COURT FILE NO.: CV-14-508968 & CV-14-508969
DATE: 20231204
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CV-14-508968
THEODOROS DARMOS FAMILY TRUST, BY ITS TRUSTEE, SHASHI R. MALIK
Appellant
– and –
THE MINISTER OF FINANCE
Respondent
AND BETWEEN:
CV-14-508969
DARMOS FAMILY TRUST, BY ITS TRUSTEE, SHASHI R. MALIK
Appellant
Molly Luu, David Chodikoff, Justin Ng, for the Appellants
Elizabeth Chasson, Erin Strashin and Jacqueline Blackett, for the Respondent
- and –
THE MINISTER OF FINANCE
Respondent
HEARD: April 3, 4, 5, 6, 7, 10, 11, 12, 13 and 14, 2023,
Contents
I. Overview.. 3
II. Cast of Character 4
III. Issues to be determined. 5
IV. Evidence at the Trial 5
V. Background. 6
VI. Agreed Facts. 7
Positions of the Parties. 14
The Appellants. 14
The Respondents. 16
Minister's Assumptions of Facts re: Ted Trust 17
Minister's Assumptions of Facts re: Darmos Trust 22
Evidence of the Witnesses. 27
Theodoros Darmos. 27
Shashi Malik. 29
Louis Alexopoulos. 30
Gary Kaye. 33
Edward Bartucci 36
Credibility of Witnesses. 37
Analysis. 37
The Trust Property. 38
Burden of Proof. 39
Residence of trust 40
Consent, Release, Discharge and Indemnity. 42
No Independent decision making of trustees. 43
Royal Trust Fees. 47
Management of the Trust Assets/Investment Strategy. 47
Distribution to Beneficiaries. 49
Professional advisors. 50
Loan to 336. 51
Tolling Agreement 51
Bell Canada Litigation. 51
Groia Representation………………………………………………………………………….52
Tax Installment 52
Billing of the Alberta Trustees. 52
Conclusion. 53
Disposition. 56
Costs. 56
a.p. ramsay j.
[1] The appellants seek judgment declaring the trusts to be Alberta trusts and that the Canada Revenue Agency vacate the assessment of Ontario provincial taxes and return the taxes paid with applicable interest. The appellant trusts appeal their Income Tax Reassessments pursuant to the Income Tax Act, R.S.C. 1985, c. I. and the Income Tax Act (Ontario), R.S.O. 1990, c. I.2.
[2] There were three trustees managing the appellant trusts. Two of the three trustees resided in Alberta. One of the trustees resided in Ontario. The assets of the appellant trusts were shares of numbered corporations, subsequently amalgamated, which held the post sale proceeds of a business sold to Bell Canada by one of the beneficiaries.
I. Overview
[3] The appellants, the Theodoros Darmos Family Trust (the “Ted Trust”) and the Darmos Family Trust (the “Darmos Trust” or the “Darmos Family Trust”), filed their T3 returns of income for the taxation years ending December 31, 2006, and December 31, 2007, respectively, as residents of Alberta, and subject to Alberta provincial tax. The Ted Trust and the Darmos Trust reported taxable income as follows:
i. Ted Trust - $996,612 for its 2006 taxation year and $713,923 for its 2007 taxation year; and
ii. Darmos Trust - $24,074,644 for its 2006 taxation year and $879,511 for its 2007 taxation year.
[4] The Ted Trust and the Darmos Trust appeal from reassessments made by the respondent, now the Ontario Minister of Finance, under the Income Tax Act (Ontario), R.S.O. 1990, c.I.2 (the “Income Tax Act”) for their respective taxation years ended December 31, 2006 and December 31, 2007 (collectively, the “Reassessments”). In so reassessing, the Respondent determined the Ted Trust and the Darmos Trust to be residents of Ontario, and subject to Ontario provincial tax. The notices of reassessment for the Ted Trust and the Darmos Trust for each of the taxation years ended December 31, 2006, and December 31, 2007 are dated November 18, 2010.
[5] The Ted Trust and the Darmos Trust served notices of objection to the Reassessments. The Reassessments were confirmed, notices of which were dated September 3, 2013. The Reassessments are the subject matter of these appeals.
[6] The value of the Ted Trust during the relevant period was approximately $5.6 million dollars.
[7] The difference in tax that would be payable if the Ted Trust was resident in Ontario versus being resident in Alberta for its 2006 and 2007 taxation years is $84,343.
[8] The value of the Darmos Trust during the relevant period was approximately $38.2 million dollars.
[9] The difference in tax that would be payable if the Darmos Trust was resident in Ontario versus being resident in Alberta for its 2006 and 2007 taxation years is $1,366,401.
II. Cast of Character
[10] The following are the relevant cast of characters:
i. Theodoros Darmos is married to Calliopi Darmos. They have two children, Peter and Demetri Darmos. Mr. Darmos was the CEO of Infostream, which carried on business in the networking and solution technology area. Bell Canada purchased all of the shares of Infostream.
ii. Calliopi Darmos is the wife of Mr. Darmos, a beneficiary under the trusts, and a director and officer of the numbered companies.
iii. The Theodoros Darmos Family Trust ("Ted Trust") was settled in the Province of Ontario on October 1, 1997, before moving to Alberta in 2004
iv. The Darmos Family Trust (“Darmos Trust”) was settled in Barbados on January 12, 2000 before moving to Alberta in 2004.
v. Panos Ntarmos is the nephew of Mr. Darmos and the protector of the Darmos Trust.
vi. Infostream was an operating corporation that carried on the business of customer-specific networking solutions for VoIP, storage area networks, and network management services for enterprise customers.
vii. Bell Canada – In May of 2004, Bell Canada purchased Infostream in a share purchase of the company. Bell Canada later sued Infostream and the Darmos Trust as well as one of the Trustees of that trust.
viii. Shashi Malik is a resident of Alberta. He is a corporate and tax lawyer and an accountant with the designation of Chartered Accountant/CPA. Mr. Malik was a director of several of the numbered corporations before their amalgamation, and a director of the parent company. These companies held the funds obtained from the sale of Infostream to Bell Canada. Mr. Malik was also one of the three co-trustees for the two appellant trusts.
ix. Louis Alexopoulos is one of the founding partners of Sotos LLP. Mr. Alexopoulos is a resident of Ontario and was one of the co-trustees of the two trusts during the relevant time. He was the corporate and M&A lawyer effecting the transaction by which Infostream was sold to Bell Canada, and general counsel for the numbered companies which held the post sale proceeds from the sale of Infostream to Bell Canada.
x. Royal Trust Corporation of Canada ("Royal Trust") was one of the three co-trustees for the two appellant trusts. Royal Trust had an office in Calgary.
xi. Garry Kaye and Gary Troup were the senior trust advisors from Royal Trust assigned to the two trusts. Both resided in Calgary, Alberta.
III. Issues to be determined
[11] The issue to be determined is whether the appellant trusts were residents of the province of Alberta or Ontario for the 2006 and 2007 taxation years.
IV. Evidence at the Trial
[12] The parties filed a Joint Document Brief in Court File No. CV-14-508969 (Darmos Trust proceeding) and agreed that all documents were admitted for the truth of their contents, subject to the respondent being able to raise issues respecting the signature of Panos Ntarmos, where appliable.
[13] The parties also filed a Joint Document Brief in Court File No. CV-14-508968 (Ted Trust proceeding) and agreed on the documents admitted for the truth of their contents except as specified.
[14] The parties also filed an Agreed Statement of Facts.
[15] The appellant trusts also called the following witnesses:
a) Theodoros Darmos
b) Shashi Malik
c) Louis Alexopoulos
d) Gary Kaye
e) Edward Bartucci
[16] The respondent Minister did not call any witnesses.
V. Background
[17] On October 1, 1997, the Ted Trust was settled in the Province of Ontario by Anna Darmos.
[18] On January 12, 2000, the Darmos Trust was settled in Barbados by Panos Ntarmos.
[19] Before May 2004, the Darmos Trust was situated in Barbados and its sole trustee was Dr. Trevor Carmichael (“Dr. Carmichael”).
[20] The protector of the Darmos Family Trust is Panos Ntarmos. Mr. Ntarmos at all relevant times lived in Greece. Ntarmos was required to consent to all distributions of income or capital from the Darmos Trust to a beneficiary and all loans by the Darmos Trust to a beneficiary or any party not dealing at arm’s length from a beneficiary.
[21] The beneficiaries of the Ted Trust include Darmos, Callie, and their sons, Peter and Demetri (collectively the “Ted Trust beneficiaries”). The beneficiaries of the Darmos Trust were Darmos, Callie, Peter and Demetri, collectively (the “Darmos Trust beneficiaries”). The Ted and Darmos Trust beneficiaries were residents of Ontario at all material times.
[22] Before 2004, Mr. Darmos was the CEO of a technological corporation, Infostream. Infostream was an operating corporation that carried on the business of customer specific networking solutions for VoIP, storage area networks, and network management services for enterprise customers.
