on 4 March 2022.
Rule 458 authorizes the court to make an order imposing an interim charge for securing a debt owed to a judgment creditor ‘on real property … or on an interest in real property … if the judgment debtor, directly or indirectly, owns the real property …, [or] holds an interest in the real property, including a beneficial interest …’ Under the same rule, the court may also order the judgment debtor to show cause why the charge should not be made absolute.
The court did in fact order Shaker to show cause why the interim charge should not be made absolute.
Shaker brought a motion to discharge the interim charge on the ground that his interest in the property was solely that of a trustee and that Rule 458 cannot be applied to a trustee’s legal interest in trust property.
Shaker’s motion was combined with the show cause hearing. At the hearing, the Respondents withdrew their request that the interim charge be made absolute and requested instead that the proceeds of the pending sale of the property to a third party be paid into court to allow the Respondents to cross-examine Shaker on the affidavit he filed in support of his motion.
The evidence before the court showed that Shaker had a legal interest in the property as a trustee of a trust. The trust acquired the property in 2007 and title was registered in the names of Shaker and his co-trustees. In his affidavit, Shaker stated that he is not and has not been a beneficiary of the trust, has no direct or indirect interest in the assets of the trust, and is not and has not been an officer, director, or shareholder of any beneficiary of the trust.
3. Analysis and Decision
For the purpose of the hearing, Justice Walker assumed that Shaker is a judgment debtor in his personal capacity and not in his capacity as trustee of the trust. Her Honour agreed with Shaker’s argument that the Respondents’ interpretation of the term ‘judgment debtor’ in Rule 458 ignored the fact that Shaker incurred the tax debt in his personal capacity and not in his capacity as trustee of the trust, and that a trustee of trust property does not ‘hold an interest’ in that trust property within the meaning of Rule 458.
Her Honour described the basic principle that a trustee acts in two distinct capacities, his personal capacity, and his capacity as a trustee. As trustee he is a fiduciary and acts for the sole benefit of the beneficiaries. The trustee must maintain the distinction between his personal affairs and the affairs and properties of the trust in order to safeguard the interests of the trust beneficiaries. If a trustee has incurred a personal debt, her creditors cannot gain access to the trust property to satisfy their debt. Since the tax debt was Shaker’s personal debt and not a debt of the trust, the CRA could not reach the trust property to satisfy the debt, for the trust property belongs to the beneficiaries.
Shaker argued that the reference to a judgment debtor’s ‘interest in real property’ in Rule 458 does not extend to his legal interest in the trust property. Her Honour agreed. Our law recognizes a distinction between legal and beneficial ownership and a beneficiary can enforce her beneficial ownership rights against the trustee. She referred to Valard Construction Ltd v Bird Construction Co,[4] which makes this point, and also to Canada v Canada North Group Inc,[5] in which Justice Coté stated, ‘Property held in trust cannot be said to belong to the trustee because “in equity it belongs to another person”’. Thus, a trustee cannot use trust property to satisfy a personal debt, and neither can his creditors.
Her Honour then went on dismiss the Respondents’ request for payment of the proceeds of sale into court and the opportunity to cross-examine Shaker on his affidavit. She said that the Respondents could not now abandon their previous theory that Shaker’s legal interest as trustee in the trust property was sufficient to support the interim charge, so that they could now engage in a cross-examination of him. Previously, they did not assert, and their evidence did not establish that Shaker had a beneficial interest in the trust property, and to permit them to make a general inquiry into Shaker’s affairs based on their unsubstantiated belief that he may have a beneficial interest in the trust was unwarranted.[6]
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[1] 2022 FC 407.
[2] RSC 1985, c 1 (5th Supp).
[3] SOR/98-106.
[4] 2018 SCC 8.
[5] 2021 SCC 30, para 47.
[6] For an unrelated proceeding in connection with the sale of the property, see Shaker v Luna, 2022 ONSC 2000.
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Written by: Albert Oosterhoff
Posted on: August 26, 2022
Categories: Commentary, WEL Newsletter
1. Introduction
Canada (National Revenue) v Shaker[1] should never have been placed before the court. It betrays a complete misunderstanding of basic trust law principles on the part of the Canada Revenue Agency. Fortunately, the court frustrated the CRA’s attempt to recover a trustee’s personal tax debt from property the title to which was held in trust by the taxpayer and others. Perhaps, faute de mieux, the reasons be helpful to inform lawyers who may never have taken a trusts course about these basic principles.
