Attribution Case

On July 13th, 2012, the Federal Court of Appeal dismissed the Crown appeal in The Queen v Peter Sommerer (2012 FCA 207)

In 1996, Peter Sommerer father, Herbert Sommerer, created an Austrian private foundation of which Peter, his wife and children were beneficiaries. Peter then entered into an agreement with the foundation to sell it certain shares at fair market value. The foundation used part of its endowment money to pay Peter for the shares. The foundation later sold the shares and realized a capital gain.

The main issue in the case was whether subsection 75(2) of the Income Tax Act (Canada) should be interpreted to apply in the context of the fair market value sale of shares, such that the capital gain realized by the foundation could be attributed back to Peter.

The Crown argued that the capital gains realized by the foundation should be attributed to Peter because it was possible that the shares or property substituted for the shares (including the proceeds of their sale) might be distributed to him as a beneficiary. In other words, the Crown argued that subsection 75(2), which generally applies in respect of the settlement of a trust where the settlor is also a beneficiary, should also apply in respect of property that has been purchased by a trust from a beneficiary at fair market value.

The Tax Court of Canada found in favour of the taxpayer on the basis that subsection 75(2) could not apply to a beneficiary in respect of property sold to a trust at fair market value. The Court main conclusion was that once properly unraveled and viewed grammatically and logically, the only interpretation is that only a settlor, or a subsequent contributor who could be seen as a settlor, can be the the person for purposes of subsection 75(2) of the Act.

A unanimous Federal Court of Appeal upheld the Tax Court decision. Since Peter was neither the settlor not a subsequent contributor (because the property was sold at fair market value), the Court held that subsection 75(2) did not apply to attribute the capital gains realized by the foundation to him.