[23] During the relevant times, the appellant trusts principally held shares in holding corporations that did not carry on an active business.
[24] In late 2003 to May 2004, KPMG created a pre-sale reorganization plan to facilitate the sale of Infostream Technology Inc. and related businesses to Bell Canada.
[25] KPMG contacted Mr. Malik on behalf of the Darmos Family Trust in April 2004. The Darmos Trust retained Malik and Gowling Lafleur Henderson LLP (“Gowlings”) to investigate a migration of the Darmos Family Trust from Barbados to Alberta.
[26] In or around 2004, Malik’s main contacts respecting the engagement were Ben Traurig and Derek Novis of KPMG.
[27] On January 1, 2005, Mr. Ntarmos appointed Mr. Alexopoulos and Royal Trust as additional trustees for the Darmos Trust together with Mr. Malik.
[28] Effective January 1, 2005, Mr. Darmos appointed Louis Alexopoulos and Royal Trust Corporation as additional trustees for the Ted Trust.
[29] After Malik performed the legal services to effect the changes to the Darmos Family Trust, he reviewed and attended to the move for the Ted Trust from Ontario to Alberta.
[30] After Mr. Malik performed the legal services to effect the changes to the Darmos Family Trust, he also moved for the Ted Trust from Ontario to Alberta.
[31] Mr. Malik represented the appellants in the sale of Infostream. He reviewed tax planning memoranda, the primary and ancillary share sale documents, drafted various closing documents, and had discussions with relevant parties to ensure that the sale of Infostream and the corporate re-organizations would not prejudice the Trusts or their beneficiaries commercially or on a tax basis. He negotiated commercial terms of the sale documents on behalf of the Appellants and beneficiaries.
[32] On May 27, 2004, the sale of Infostream closed. The particulars related to the sale are not in dispute.
[33] There are no reassessments related to the Infostream sale transactions. No tax assessments were issued in 2004-2005 and nothing related to the Infostream sale transaction is in dispute.
VI. Agreed Facts
[34] For the purposes of these appeals, the parties filed and Agreed Statement of Facts in which they admit the facts below.
A. REASSESSMENTS UNDER APPEAL
i. THE THEODOROS DARMOS FAMILY TRUST AND THE DARMOS FAMILY TRUST
[35] On October 1, 1997, the Ted Trust was settled in Ontario by Anna Darmos, who was Theodoros Darmos’ mother.
[36] Darmos and his spouse, Callie, were the original trustees of the Ted Trust.
[37] The beneficiaries of the Ted Trust include Darmos, Callie, and their sons, Peter and Demetri (collectively the “Ted Trust beneficiaries”).
[38] At all material times, the Ted Trust beneficiaries were individuals resident in Ontario.
[39] On January 12, 2000, the Darmos Trust was settled in Barbados by Panos Ntarmos (“Ntarmos”), who is Darmos’ nephew.
[40] At all material times, Ntarmos was a resident of Greece.
[41] Ntarmos was the protector of the Darmos Trust and was authorized to appoint the trustees of the Darmos Trust.
[42] Dr. Trevor Carmichael, a resident of Barbados, was appointed as the original trustee of the Darmos Trust.
[43] The beneficiaries of the Darmos Trust were Darmos, Callie, Peter and Demetri, collectively (the “Darmos Trust beneficiaries”).
[44] At all material times, the Darmos Trust beneficiaries were individuals resident in Ontario.
[45] Ntarmos was required to consent to all distributions of income or capital from the Darmos Trust to a beneficiary and all loans by the Darmos Trust to a beneficiary or any party not dealing at arm’s length from a beneficiary.
[46] On May 7, 2004:
i) Dr. Trevor Carmichael resigned as trustee of the Darmos Trust; and
ii) Shashi B. Malik, a tax practitioner who is both a tax and corporate lawyer and a Chartered accountant (as it was known then) resident in Alberta, was appointed trustee of the Darmos Trust.
[47] On May 14, 2004:
i) Darmos and Callie resigned as trustees of the Ted Trust; and
ii) Malik was appointed trustee of the Ted Trust.
[48] On January 1, 2005, Louis Alexopoulos (“Alexopoulos”), a lawyer resident in Ontario, and the Royal Trust Company (“Royal Trust”) were appointed as additional trustees of the Ted Trust and the Darmos Trust.
[49] Malik and Alexopoulos each received trustee fees for acting as trustees of the Ted Test and the Darmos Trust. Royal Trust received $8,500 per year per trust as trustee fees for acting as trustee of the Ted Trust and the Darmos Trust.
[50] Malik also provided legal services to the Ted Trust and the Darmos Trust in his capacity as a lawyer at Gowlings.
[51] Alexopoulos, of Sotos Associates LLP in Toronto, was Darmos’ long-time lawyer. Alexopoulos also acted for all the corporations controlled by Darmos and provided legal services to the Ted Trust and the Darmos Trust in his capacity as a lawyer at Sotos Associates LLP.
[52] KPMG LLP in Toronto prepared the T3 returns for the Ted Trust’s and the Darmos Trust’s 2006 and 2007 taxation years, respectively. KPMG LLP in Calgary processed and printed those returns.
ii. INFOSTREAM TECHNOLOGIES INC.
[53] Darmos was the CEO, President and founder of Infostream Technologies Inc. (“Infostream”), a Richmond Hill, Ontario based company.
[54] Infostream’s businesses included: managed services, enterprise systems and storage, IP/Networking and cabling.
Shareholding of Infostream prior to May 2004 Reorganizations
[55] Since February 11, 2000, the Darmos Trust held 89.99 common shares in the capital of Infostream Consulting Inc. (“ICI”), being all the issued and outstanding common shares, which had a fair market value (“FMV”) of $56,693,700 and an adjusted cost base (“ACB”) of $1.00.
[56] Since February 18, 2000, the Ted Trust held 5,899,734 special shares in the capital of ICI, being all the issued and outstanding special shares, which had a FMV of $5,899,734 and an ACB of $1.00.
[57] ICI owned all of the shares of Infostream, the operating company, which consisted of 240 Class C shares, 4000 Class D shares and 117 common shares.
iii. REORGANIZATIONS IN ANTICIPATION OF SALE OF INFOSTREAM
[58] On May 14, 2004, Darmos incorporated seven new holding companies to facilitate a reorganization, contemplated by KPMG LLP in Toronto, prior to the sale of Infostream (collectively, the “numbered companies”):
i) 6235310 Canada Inc. (“310 Canada”);
ii) 6235301 Canada Inc. (“301 Canada”);
iii) 6235352 Canada Inc. (“352 Canada”);
iv) 6235336 Canada Inc. (“336 Canada”);
v) 6235344 Canada Inc. (“344 Canada”);
vi) 6235298 Canada Inc. (“298 Canada”); and
vii) 6235280 Canada Inc. (“280 Canada”).
[59] On May 14, 2004, the Darmos Trust and the Ted Trust entered into a series of transactions to reorganize the share structure of Infostream in advance of an anticipated sale of Infostream to Bell Canada (“Bell”).
[60] On May 20, 2004, Infostream, 280 Canada, 301 Canada, and ICI amalgamated. The amalgamated company was named Infostream Technology Inc. (“ITI”).
[61] On May 21, 2004, as a result of the share reorganization and the amalgamation, referred to in paragraphs 62 and 63, above:
i) The Darmos Trust owned 100 common shares in the capital of 310 Canada, being all the issued and outstanding common shares of 310 Canada.
ii) 310 Canada owned 100 common shares in the capital of 352 Canada, being all the issued and outstanding common shares of 352 Canada.
iii) 352 Canada owned 89.99 common shares in the capital of ITI.
iv) The Ted Trust owned 2,950,026 Class A shares of ITI and 10.01 common shares of ITI, which it acquired from Peter Stavropoulos and the Peter Stavropoulos Family Trust, respectively.
v) The Ted Trust owned 100 common shares in the capital of 298 Canada, being all of the issued and outstanding common shares on 298 Canada.
vi) 298 Canada owned 100 common shares of 344 Canada, being all of the issued and outstanding common shares of 344 Canada.
vii) 344 Canada owned 3,649,734 Class A shares of ITI.
[62] The following diagrams illustrate the shareholdings of the Darmos Trust and the Ted Trust as of May 21, 2004:
iv. SALE OF INFOSTREAM TO BELL
[63] On May 27, 2004:
i) 352 Canada sold its 89.99 common shares of ITI to Bell for proceeds of $56,693,700;
ii) 352 Canada subscribed for 56,564 common shares in the capital of 336 Canada for a subscription price of $56,564,000.
iii) the Ted Trust sold 2,950,026 Class A shares of ITI and 10.01 common shares of ITI to Bell for proceeds of $9,256,326;
iv) 344 Canada sold 3,649,734 Class A shares of ITI for proceeds of $3,649,734; and
v) 344 Canada subscribed for 3,649 common shares of 336 Canada for a subscription price of $3,649,000.