2. Facts
In January 2022, the CRA registered a certificate with the court against the taxpayer, Mr Shaker, in which it claimed a tax debt in excess of $4.7 million plus interest under s 223 of the Income Tax Act.[2] It also claimed a writ of execution and filed it in Ottawa and Toronto. In February 2022, the Respondents (the Department of Justice on behalf of Her Majesty the Queen in Right of Canada and the CRA) brought an ex parte motion to obtain an interim charge to secure payment of the tax debt against Shaker’s interest in certain property in Toronto. They asserted that Shaker had a legal interest in the property as trustee and therefore had an interest in the property within the meaning of Rule 458 of the Federal Court Rules.[3] The order was granted on 4 March 2022.
Rule 458 authorizes the court to make an order imposing an interim charge for securing a debt owed to a judgment creditor ‘on real property … or on an interest in real property … if the judgment debtor, directly or indirectly, owns the real property …, [or] holds an interest in the real property, including a beneficial interest …’ Under the same rule, the court may also order the judgment debtor to show cause why the charge should not be made absolute.
The court did in fact order Shaker to show cause why the interim charge should not be made absolute.
Shaker brought a motion to discharge the interim charge on the ground that his interest in the property was solely that of a trustee and that Rule 458 cannot be applied to a trustee’s legal interest in trust property.
Shaker’s motion was combined with the show cause hearing. At the hearing, the Respondents withdrew their request that the interim charge be made absolute and requested instead that the proceeds of the pending sale of the property to a third party be paid into court to allow the Respondents to cross-examine Shaker on the affidavit he filed in support of his motion.
The evidence before the court showed that Shaker had a legal interest in the property as a trustee of a trust. The trust acquired the property in 2007 and title was registered in the names of Shaker and his co-trustees. In his affidavit, Shaker stated that he is not and has not been a beneficiary of the trust, has no direct or indirect interest in the assets of the trust, and is not and has not been an officer, director, or shareholder of any beneficiary of the trust.
3. Analysis and Decision
For the purpose of the hearing, Justice Walker assumed that Shaker is a judgment debtor in his personal capacity and not in his capacity as trustee of the trust. Her Honour agreed with Shaker’s argument that the Respondents’ interpretation of the term ‘judgment debtor’ in Rule 458 ignored the fact that Shaker incurred the tax debt in his personal capacity and not in his capacity as trustee of the trust, and that a trustee of trust property does not ‘hold an interest’ in that trust property within the meaning of Rule 458.
Her Honour described the basic principle that a trustee acts in two distinct capacities, his personal capacity, and his capacity as a trustee. As trustee he is a fiduciary and acts for the sole benefit of the beneficiaries. The trustee must maintain the distinction between his personal affairs and the affairs and properties of the trust in order to safeguard the interests of the trust beneficiaries. If a trustee has incurred a personal debt, her creditors cannot gain access to the trust property to satisfy their debt. Since the tax debt was Shaker’s personal debt and not a debt of the trust, the CRA could not reach the trust property to satisfy the debt, for the trust property belongs to the beneficiaries.
Shaker argued that the reference to a judgment debtor’s ‘interest in real property’ in Rule 458 does not extend to his legal interest in the trust property. Her Honour agreed. Our law recognizes a distinction between legal and beneficial ownership and a beneficiary can enforce her beneficial ownership rights against the trustee. She referred to Valard Construction Ltd v Bird Construction Co,[4] which makes this point, and also to Canada v Canada North Group Inc,[5] in which Justice Coté stated, ‘Property held in trust cannot be said to belong to the trustee because “in equity it belongs to another person”’. Thus, a trustee cannot use trust property to satisfy a personal debt, and neither can his creditors.
Her Honour then went on dismiss the Respondents’ request for payment of the proceeds of sale into court and the opportunity to cross-examine Shaker on his affidavit. She said that the Respondents could not now abandon their previous theory that Shaker’s legal interest as trustee in the trust property was sufficient to support the interim charge, so that they could now engage in a cross-examination of him. Previously, they did not assert, and their evidence did not establish that Shaker had a beneficial interest in the trust property, and to permit them to make a general inquiry into Shaker’s affairs based on their unsubstantiated belief that he may have a beneficial interest in the trust was unwarranted.[6]
—
[1] 2022 FC 407.
[2] RSC 1985, c 1 (5th Supp).
[3] SOR/98-106.
[4] 2018 SCC 8.
[5] 2021 SCC 30, para 47.
[6] For an unrelated proceeding in connection with the sale of the property, see Shaker v Luna, 2022 ONSC 2000.
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