Brent Kern Family Trust v. R – FCA: 75(2) attribution rule not applicable to sales for valuable consideration

Bill Innes on Current Tax Cases New Window

Brent Kern Family Trust v. Canada (October 14, 2014 – 2014 FCA 230) was a decision of the Federal Court of Appeal which affirmed that the attribution rule in subsection 75(2) of the Income Tax Act does not apply to sales for valuable consideration. The underlying facts (taken from the tax court decision): New Window

are not complex and involved a corporate reorganization and trust structure that was clearly designed to benefit from the application of the attribution rule in subsection 75(2) of the Income Tax Act:

75(2) 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.

The reorganization was effected in 2004.

[7] Counsel greatly shortened the proceedings through two Statements of Agreed Facts applicable to each phase of the hearing. The material facts relevant to this appeal concerning the transaction structure are:

1. From 1997 to July 2004 Mr. Kern was originally the sole shareholder and controlling mind of Wilf’s Oilfield Services (1997) Ltd. (“OPCO”);

2. An Alberta limited company, 905558 Alberta Ltd., was created in November of 2000 (“Holdco”);

3. Two trusts were created on July 30, 2004: the Appellant, the Brent Kern Family Trust (the “Brent Trust”), and the Kern Family Trust (“the Kern Trust”);

4. Mr. Kern ordered his affairs such that he became a preferred shareholder in OPCO and Holdco. Mr. Kern and OPCO were beneficiaries, along with other family members in the Brent Trust, whereas Holdco, Mr. Kern and family members were beneficiaries in the Kern Trust;

5. Through share exchanges, the common shares previously held by Mr. Kern in OPCO and Holdco, were exchanged for preferred shares; and

6. For valuable consideration, OPCO common shares were sold to Kern Trust and similarly Holdco’s shares of OPCO were sold to the Appellant, Brent Trust.
The dividends that were at issue were paid in 2005 and 2006.

[8] The material facts concerning the reassessed transactions, which occurred after the creation of the structure, described in paragraph 7 above are essentially the same in each of the two reassessed taxation years, namely:


1. OPCO declared a dividend in favour of Kern Trust for $245,000.00;

2. Kern Trust allocated $245,000.00 to Holdco;

3. Holdco declared a dividend on the common shares owned by the Brent Trust in the amount of $245,000.00;

4. The Appellant contends that subsection 75(2) applies and deems the dividend of Brent Trust to be received by OPCO (the “Attributed Dividend”), because OPCO is the person which transferred the property to Brent Trust while OPCO was an enduring potential beneficiary;

5. On that basis, the Brent Trust reported no income from the declared dividend on its T-3 trust income return;

6. This Attributed Dividend in OPCO’s hands was a dividend received by a corporation pursuant to section 112 of the Act which section affords the non-taxable payment of inter-corporate dividends; and

7. The amount of the dividend, $245,000.00 (“Dividend Amount”) was allocated and paid to Mr. Kern, who in turn lent the Dividend Amount to OPCO.

Similar transactions and income tax reporting occurred in 2006, save and except that the amount of the 2006 dividend declared was $155,000.00 and through incremental reduction, the amount ultimately lent to OPCO by Mr. Kern was $151,591.99.

Well after the planning was implemented, in 2012 the Federal Court of Appeal in Sommerer v. The Queen came down with a decision that subsection 75(2) did not apply to transfers of property for valuable consideration.

The Tax Court applied Sommerer and dismissed the appeal. The taxpayer appealed to the Federal Court of Appeal. The Court of Appeal made short work of the appeal:

[4] In this Court, counsel for the appellant spent most of his time challenging Sommerer on the basis that the decision was manifestly wrong largely on the basis that both the trial judge and the FCA in Sommerer were not informed sufficiently as to the history and purpose of ss. 75(2).

[5] Like the trial judge in this case (at para. 27) we conclude that this Court in Sommerer “spent considerable time analyzing the text, content and purpose of the subsection, or at least sufficiently enough” to arrive at a correct interpretation of ss. 75(2). In our view, counsel for the appellant has not pointed to any fundamental matter that was overlooked sufficient to justify intervention on the basis of Miller v. Canada (Attorney General) 2002 FCA 370 at para. 10.

Accordingly the appeal was dismissed with costs.