[64] The following diagrams illustrate the shareholdings of the Darmos Trust and the Ted Trust as of May 27, 2004 (post sale of ITI to Bell):
[65] On July 5, 2004, 336 Canada redeemed 1,200 common shares from 352 Canada for redemption proceeds of $1,200,000.
[66] On July 21, 2004, 336 Canada redeemed 18,440 common shares from 352 Canada for redemption proceeds of $18,440,000.
[67] After the sale of ITI to Bell, 352 Canada and 344 Canada invested the proceeds of sale they received from Bell in 336 Canada. The Darmos Trust and the Ted Trust held shares in 310 Canada and 298 Canada, respectively, which held shares in 352 Canada and 344 Canada, respectively, which each held shares in 336 Canada. The approximate value of the property held by the Darmos Trust and the Ted Trust was:
i) $5,600,000 with respect to the Ted Trust’s 100% interest in 298 Canada; and
ii) $38,200,000 with respect to the Darmos Trust’s 100% interest in 310 Canada.
v. EVENTS SUBSEQUENT TO THE SALE OF INFOSTREAM
[68] On January 1, 2007, 336 Canada, 352 Canada, 344 Canada, 298 Canada and 310 Canada amalgamated and continued as 336 Canada (“336 Amalco”).
[69] After the amalgamation, the shareholders of 336 Amalco, and the values attributed to those shareholdings were as follows:
i) the Ted Trust: 3 shares - $1,176,976; and
ii) the Darmos Trust: 97 shares - $38,026,093.
[70] Darmos was the President and Callie was the Secretary of 336 Amalco. Darmos, Callie and Malik were the directors of 336 Amalco.
[71] The securities held by 336 Amalco were managed by RBC Dominion Securities in Toronto.
a) Dividends to the Ted Trust and the Darmos Trust
[72] In 2005 and 2006, 298 Canada declared dividends to its sole shareholder, the Ted Trust, in the amounts of $330,000 and $1,127,000, respectively.
[73] 352 Canada declared and paid a total of $37,446,000 in dividends to 310 Canada as follows:
i) on July 21, 2004, capital dividend of $18,440,000;
ii) on January 1, 2005, a taxable dividend of $138,000; and
iii) on April 30, 2005, a taxable dividend of $18,888,000.
[74] In 2006, 310 Canada declared and paid dividends of $19,348,000 to the Darmos Trust.
[75] On December 20, 2007:
i) the Ted Trust reported a dividend from 336 Amalco in the amount of $552,474; and
ii) the Darmos Trust received a dividend from 336 Amalco in the amount of $947,526.
[76] On December 22, 2009, the Darmos Trust received a dividend from 336 Amalco in the amount of $300,000.
b) Distributions to the Ted Trust Beneficiaries and the Darmos Trust Beneficiaries
[77] On March 1, 2005, the Darmos Trust distributed $1,800,000 to Darmos.
[78] On March 16, 2005, the Darmos Trust disturbed $2,400,000 European dollars to Darmos.
[79] The following distributions were made from the Ted Trust in 2005 and 2006:
| 2005 | 2006 | |
|---|---|---|
| Peter | $150,000 | $150,000 |
| Demetri | $150,000 | $150,000 |
| Callie | $30,000 | $30,000 |
[80] On May 1, 2006, the trustees of the Darmos Trust consented to a $6,600,000 interest-free demand loan from 336 Canada to 6235361 Canada (“361 Canada”), which was secured by a first mortgage registered by 336 Canada against real property. 361 Canada is a corporation wholly owned by Darmos and Callie. Ntarmos consented to the loan to 361 Canada. 361 Canada entered into an agreement to purchase property in Toronto, Ontario.
[81] In December 2007, the Darmos Trust distributed $120,000 to each of Peter and Demetri. Ntarmos consented to the distributions.
[82] On December 20, 2007, the Ted Trust,
i) distributed $1,000,000 from its capital to Darmos; and
ii) distributed $1,000,000 from its capital to Callie.
[83] On December 22, 2008, the Darmos Trust received a dividend which it included in its computation of income. The Darmos Trust made distributions of $125,000 to each of Darmos, Callie, Demetri and Peter. Ntarmos consented to the distributions.
[84] On December 22, 2009, the Darmos Trust received a dividend of which it distributed $8,679.29 to each of Darmos, Callie, Demetri and Peter as a capital distribution, and included the remainder in its computation of income. The Darmos Trust made distributions of $66,320.71 to each of Darmos, Callie, Demetri and Peter. Ntarmos consented to the distributions.
VII. Positions of the Parties
A. The Appellants
[85] The appellants ask that the Notices of Reassessment be vacated and seek a refund of the payments made pursuant to the Notices of Reassessment with applicable interest.
[86] The appellant trusts submit that taxpayers are free to organize their affairs to avoid taxes. In 2004, as part of corporate and tax planning, the residence of the Darmos Trust was changed from Barbados to Alberta because a change in tax laws affecting non-resident trusts would deem the Darmos Trust to be resident in Canada in any event. Alberta was chosen as a reasonable jurisdiction both for tax reasons and for potential business opportunities. The Theodoros Darmos Family Trust (the "Ted Trust") similarly moved from Ontario to Alberta because the corporate and tax advice provided to the trustees of the trust was that it would be more efficient to have both the Darmos Trust and Ted Trust jointly managed and controlled by common trustees.
[87] The appellants submit that the trusts are discretionary trusts holding shares of a private corporation which is an organizational structure that has been endorsed by the Canada Revenue Agency as acceptable. The appellants submit that the respondent has led no evidence on the central management of the trusts and conflates the control of 336 Canada with the control of the appellants. They argue the respondents have focused on proving the management and control of 336 Canada, the corporation.
[88] The appellants submit that the three Trustees controlled and managed the appellants, and also retained control of 336 Canada through the ownership of voting shares. The appellants argue that the Trustees exercised their duties independently and their decision-making capacity in respect of the trust property was unfettered; they exercised control over the trust assets, at all times maintained control over 336 Canada, and managed the cash and liquid assets of the appellants during the period at issue. The appellants further submit that the common advisors and protectorate are not determinative of the trusts’ central management and control.
[89] The appellants argue that the trustees led strategic direction and performed managerial functions. During the period at issue, the trustees encountered serious issues which required that they exercise their discretion and management skills in order to take an active role in the strategic steps of the appellant trusts. The trustees rely on the following managerial decisions:
a. the Trustees consented to a loan made by 336 Canada to a related corporation to purchase a property on Yonge Street in Toronto after satisfying themselves that a negative tax consequence would not arise to the Appellants or the beneficiaries. After making further inquiries to KPMG to consider the issue, the trustees ultimately decided that the loan was better than a capital encroachment.
b. the Trustees decided to pause all distributions after June 2006 to consider the implications of the Bell Canada Litigation.
c. the Trustees retained Joseph Groia and his firm as litigation counsel on behalf of the trusts in the Bell Canada Litigation. After satisfying themselves that all the named defendants in the Bell Canada Litigation (including the Appellants) had common interests, Malik and Alexopoulos believed that appointing Groia would allow the Appellants to coordinate their defence and mitigate legal fees. Royal Trust took issue with Groia’s reputation and abstained from the decision to appoint Groia as litigation counsel for the Appellants in the Bell Canada Litigation.
d. the Trustees reviewed the litigation strategy of Groia in the Bell Canada Litigation, provided instructions, and received updates respecting the litigation on a periodic basis and as needed.
e. the Trustees hotly debated the issue of whether to toll claims of and against Peter Stavropoulos and ultimately decided to enter into a tolling agreement.
f. the Trustees consented to the amalgamation of the predecessor corporations to form 336 Canada. Kaye, on behalf of Royal Trust, consented after assurances that the amalgamation would have “no detrimental impact on the trusts or the beneficiaries thereof”. Malik and Alexopoulos independently considered the tax consequences and corporate benefits of the amalgamation.
g. the Trustees exercised management and oversight over the investment portfolio of 336 Canada, managed by RBC Dominion Securities, by recommending that the conservative, capital-preserving mix of the portfolio be changed to reflect at least 50% equities, pursuant to Royal Trust’s recommendation. As of April 30, 2007, the portfolio investments were changed to comprise 54% of equities in conformity with Royal Trust’s recommendation, as contemporaneously documented in the October 11, 2007 Minutes.
h. the Trustees considered the tax risk recommendations to approve capital encroachments in December 2007, primarily based upon Malik’s view of historical tax changes and the risks and rumours highlighted by KPMG LLP.
i. the Trustees declined KPMG LLP’s advice to pay large installment payments to the Canada Revenue Agency. Instead, the Trustees followed Royal Trust’s recommendation and internal policy to not make installment payments as contemporaneously documented in the October 11, 2007 Minutes.
B. The Respondents
[90] The Respondent conceded in opening argument that he does not take issue with any of the corporate planning related to the sale of Infostream.
[91] The respondent argues that the evidence supports a conclusion that the central management and control is in Ontario and therefore the trusts will be liable for tax as a resident of Ontario.
