Analysis
The first plaintiff (TMW) and members of his family are the beneficiaries under the Ta-Ming Wang Trust (the trust). The trust was intended to take advantage of a well-established tax-saving structure under which a foreign national such as TMW immigrating into Canada could obtain a five-year Canadian tax holiday on foreign source income earned by a non-resident company, owned by a non-resident trustee; ie on income by way of dividends paid by the company to the trust during the five-year tax holiday. It was established by a settlement dated 2 May 1996 made between TMW’s mother as settlor and the first defendant (CIBC) as the original trustee. TMW’s wife (KYS), the present trustee of the trust, is the second plaintiff. The second defendant (the company) was struck off the Register of Companies as part of the trust migration process essential to obtaining the tax benefits, but was restored to the Register for the purposes of the case.
In order to obtain the benefit of the tax-saving strategy, the trustee, CIBC, procured the payment of a dividend from the company in which it owned all the shares but it failed to ensure that the dividend was paid at a time when it would not be subject to tax on its foreign source income, having been incorrectly advised. The dividend was paid approximately one and a half months after the closure of the tax holiday and the trust was consequently assessed to tax on the dividend. Had CIBC known that the advice was incorrect the dividend would not have been procured.
TMW applied to have the declaration of the dividend set aside on the basis:
- (1) the actions of the trustee in deciding to procure the declaration of the dividend, and to receive the payment as a dividend, fell within established Hastings-Bass principles, and the actions of the directors in declaring the dividend by the company and the payment of the dividend by the company to the trust, having regard to the substance rather than the form of the transaction, were similarly liable to be set aside: the entire transaction was orchestrated by the trustee and was therefore to be regarded as the act of the trustee, acting through its nominee directors, so that the entire transaction, including the declaration and payment of the dividend, failed, on Hastings-Bass principles, without the need to consider the acts or understanding of the directors themselves.
- (2) and alternatively, the Hastings-Bass principle applied to the acts of the directors themselves, and their actions, in resolving to declare the dividend and paying it to the trust as a dividend, being intended, but failing, to achieve the fiscal purposes of the trust structure of which the company was an integral part, were themselves void on Hastings-Bass principles.
Held
Declaratory relief granted for the setting aside of CIBC’s decisions taken as trustee. No such relief granted in respect of the directors’ decisions [39].
The trustee’s decision fell well within the recognised formulation of the Hastings-Bass principle stated by Lloyd LJ in Sieff v Fox [2005]. In deciding to procure the payment of the dividend, and to receive it on the erroneous advice as to when the tax holiday would be deemed to commence, the trustee took into account the wrong expiry date of the relevant tax holiday. That was a decision which the trustee would not have taken had it been aware of the true consequences. On that basis, the decision of the trustee, having been so erroneously taken with the detrimental consequences for its trust, was liable to be set aside as being a decision which it was not authorised to make, because it was not a decision that could operate as intended for the benefit of the trust. Accordingly, it was a decision which was void ab initio [25].
Regarding the further question, whether the decision of the directors of the company to declare and pay the dividend could and, if so, should, also be declared void, it was established, at least at first instance, that the Hastings-Bass principle applied to the decisions of directors [27-32]. TMW’s submission that it could be assumed that the directors of the company, the very object of which was to give effect to the tax-saving purposes of the trust, understood that the company held its assets for the sole purpose of assisting in the fulfilment of that objective. As such, the fiduciary powers held by the directors were to be exercised only for those purposes, and the erroneous exercise of their powers which brought about the declaration and payment to the trustee of the dividend, with its detrimental fiscal consequences, was accordingly unauthorised, and liable to be set aside on Hastings-Bass principles. However, records were no longer available and there was no evidence as to what the directors may or may not have had in mind in relation to the erroneous advice or misconceived assumptions arising from it. Therefore, on the basis that directors as fiduciaries owed their duties only to their company, there was no ground that allowed the court to assume that the directors would have had in mind directly the interests of the trust or its beneficiaries. In the absence of available evidence as to the directors’ state of mind, there could be no basis for concluding that their belief was itself erroneous, and the practical reality that the directors’ status was no more than nominees of the trustee meant that the legal obligation placed on directors to act independently on behalf of the company of which they are fiduciaries could not be overlooked. Indeed, it would be a contradiction in terms to hold that the decisions of directors, who were mere nominees and acting merely on the directions of their principal, could be set aside on Hastings-Bass principles, which required that the decision in question was attributable to the fiduciary decision maker and to no one else [35].
Judgment HHJ Smellie: Introduction [1] The first plaintiff (TMW) and members of his family were the beneficiaries under a trust known as the Ta-Ming Wang Trust (the trust) established by a settlement dated 2 May 1996 made between his mother, Wu Hsiu-Yen Wang, as settlor and the first defendant (CIBC) as the original trustee. The …Continue reading "Re the Ta-Ming Wang Trust Cause no. FSD 0089 of 2010"