EDGE Magazine | Q3 2011
“
Mr. Sommerer is one of those energetic individuals whose mind is so full of business ideas,
specifically connected to the hi-tech industry, that he cannot seem to actuate them fast enough. He left me with the impression of someone who cannot sit still for long, evidenced by standing throughout his three and a half days of testimony."
How, then, are the substantial gains earned by the energetic Mr. Sommerer
in a private foundation
established in Austria to be taxed? This is the issue that was addressed in the recent Tax Court of Canada appeal decision of Sommerer v. The Queen, 2011 TCC 212.
As background, Mr. Sommerer's father established a "Private Foundation"in Austria in 1996. Mr. Sommerer, his wife and children were the beneficiaries of the foundation. In 1996, Mr. Sommerer sold his shares in a company he founded, Vienna Systems Corporation, to the foundation. However, he retained voting rights. The shares were subsequently sold, and a significant gain was realized. The issue was whether this gain was taxable in the hands of Mr. Sommerer's hands.
Numerous issues were argued and determined.
On the issue of whether the Private Foundation constituted a "trust" under Canadian law, the Court first considered the essential elements of a trust under Canadian law, and then considered the elements of the foreign arrangement
to determine if it would be considered as a trust for the purposes of Canadian law.
The discussion regarding the existence of a "trust" is informative.
In considering what a trust is, the Court
noted that a trust "cannot be defined. It can only be described. That means you can point to it's characteristics or elements, but you cannot put into a sentence what it is."
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How, then, can a trust be described? The court accepted the following descriptions:
• An equitable obligation, binding a person (called the trustee) to deal with property (called trust property) owned by him as a separate fund, distinct from his own property, for the benefit of persons (called beneficiaries or, in all cases, cestui qui trust) of whom he may be one, and any of whom may enforce the obligation. • The hallmarks, the essential characteristics of the common-law trust, are heavily reflective of a peculiar legal history. The foremost of these is the fiduciary relationship which exists between trustee and beneficiary. The following elements are surely essential. From the moment of the creation of the trust, there must be an ability of the beneficiary to secure an accounting or, to put it another way, a power in the beneficiary to enforce the discharge of it's duties by the trustee. • In simplified terms, a trust is an arrangement whereby a person who holds title to property is under an obligation to administer it for the benefit of another person or persons.
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