[92] The appellant trusts have not proven, on a balance of probabilities, that the central management and control of the trust property resides in Alberta with Shashi Malik and the Royal Trust Company of Canada. Malik and Royal Trust, represented by Garry Kaye, were selected as trustees to give the illusion that the appellant trusts were resident in Alberta. Malik and Kaye implemented and papered decisions already made by Darmos and/or his advisors, Louis Alexopoulos and KPMG, in Ontario.
[93] The appellant trusts have not tendered contemporaneous documentation evidencing that the central management and control of the trust property was located in Alberta. The vast majority of the documentation tendered demonstrated that the role of the trustees was to implement and document the decisions made by others. The court may draw an adverse inference from the failure of the appellant trusts to tender notes or documents in support of their assertions.
i. Minister's Assumptions of Facts re: Ted Trust
[94] In performing a reassessment, the Minister proceeds on the basis of certain assumptions. As detailed below, the appellant bears the initial onus to “demolish” these assumptions: Johnston v. Minister of National Revenue, 1948 CanLII 1 (SCC), 1948 S.C.R. 486, at para. 7.
[95] The Assumptions of Fact made by the Minister are disclosed in the Minister's Reply dated July 15, 2015. The Minister’s Assumptions are as follows:
Background
a) Darmos is a resident of Ontario.
b) Calliopi Darmos is the spouse of Mr. Darmos and is a resident of Ontario.
c) Peter Darmos and Demetri Darmos are the children of Mr. Darmos and Calliopi Darmos and are residents of Ontario.
d) On October 1, 1997, Panos Ntarmos, the nephew of Darmos, settled the appellant trust in Ontario;
e) Ntarmos is the Protector of the appellant trust and is a resident of Greece;
f) Darmos and Calliopi are authorized to change trustees and appoint one or more substitute trustees to fill a vacancy in the office of the trustee.
g) The beneficiaries of the appellant trust were Darmos, Calliopi, Peter and Demetri.
h) Darmos was the main controlling beneficiary.
i) Darmos and Calliopi were appointed as trustees of the appellant trust.
j) On May 7, 2004, Shashi Malik was appointed to act as trustee of the appellant trust in place of Darmos and Calliopi.
k) During the taxation years under appeal, Malik was a lawyer residing in the Province of Alberta.
l) In 2005, Louis Alexopoulos, a lawyer residing in Toronto, Ontario and the Royal Trust Company of Canada, Calgary, Alberta were appointed to act as trustees of the appellant trust in addition to Mr. Malik.
m) Alexopoulos and his firm Sotos LLP were the lawyers for Darmos, the appellant trust and all of the corporations owned and controlled by Darmos.
n) KPMG LLP Chartered Accountants in Toronto, Ontario were the accountants for Darmos, the appellant trust and all of the corporations owned and controlled by Darmos.
o) KPMG LLP designed and implemented the tax planning for Darmos, the corporations owned and controlled by Darmos and for the appellant trust.
p) KPMG LLP is a resident of the Province of Ontario.
q) Since February 18, 2000, the appellant trust held 5,899,734 special shares in the capital of Infostream Consulting Inc. (“ICI”), being all of the issued and outstanding special shares, which had a fair market value of $5,899,734 and an adjusted cost base of $1.00.
r) ICI owned all of the shares of the operating company, Infostream Technologies Inc. (“Infostream”) which consisted of 240 Class C shares, 4,000 Class D shares and 117 common shares.
Reorganization
s) On May 14, 2004, Darmos incorporated seven new holding companies.
t) On May 14, 2004, the following transactions were completed as directed by Darmos and his accounting and legal advisors in Toronto.
i. The appellant trust sold 5,899,734 special shares in the capital of ICI to 623580 Canada Inc. (“623580”) in consideration for 2,250,000 and 100 common shares of 623580 with a fair market value of $2,250,000 and 100 common shares of 623580 with a fair market value of $3,649,734.
ii. The sale of special shares of ICI by the appellant trust to 623580 was completed pursuant to section 85 of the Income Tax Act, R.S.C. 1985, 5th supp. c.1, as amended.
iii. As a result of the transaction, the appellant trust realized a capital gain of $2,250,000 which was allocated to the beneficiaries of the appellant trust.
iv. The beneficiaries of the appellant trust included the capital gain in computing their income for the 2004 taxation year and claimed a capital gain exemption to reduce their taxable income for the 2004 taxation year.
v. The appellant trust sold 100 common shares in the capital of 623580 to 6235298 for share consideration of 100 common shares of 6235298 which had a fair market value of $3,649,734 and an adjusted cost base of $1.00.
vi. The appellant trust acquired 10.01 common shares of ICI from the Peter Stavropoulos Family Trust and 700,026 special shares of ICI from Peter Stavropoulos for total consideration of $5,716,600.
vii.The appellant trust issued non-interest bearing notes in payment for the common and special shares of ICI.
u) On May 20, 2004, 6235280, 6235301 Canada Inc., ICI and Infostream (the operating company) amalgamated to Infostream Technologies Inc. (“ITI”).
v) As a result of the amalgamation, 6235298 received 3,349,734 Class A shares of ITI and the appellant trust received 2,950,026 Class A shares and 10.01 common shares (“6235344”) for share consideration of 100 common shares of 6235344.
w) As a result of the series of transactions referred to above, the appellant trust owned 100 common shares in the capital of 6235298 and 2,950,026 Class A shares of ITI and 10.01 common shares of ITI.
x) As a result of the series of transactions referred to above, 6235298 owned 100 common shares of 6235344, being all of the issued and outstanding common shares in the capital of 6235344.
y) On May 27, 2004, 62334344 sold its 3,649,734 Class A shares of ITI to Bell Canada for proceeds of $3,649,734 and reported capital gains of $3,649,733.
z) On May 27, 2004, the appellant trust sold 10.01 common shares and 2,950,026 Class A shares of ITI to Bell Canada for proceeds of $9,256,326 and reported capital gains of $1,191,816.
aa) On May 27, 2004, 6235344 purchased 3,649 common shares of 6235336 for a subscription price of $3,349,733.
bb) At all times, Darmos controlled the corporations involved in these transactions and series of transactions and continued to control the appellant trust directly and indirectly through professional advisors.
cc) KPMG LLP in Toronto handled all of the accounting for the above transactions and series of transactions pursuant to the instruction and direction of Darmos.
dd) Darmos was responsible for all negotiations regarding the sale of ITI to Bell Canada.
ee) Darmos represented to Bell Canada that he was the founder and sole owner of ITI.
ff) All information provided to Bell Canada relating to the sale of ITI was provided pursuant to the direction of Darmos.
gg) Darmos retained and provided instructions to counsel relating to the action brought by Bell Canada against Darmos, Calliopi, the appellant trust, the Darmos Family Trust, 6233544 Canada Inc., 6235352 Canada Inc., 6235298 Canada Inc. and 6235310 Canada Inc.
hh) For the taxation year ended April 30, 2005, 336 Canada paid total dividends of $1,550,000 to 6235344.
ii) On July 21, 2004, 6235344 paid a capital dividend of $1,450,000 to 6235298.
jj) For the taxation year ended December 31, 2005, 6235298 declared dividends of $330,000 to its sole shareholder, the appellant trust.
kk) For the taxation year ended December 31, 2006, 6235298 declared dividends of $1,127,000 to its sole shareholder, the appellant trust.
ll) These dividends were reported by the appellant trust at the lower Alberta tax rate and then distributed to Darmos or as he directed.
mm) KPMG LLP in Toronto directed the amount of dividends that were declared by the above described corporations pursuant to the direction of Darmos.
nn) On December 23, 2004, Darmos, Calliopi, Peter and Demetri delegated the investment management of the trust property to RBC Dominion Securities.
oo) All of the beneficiaries agreed that the trustees would not be responsible for any loss or damage to the property owned by the appellant trust that may occur to any investment made by RBC Dominion Securities.
pp) Alexopoulos determined that the corporations that were formed as part of the sale of Darmos’ interest in ITI to Bell Canada were no longer necessary and as such determined that these corporations would be amalgamated.
qq) On January 1, 2007, 6235336, 6235352, 6235344, 6235298 and 6235310 amalgamated to form 6235336 Canada Inc. (“336 amalco”).
rr) After the amalgamation, the shareholders of 336 amalco were:
(i) the appellant trust: 3 common shares;
(ii) Darmos Family Trust: 97 common shares.
ss) On December 20, 2007, the appellant trust received a dividend from 336 amalco in the amount of $552,474.
Distribution to Beneficiaries
tt) On January 24, 2006, KPMG instructed Alexopoulos to make distributions from the appellant trust as follows:
| 2005 | 2006 | |
|---|---|---|
| Peter | $150,000 | $150,000 |
| Demetri | $150,000 | $150,000 |
| Callie | $30,000 | $30,000 |
uu) On December 20, 2007, Mr. Darmos requested an encroachment on capital of the appellant trust and a distribution from the appellant trust in the amount of $1,00,000 was made to Mr. Darmos.
vv) On December 20, 2007, Calliopi requested an encroachment on capital of the appellant trust and a distribution from the appellant trust in the amount of $1,000,000 was made to Calliopi.
ww) KPMG LLP provided the instructions to the trustees of the appellant trust to implement the above described distributions.
xx) Darmos agreed and directed KPMG LLP to provide the above described instructions.
