Caplan v Agence du revenue du Quebec (Caplan) concerned distributions allocated from a discretionary trust to beneficiaries of a trust and then transferred to their father (also a beneficiary). The court found that the children acted as an “accommodating party, whether as an agent or nominee, for their father.” Moreover, they never had control over amounts paid to them by the Trust. In the end, the amounts allocated to the children were taxed to the father, effectively defeating the tax planning that had been put in place.
In 2011 the Philip Caplan Family Trust (the Trust) was settled. The Trust had two trustees: Philip Caplan (Philip) and his spouse Susan Kasser. The beneficiaries were themselves, their children Michael Caplan (Michael), Megan Caplan (Megan) and a corporate beneficiary, 7898037 Canada Inc.
The Trust held the common shares of 789029 Canada Inc., which held shares of PC Packaging and Design Inc.
In 2011 to 2014, 789029 Canada Inc. paid dividends to the Trust, which allocated all or part of the dividends to Michael and Megan. Michael and Megan properly reported the dividend income. The dividends allocated to Michael and Megan were immediately returned to their father and those amounts were used by him for personal purposes (cheques were issued to Michael and Megan, who endorsed the cheques to Philip, who then deposited them into his own account).
Philip argued that the funds transferred to him were used for the benefit of his children.
One of the issues at trial was whether the amounts paid by the Trust to Michael and Megan must be taxed in Philip’s hands.
The court held that Michael and Megan acted as an “accommodating party, whether as an agent or nominee, for their father.” Moreover, they never had control over amounts paid to them by the Trust.
The court ultimately held that the amounts allocated by the Trust to Michael and Megan would be taxed in Philip’s hands.
Why this Case is Important
While this case is a Quebec case and under the Taxation Act it demonstrates the importance of properly documenting trustee decisions and tracing the funds to the beneficiaries of the trust. Using family trusts in tax and estate planning can bring many benefits, however, be careful when allocating income and documenting trustee decisions.
 2019 QCCQ 3269.
 See paragraphs 97 and 98.
 CQLR, c. I-3