Tax Filings
yy) KPMG LLP prepared the T3 returns for each taxation year of the appellant trust based on information received from Darmos and his advisors.
zz) KPMG LLP directed all accounting transactions in regard to the sale of the operating company, ITI, the amount of dividends that would flow between and among the various corporations owned and controlled by Darmos and the amounts that would be distributed to the beneficiaries.
Central Management and Control in Ontario
aaa) At all times, Darmos managed and controlled all activities of the appellant trust either directly or indirectly through his professional advisors in Ontario including KPMG LLP and Mr. Alexopoulos.
bbb) At all times, the mind and management of the appellant trust was in the Province of Ontario.
ccc) The trustee’s duties were restricted to administrative actions only in carrying out directions from Mr. Darmos and his professional advisors in Ontario.
ddd) The trustees were not responsible nor did they have a role in any decision making with respect to the appellant trust or its management.
eee) The trustees in Calgary, namely the Royal Trust and Malik, were paid a nominal fee consistent with the limited administrative duties that were performed.
fff) The selection of two trustees located in Calgary were tax driven.
ggg) The appellant trust was formed to receive dividends from corporations owned and controlled by Darmos and to pay tax on dividends received at the lower Alberta income tax rate.
hhh) The appellant trust had minimal activity beyond the holding of common shares of 6235298 and after amalgamation, holding 3 common shares of 336 amalco and the receipt of dividends.
Minister's Assumptions of Facts re: Darmos Trust
[96] The Assumptions of Fact made by the Minister are disclosed in the Minister's Reply dated July 20, 2015. The Minister’s Assumption are as follows:
Background
a) Theodoros Darmos ("Darmos"), is a resident of Ontario;
b) Calliopi Darmos ("Calliopi") is the spouse of Darmos and is a resident of Ontario;
c) Peter Darmos ("Peter") and Demetri Darmos ("Demetri") are the children of Darmos and Calliopi and are residents of Ontario;
d) on January 12, 2000, Panos Ntarmos ("Ntarmos"), the nephew of Darmos, settled the appellant trust in Barbados;
e) Ntarmos is the Protector of the appellant trust and authorized to appoint the trustees of the appellant trust;
f) all distributions of income or capital from the appellant trust to a beneficiary and all loans by the appellant trust to a beneficiary or to any party not dealing at arm's length from a beneficiary required the consent of the Protector Ntarmos;
g) at all times, Darmos did not deal at arm's length from his nephew Ntarmos;
h) at all times, Ntarmos was directed by Darmos;
i) the beneficiaries of the appellant trust were Darmos, Calliopi, Peter and Demetri;
j) Darmos was the main controlling beneficiary;
k) Dr. Trevor Carmichael, a resident of Barbados, was appointed as the original trustee of the appellant trust;
l) on May 7, 2004, Shashi Malik ("Malik") was appointed to act as Trustee of the appellant trust in place of Dr. Carmichael;
m) during the taxation years under appeal, Malik was a lawyer residing in the Province of Alberta;
n) in 2005, Alexopoulos, a lawyer residing in Toronto, Ontario, and Royal Trust were appointed to act as Trustees of the appellant trust in addition to Malik
o) Alexopoulos and his firm Sotos LLP were the lawyers for Darmos, the appellant trust and all of the corporations owned and controlled by Darmos;
p) KPMG LLP Chartered Accountants (“KPMG LLP") in Toronto, Ontario were the accountants for Darmos, the appellant trust and all of the corporations owned and controlled by Darmos;
q) KPMG LLP designed and implemented the tax planning for Darmos, the corporations owned and controlled by Darmos, and for the appellant trust;
r) KPMG LLP is a resident of the Province of Ontario;
s) since February 11, 2000, the appellant trust held 89.99 common shares in the capital of lnfostream Consulting Inc. ("ICI”), being all of the issued and outstanding common shares, which had a fair market value of $56,693,700 and an adjusted cost base of $1.00;
t) ICI owned all of the shares of the operating company, Infostream Technologies Inc. ("lnfostream") which consisted of 240 Class C shares, 4000 Class D shares and 117 common shares;
Reorganization
u) on May 14, 2004, Darmos incorporated seven new holding companies;
v) through a series of transactions and the capitalization of safe income, the adjusted cost base of the shares held by the appellant trust in the capital of ICI increased from $1.00 to $8,400,000;
w) as a result of the series of transactions referred to above, the appellant trust owned 100 common shares in the capital of 6235310 Canada Inc. ("6235310"), being all of the issued and outstanding common shares of 6235310;
x) 6235310 owned 100 common shares in the capital of 6235352 Canada Inc. ("6235352"), being all of the issued and outstanding common shares of 6235352;
y) 6235352 owned 89.99 common shares in the capital of the operating company ITI, being all of the issued and outstanding common shares of ITI;
z) on May 27, 2004, 6235352 sold its 89.99 common shares of ITI to Bell Canada for proceeds of $56,693,700 and reported capital gains of $47,534,089;
aa) on May 27, 2004, 6235352 subscribed for 56,564 common shares in the capital of 6235336 Canada Inc. ("6235336”) for a subscription price of $56,564,000;
bb) at all times, Darmos controlled the corporations involved in these transactions and series of transactions and continued to control the appellant trust directly and indirectly through professional advisors;
cc) KPMG LLP in Toronto handled all of the accounting for the above transactions and series of transactions pursuant to the instruction and direction of Darmos;
dd) Darmos was responsible for all negotiations regarding the sale of ITI to Bell Canada;
ee) Darmos represented to Bell Canada that he was the founder and sole owner of ITI;
ff) all information provided to Bell Canada relating to the sale of ITI was provided pursuant to the direction of Darmos;
gg) Darmos retained and provided instructions to counsel relating to the action brought by Bell Canada against Darmos, Calliopi, the appellant trust, the Theodoros Darmos Family Trust, 6235344 Canada Inc., 6235352 Canada Inc., 6235298 Canada Inc. and 6235310 Canada Inc.;
hh) on July 4, 2004, 6235336 redeemed 1,200 common shares from its sole shareholder 6235352 for redemption proceeds of $1,200,000;
ii) on July 21, 2004, 6235336 redeemed 18,440 common shares from its sole shareholder 6235352 for redemption proceeds of $18,440,000;
jj) for the taxation year ended April 30, 2005, 6235352 declared and paid a total of $37,466,000 in dividends to its sole shareholder 6235310 as follows:
i. on July 21, 2004, a capital dividend of $18,440,000;
ii. on January 1, 2005, a taxable dividend of $138,000;
iii. on April 30, 2005, a taxable dividend of $18,888,000;
kk) the dividends received by 6235310 were paid to its sole shareholder, the appellant trust as follows:
i. taxable dividend of $18,888,000 reported in the taxation year ending March 31, 2006;
ii. taxable dividend of $460,000 reported in the year ended December 31, 2006
ll) these dividends were reported by the appellant trust at the lower Alberta tax rate and then distributed to Darmos or as he directed to his spouse, Calliopi or his children, Peter and Demetri;
mm) KPMG LLP in Toronto directed the amount of dividends that were declared and paid by the above described corporations pursuant to the direction of Darmos;
nn) on December 23, 2004, Darmos, Calliopi, Peter and Demetri delegated the investment management of the trust property to RBC Dominion Securities;
oo) all of the beneficiaries agreed that the Trustees would not be responsible for any loss or damage to the property owned by the appellant trust that may occur to any investment made by RBC Dominion Securities;
pp) Alexopoulos determined that the corporations that were formed as part of the sale of Darmos' interest in ITI to Bell Canada were no longer necessary and as such determined that these corporations would be amalgamated;
qq) on January 1, 2007, 6235336, 6235352, 6235344, 6235298 and 6235310 amalgamated to form 6235336 Canada Inc. ("6235336 amalco");
rr) after the amalgamation, the shareholders of 6235336 amalco were:
i. Theodoros Darmos Family Trust: 3 common shares;
ii. appellant trust: 97 common shares;
ss) on December 20, 2007, the appellant trust received a dividend from 6235336 amalco in the amount of $240,000;
Distributions to Beneficiaries
tt) on March 1, 2005, Darmos requested a distribution from the appellant trust in the amount of $1,800,000;
uu) Ntarmos consented to the distribution and Darmos directed that the funds be paid to Alexopoulos' law firm, Sotos LLP, for distribution to Darmos;
vv) on March 16, 2005, Darmos requested a distribution from the appellant trust in the amount of $2,400,000 in European dollars;
ww) Ntarmos consented to the distribution and funds were paid to Darmos;
xx) on May 1, 2006, the trustees of the appellant trust consented to a $6,600,000 loan from 6235336 to 6235361 Canada Inc. ("6235361"), a corporation wholly owned by Darmos and Calliopi;
yy) Ntarmos consented to the loan of $6,600,000 to 6235361;
zz) 6235361 entered into an agreement to purchase property in Toronto for $6,450,000;
aaa) in December 2007, the appellant trust distributed $120,000 to each of Peter and Demetri;
bbb) Ntarmos consented to the distribution of $120,000 to each of Peter and Demetri;
ccc) on December 22, 2008, the appellant trust distributed $125,000 to each of Darmos, Calliopi, Demetri and Peter;
ddd) Ntarmos consented to the distribution;
eee) on December 22, 2009, the appellant trust received a dividend from 6235336 amalco in the amount of $300,000 and distributed $75,000 to each of Peter, Demetri, Darmos and Calliopi;
fff) Ntarmos consented to the distribution to the beneficiaries;
ggg) KPMG LLP provided the instructions to the Trustees of the appellant trust to implement the above described loans and distributions;
hhh) Darmos agreed and directed KPMG LLP to provide the above described instructions;
Tax Filings
iii) KPMG LLP prepared the T3 returns for each taxation year of the appellant trust based on information received from Darmos and his advisors;
jjj) KPMG LLP in Toronto, Ontario directed all accounting transactions in regards to the sale of the operating company, ITI, the amount of dividends that would flow between and among the various corporations owned and controlled by Darmos and the amounts that would be distributed to the beneficiaries;
Central Management and Control in Ontario
kkk) at all times, Darmos managed and controlled all activities of the appellant trust either directly or indirectly through his professional advisors in Ontario including KPMG LLP and Alexopoulos;
lll) at all times, the mind and management of the appellant trust was in the Province of Ontario;
mmm) the Trustee's duties were restricted to administrative actions only in carrying out directions from Darmos and his professional advisors in Ontario;
nnn) the trustees were not responsible nor did they have a role in any decision making with respect to the appellant trust or its management;
ooo) The Trustees in Calgary, namely the Royal Trust and Malik, were paid a nominal fee consistent with the limited administrative duties that were performed;
ppp) the appellant trust was formed to receive dividends from corporations owned and controlled by Darmos and to pay tax on dividends received at the lower Alberta income tax rate;
qqq) the appellant trust had minimal activity beyond the holding of common shares of 6235310 and after amalgamation, holding 97 common shares of 6235336 amalco and the receipt of dividends;
VIII. Evidence of the Witnesses
A. Theodoros Darmos
[97] In the early 80s, Ted Darmos started DataStream Electronics part-time. The company later changed its name to Infostream Cables and Systems, and then to Infostream Technologies. The nature of the business changed from cables and systems to networking. Mr. Darmos brought on a partner along the way as the business grew and more people joined the company. In 2000, he ventured into enterprise systems and storage. He built the company up over 35 years and was the President and CEO of the company for a time. In 2002, the company had revenues of $62 million, and when he was approached by Bell in 2003, the company had revenue projections of $100 million. The revenues surpassed that in the following years and at the time Bell closed the books in 2005, the revenue was $135 million.
[98] Mr. Darmos’ relationship with KPMG goes back to the mid-90s. He was referred to George Christopoulos by a relative, and continued relationships with others at KPMG after Mr. Christopoulos left including Morris Pilar, Ed Bartucci and Paola D'Agostino. These professionals completed the tax returns for Infostream and later for the numbered corporations. It was Mr. Christopoulos who introduced Mr. Darmos to Mr. Alexopoulos in the mid-90s. Alexopoulos acted for Infostream, Darmos personally, and the numbered corporations before and after the sale to Bell.
[99] Mr. Darmos testified that the Ted Trust followed the bigger trust to Alberta for ease of management of funds, as it was efficient to have one trustee manage both trusts. Mr. Malik was initially the only trustee, and like the Darmos Trust, the Ted Trust increased the number of trustees to three. Darmos and his wife resigned as trustees, and Mr. Malik was appointed as the trustee for the Ted Trust.
[100] Mr. Darmos believes KPMG or Paul Hawa advised him that the Darmos Trust was being moved to Alberta because of upcoming changes to the way the Canadian government would treat offshore trusts.
[101] In May 2004, Mr. Darmos sold Infostream to Bell for $70 million. His CFO, Paul Hawa, negotiated the sale with Bell Canada. The proceeds of the sale went into the Sotos and Associates trust account. His family received five or six million dollars from the sale.
[102] On the advice of KPMG, five companies were set up to deal with the proceeds of the sale of Infostream. Mr. Darmos was a director of the resulting amalgamated company 336, as well as his wife and Mr. Malik.
[103] Three percent of the total funds belonged to the Ted Trust and 97 percent belonged to the Darmos Trust. He testified that the shares came from the sale of Infostream.
[104] Darmos sold Infostream to Bell for $70 million and the transaction closed in May 2004. Darmos’ long-standing lawyer and trusted advisor, Louis Alexopoulos, represented Infostream and the numbered corporations on the sale to Bell. Darmos met Alexopoulos in the mid-1990s.
[105] Mr. Darmos and Callie were directors of the numbered corporations, as well as the president and secretary of each corporation, respectively. These corporations were part of the KPMG tax plan and were set up on the advice of KPMG in Toronto.
[106] The proceeds from the sale of Infostream ended up in 336 Canada. Mr. Darmos wanted Royal Bank Dominion Securities (“RBC DS”) in Toronto to manage the assets of 336 Canada. Infostream banked with the Royal Bank of Canada (RBC), and the two had a pre-existing relationship. Mr. Alexopoulos also referred RBC DS to Darmos. Darmos said he gave the “go ahead to RBC to do the investments.”
[107] Mr. Darmos, Callie, Peter and Demetri, as beneficiaries of the Darmos Trust and the Ted Trust, delegated responsibility for the management of 336 Canada’s investment portfolio to RBC DS and granted indemnities to the trustees. Frank Aiello, from RBC DS, developed an investment policy for 336 Canada which reflected Darmos’ objective to preserve the capital and have some growth for inflation. Darmos and Callie signed an Investment Policy Statement, as officers of 336 Canada.
[108] After the sale of Infostream, Darmos asked Alexopoulos to consider being a trustee of the Darmos Trust and the Ted Trust, and he accepted. Darmos understood that Royal Trust Corporation of Canada (Royal Trust) became the third trustee because RBC was Infostream’s bank and Royal Trust was the escrow agent, though he was not sure about the details or mechanics of the appointment.
[109] In May 2006, Bell Canada commenced litigation arising out of the purchase by Bell Canada of 100% of the shares of Infostream, against Darmos, Callie, the numbered corporations and the appellant trusts. Darmos retained Joseph Groia as counsel to represent him, Callie and the numbered corporations in the litigation. On the advice of Alexopoulos and Groia, Darmos signed the Settlement Agreement and Mutual Release on behalf of all the vendors of the Infostream shares, including himself and Callie, to settle the Bell litigation. He also signed a separate document in connection with the settlement of that litigation.
[110] The Darmos Family Trust was required to move from Barbados because tax changes introduced in or around 2003 deemed the Darmos Family Trust to be resident in Canada, but not resident in any specific province.
[111] KPMG LLP and/or Paul Hawa (Chief Financial Officer of Infostream) informed Darmos of the changes regarding Canadian tax law and advised Darmos that the Darmos Family Trust was migrating to Canada. Other than being informed of the move, he did not play any part in the move of the Darmos Family Trust.
[112] The Ted Trust was moved because Darmos and his spouse, Callie, as the persons entitled to appoint trustee(s), wished for the Ted Trust to be jointly managed with the Darmos Family Trust for convenience, cost effectiveness and for joint management of the trust property.
B. Shashi Malik
[113] Mr. Malik’s involvement with the Darmos Trust began in late April 2004 when he received a call from Derek Novis at KPMG in Toronto. He was a seven-year lawyer at that time. He could not say for certain whether he took notes of his conversation with Mr. Novis. Mr. Malik agreed that one of the reasons he was contacted by KPMG was because he lived in Alberta. He confirmed that the Darmos Trust did not invest in real estate in Alberta, did not retain a real estate agent, and that Darmos never flew out to Calgary to look at real estate. There is no record of any investment made by the Darmos Trust or the Ted Trust in the province of Alberta.
[114] Prior to May 2004, Mr. Darmos and his wife were not clients of Mr. Malik or Gowlings, the law firm where Malik was a partner at the time. Infostream was similarly not a client of Mr. Malik or Gowlings. Mr. Malik had never even met Darmos, Callie, Peter or Demetri prior to May 2004.
[115] Mr. Malik also never met Mr. Ntarmos and did not communicate directly with him by telephone. Mr. Malik understood that Mr. Ntarmos lived in Greece and that he was not fluent in English.
[116] Mr. Malik was the sole trustee of the Darmos Trust in 2004. In July 2004, 336 Canada redeemed some of its common shares for approximately $19 million dollars.
[117] Mr. Malik agreed that 310 Canada paid dividends to the Darmos Trust in two amounts in 2006: $460,000 and $18,888,000. Mr. Malik agreed that the dividends, $19,348,000, would have flowed up to the Darmos Trust. He indicated that the $19 million was not distributed to the beneficiaries because of the Bell litigation. He could not say with certainty what happened to the funds but believed it was either held or loaned to 336 Canada. He agreed there was no document evidencing a loan of $19,348,000 to 6235336. He indicated that he could not say exactly when the loan was, and testified that it was also possible that the dividend was declared up the chain and loaned back, and noted that he was not sure of the exact date of that. He could not say in what year the loan was made but believed it could have been 2006 or 2007. There are no trustee minutes with respect to the funds received by the Darmos Trust from the redemptions or how those funds were distributed, to whom, and in what amount.
[118] Mr. Malik was also made the sole trustee of the Ted Trust in 2004. The Ted Trust received $9,246,326 on the sale of Infostream to Bell Canada. These proceeds did not go into 336 Canada. Malik agreed that some of these proceeds were distributed to the beneficiaries of the Ted Trust in 2004, with the exception of one of the capital beneficiaries, Georgina Ardamis. By email, dated December 21, 2004, Alexopoulos told Malik that he had now been advised not to make a distribution to Ms. Ardamis and asked that Malik draft accordingly. On re-examination, Mr Malik testified that Ms. Ardamis’ tax situation would have been considered in determining whether to make a distribution to her.
[119] Mr. Malik said Alexopoulos advised him that Darmos and Callie wanted to retain Joseph Groia for themselves, and to represent the numbered corporations, with respect to the Bell litigation. Mr. Malik agreed, in his capacity as trustee, that Groia should represent the trusts as well. Mr. Kaye, on behalf of Royal Trust, abstained.
[120] Mr. Malik testified that there was a pause in trust distributions as a result of the Bell litigation. Malik said there were discussions regarding the pause amongst the trustees but does not know whether there was a specific minute.
[121] Mr. Malik testified about the interest-free loan from 336 Canada to 361 Canada. He said Alexopoulos informed the trustees that Darmos and Callie incorporated 361 Canada and wanted to invest in property in Toronto and that Mr. Alexopoulos proposed a loan from 336 Canada to 361 Canada. Mr. Malik indicated that consent of the trustees was unnecessary as it was corporate property and shareholders do not typically have a say in the disposition or acquisition of property.
[122] Mr. Malik said KPMG provided a brief answer saying the loan from 336 Canada to 361 Canada would work, but that he was not totally comfortable with that answer. He asked Alexopoulos to go to KPMG to ensure that no negative tax consequences would result to the trust or to the trust beneficiaries.
C. Louis Alexopoulos
[123] Mr. Alexopoulos was a partner at the law firm Sotos LLP in Toronto. Darmos and the Darmos family were long-standing clients of Alexopoulos, dating back to the early 1990’s. Alexopoulos acted for Darmos personally, for Infostream and for the numbered corporations later on. He had regular conversations with Darmos, who considered him a trusted advisor, and he continues to act as a trusted advisor to Darmos today.
[124] Mr. Alexopoulos represented the numbered corporations on the sale of Infostream to Bell, as well as Mr. Darmos and Callie personally. Mr. Darmos brought Alexopoulos in to look at the Memorandum of Understanding received from Bell, after he had reviewed the terms with the assistance of his CFO, and asked Alexopoulos to offer his opinion on the terms. Mr. Darmos, with the assistance of his CFO, negotiated the purchase price for a 100% interest in Infostream.
[125] The only assets of the trusts were the shares held in the parent corporation and the subsidiaries. The funds were from the sale of the Infostream transaction to Bell Canada and the funds, while they were in the corporations, were being administered by the directors of those corporations.
[126] Alexopoulos and Darmos met with Mr. Malik to discuss opportunities to invest in Alberta. The trusts did not own any real property in 2006 and 2007. He had no recollection of the trusts being involved in any transactions involving real property during that time. He agreed that on May 1st, 2006, the trustees of the Darmos Trust consented to a $6.6 million interest-free demand loan from 366 Canada to 361 Canada which was secured by a first mortgage registered by 336 Canada against real property. 361 Canada is a corporation wholly owned by Darmos and Callie. Ntarmos consented to the loan to 361 Canada, and 361 Canada apparently entered into property in Toronto, Ontario. Mr. Alexopoulos acted for the company 361 Canada in the acquisition of the property on Yonge Street in Toronto. He had made the recommendation that 361 Canada Inc. borrow funds from 336 Canada Inc. to effect the purchase.
[127] Mr. Alexopoulos acted for 361, as the purchaser of the property, later mortgagor, and 336 Canada, as the lender of the $6.6 million loan to 361 Canada. Mr. Darmos and his wife Callie were the sole shareholders of that entity. Mr. Alexopoulos testified that “(b)ecause the loan was between the corporations, they were entitled to do that on their own. It didn't really need the consent of the trustees.”
[128] He introduced the corporations and Mr. Darmos to RBC Dominion Securities.
[129] Both trusts retained the law firm of Joe Groia to represent them together with other vendors in the Infostream transaction with respect to the Bell Canada litigation.
[130] Mr. Alexopoulos had the contact for certain aspects of the trust business with KPMG, both in his capacity as a trustee but also as counsel to the corporations. Mr. Alexopoulos testified that the trust was at the very top of the chain, as the shareholder, and underneath, there were a series of corporations, and the bulk of the assets of the trust were held within the corporate entities. And it was those corporate entities which would invest the funds.
[131] Thereafter, over a period of about three to four months, Mr. Alexopoulos drafted and negotiated the share purchase agreement and all of the ancillary documents attached to the agreement. After the sale closed, all sale proceeds, minus the escrow amounts, were paid into his trust account, and he made sure the funds came to the vendors on the sale.
[132] Mr. Darmos approached Alexopoulos and asked whether he would be interested in becoming one of the trustees for both of the trusts. He agreed to become a trustee – “I had a long relationship with Ted Darmos at that point. We had been going for 15 years, solicitor and client relationship, so I was acting for him in personal capacity. I also acted for all the corporations that were owned at that point by the trusts and I thought I was uniquely positioned to offer some assistance to the Darmos family.”
[133] Mr. Alexopoulos introduced Darmos and the numbered corporations to RBC DS, as a result of his relationship with the head of high-net-worth individuals for the bank, Michael Lagopoulos. Subsequently, an account was opened for 336 Canada with RBC DS. Once that account was opened, Mr. Alexopoulos corresponded with Tricia Tait at RBC DS on Darmos’ behalf. He also reviewed the Investment Policy Statement, developed by RBC DS in consultation with Darmos.
[134] Mr. Alexopoulos introduced Royal Trust to Darmos and Malik. Though not yet a trustee himself, Alexopoulos negotiated the fee with Royal Trust on behalf of the trustees. He thought the fee Royal Trust wanted to charge to act as a trustee was exorbitant, and explained “the rationale for that, Royal Trust, they were a subsidiary, Royal Trust Dominion Securities was already earning fees because it had a direct relationship with the corporations and they were providing investment advice to the corporations. And, for that, they were charging a fee. And so when it came time for Royal Trust to be added as a co-trustee, I didn’t think it was appropriate for them to charge a fee basically on the same assets. So I took an aggressive, what I thought was an aggressive stance with them in terms of negotiating the fee on behalf of the trust.”
[135] When the Bell lawsuit was filed, Mr. Alexopoulos recommended that Darmos retain Groia as defence counsel. Mr. Darmos retained Groia as counsel for himself, for Callie and for the numbered corporations. In order to minimize the expense of multiple representations, Mr. Alexopoulos also wanted Groia to represent the trusts, who were also named in the lawsuit. Royal Trust did not want to retain Groia. Mr. Alexopoulos’ handwritten notes, made contemporaneously, summarize an office conference with Mr. Darmos, and former Infostream CFO Paul Hawa, where it was confirmed that Royal Trust would be asked to resign if they did not cooperate with the appointment of Mr. Groia. Mr. Groia was subsequently retained to represent the trusts.
[136] Mr. Alexopoulos was the primary contact with Mr. Groia on behalf of the trustees and said he provided regular updates to the other trustees as to the status of the litigation. When costs were awarded against Mr. Darmos, Callie, the numbered corporations, and the trusts, in the context of a motion to compel answers, Mr. Malik did not know about the costs award until Mr. Alexopoulos forwarded the bill for payment.
[137] Mr. Alexopoulos also negotiated a tolling agreement, with the assistance of Mr. Groia, to deal with a potential claim involving Peter Stavropoulos and his trust, to a higher amount of the proceeds from the Infostream sale. Mr. Alexopoulos thought it was appropriate that the trustees enter into the same tolling agreement as the numbered corporations so they would not be fighting on two fronts during the Bell litigation. Ultimately, the trustees proceeded with the tolling agreement but Royal Trust abstained.
[138] Mr. Alexopoulos, together with Darmos and Groia, attended and participated in the settlement conference that led to the settlement of the Bell litigation. Mr. Alexopoulos, as a representative of the trusts, had a role in negotiating and agreeing to the settlement.
[139] Mr. Alexopoulos acted as counsel for the lender, 336 Canada, and the purchaser and mortgagor, 361 Canada, on the purchase of the Yonge Street property in Toronto. Darmos and Callie were the sole shareholders of 361 Canada. The consent of the trustees to 336 Canada loaning $6.6 million interest-free to 361 Canada was not necessary as the trusts were not shareholders of 336 Canada. The decision to advance an interest free loan to 361 Canada was made by the directors of 336 Canada and not the trustees.
[140] Mr. Alexopoulos worked with Mr. Darmos and KPMG with respect to the amalgamation of the numbered companies as well, which was done to simplify the corporate structure. He reported the completion of the amalgamation to his fellow trustees. Mr. Alexopoulos said the amalgamation would have required shareholder consent.
D. Gary Kaye
[141] Prior to his retirement in 2008, Mr. Kaye spent 32 years in the trust department of Royal Trust Corporation of Canada. From 1999 until his retirement, he held the position as senior trust advisor in the Calgary office.
[142] He was routinely assigned new Alberta situs trust accounts. He was the “the visible head of Royal Trust” and the point of contact at Royal Trust on matters to do with the trusts, but had an entire team of people in Calgary, and resources across the country, including senior management, legal and accounting. He was involved with the Darmos Trust from the inception in early 2005 until he retired in 2008. Royal Trust performed such administrative functions as detailed record keeping for the trusts.
[143] Mr. Kaye had no contact with the beneficiaries. He had communications with the co-trustees by email in the case of Mr. Alexopoulos and email and phone in the case of Mr. Malik.
[144] Mr. Kaye believes Royal Trust required two consents in relation to the trusts, the first being an indemnification in respect of the actions of previous trustees. He stated:
And, secondly, I believe there was an instance where there was a request to have the assets held in the numbered companies managed by RBC Dominion Securities. And our standard policy would have required us to get releases from the beneficiaries before we would allow that to happen.
In a normal trust account, Royal Trust manages the assets, stocks, bonds, portfolios, but this was not the norm.
Here, the only assets in the two Darmos trusts was shares of two holding companies, numbered companies, and Royal Trust did not actively manage the assets within those holding companies.
And that, in the normal course of business, is a concern for us so we would have required releases from the beneficiaries that basically said that they were okay with the fact that RBC Dominion was managing those assets. [Emphasis added.]
[145] Royal Trust kept detailed records of cash in the trusts, and paid interest on cash balances, which Kaye acknowledged did not constitute active management of the money. Royal Trust was responsible for record keeping. It had an accounting system that kept track of all transactions with respect to the trusts. Royal Trust was solely responsible for issuing cheques.
[146] Mr. Kaye provided his evidence of what trust management implied to him. It included making discretionary decisions, keeping track of the trust assets, investment management and “actively overseeing what those assets were doing.”
[147] He believes the assets of 336 consisted of a portfolio of securities, stocks, bonds, and cash. Royal Trust did not provide management of the assets of 336. The assets were managed by RBC Dominion Securities.
[148] The idea to amalgamate the numbered companies was initiated in Toronto and not by Royal Trust. Royal Trust asked for and received assurance that it would not impact the value of the trust or the beneficiaries and, therefore, saw no reason not to agree to it. He could not recall if Royal Trust received professional advice from the team “down east” but that would have been the normal procedure.
[149] KPMG prepared the returns annually, but the manager of the tax department at Royal Trust reviewed the returns.
[150] He testified that Royal Trust documented every single discretionary decision taken within the trust.
[151] The practice of Royal Trust was to make a decision as if it were a sole trustee but obtain the written sign off of co-trustees to approve the decision.
[152] Royal Trust’s policy was to treat requests for distributions by beneficiaries as a discretionary decision, which would engage a discretionary decision process. The process involved reviewing relevant factors and especially the wording of the trust deed and making a decision as to whether Royal Trust, as a trustee, was in a position to approve that request. The discretionary decision would be documented in a standard form “trustee minute”. Royal Trust did not reject any discretionary requests with respect to the Darmos Trust during Kaye’s tenure. A big part of the discretionary decision process was documenting that decision on the trustee minute. All the encroachments made from the trusts were considerable in size, at least six figures, sometimes seven. The trustee minute was signed by Kaye and Gary Troup and would require the signature of the vice president for Western Canada and two signatures from senior management in Toronto.
[153] The senior management team that he would generally discuss matters with consisted of three individuals – one in Toronto, one in Ottawa, and one in Montreal. They would sign off on a form called "Executor (Estate/Trustee Liquidator) Minute or Trustee Minute". Gary Troup was the manager of the trust department in Calgary responsible for the administrative documentation, paperwork, the recordkeeping whereas Mr. Kaye dealt with the lawyers, accountants etc.
[154] Mr. Alexopoulos wanted the co-trustees to sign a tolling agreement. Royal Trust wanted to obtain an external legal opinion. The other two trustees wanted to rely on the advice of Mr. Groia (a Toronto lawyer). Royal Trust abstained from singing the agreement.
[155] Mr. Kaye testified about Royal Trust’s detailed system for making decisions and said they were very diligent in documenting every single discretionary decision they ever took within the trust. He said trustee minutes were a very integral part of Royal Trust’s policy with respect to trusts, and that every time there was a discretionary decision, the most common being an encroachment of capital or income to the beneficiaries, they were required to formally document a decision in a trust minute.
[156] When the distributions were considerable in size, six to seven figures, multiple signatures were required, including from senior management in Toronto. Kaye clarified that by six-figures he meant below a million dollars but above $99,000 and by seven-figures, he meant anything above a million dollars. He agreed that the two $120,000 distributions to each of Peter and Demetri, in December 2007 from the Darmos Trust, were examples of a six-figure distribution. He did not know whether a Royal Trust minute existed with respect to that distribution and said he did not have it in front of him.
[157] During his testimony, Kaye agreed that Royal Trust handled the recordkeeping for the Darmos Trust and the Ted Trust. At one point, in reviewing the financial statements for 2005, Royal Trust saw that 310 Canada paid dividends to the Darmos Trust of $18 million but only received $3 million its accounts. Kaye had to write Alexopoulos to confirm where the money went. When asked about what happened to the dividend of $19,348,000 declared and paid by 310 Canada to the Darmos Trust in 2006, Kaye replied “I have no idea. This is news to me.”
[158] Kaye said that the head office of Royal Trust mandated that all trust accounts be reviewed annually. Kaye testified that he believed there was an annual review conducted for the Darmos Trust and the Ted Trust in 2006 and 2007, as well as the outcome of those reviews. The appellant trusts did not produce the annual reviews referred to by Kaye in his testimony.
[159] When asked about the Consent, Release, Discharge and Indemnities signed by the beneficiaries of the Darmos Trust and Ted Trust, Kaye said Royal Trust’s standard policy would have required releases from beneficiaries before they would allow a request to have the assets held in the numbered corporations to be managed by RBC DS and not Royal Trust. He said in a normal trust account, Royal Trust manages the assets, stocks, bonds, portfolios, but this was not the norm.
[160] Kaye said that the share certificates of the numbered corporations were physically held in a vault in Calgary. He later agreed, based on an email written at the time, that on the amalgamation, Royal Trust did not hold the original share certificate in its vault and only held a copy.
[161] When asked whether there were any legal proceedings against the trust during his tenure as trustee, Kaye said there was no legal proceeding against the trust per se, and believed it was between Darmos and Bell Canada. When prompted by his counsel showing him an email, Kaye recalled the issue of the tolling agreement that Alexopoulos wanted the co-trustees to sign off on. Royal Trust wanted to get an external legal opinion, and the co-trustees would not agree, so Royal Trust abstained from signing the tolling agreement.
[162] Kaye testified about the payment of tax installments and Royal Trust’s policy with respect to the payment of installments. In an email chain between Kaye and his fellow trustees about whether or not to pay tax installments, Kaye equivocates, saying we can go either way. In oral testimony, he said “I indicated to the co-trustees that we – being, we, the three trustees – can reach a decision on the installment issue when we were to talk in April and that Royal Trust would go either way, either make the installments or not.”
[163] When asked how often the trustees met, Kaye said he recalled they were scheduled to meet quarterly but could not specifically recall that they actually met every single quarter. The only contemporaneous evidence in the record regarding trustee teleconferences are those written or authored by Alexopoulos: handwritten notes from April 2007, typed notes from October 2007, and a handwritten agenda from December 2007.
E. Edward Bartucci
[164] Mr. Bartucci is retired partner from KPMG. He practiced as a CPA/CA for about approximately 40 years, specializing in the area of tax for over 35 years. He became involved with the trusts after the disposition of the Infostream shares to Bell Canada.
[165] KPMG provided professional services to the companies numbered 6235310, 6235352, 6235338, 5336, 6235298, 6235298, 6235344 and 6235336. He also provided professional services to the Darmos Trust and to the Ted Trust. He understood the assets of the Ted Trust were shares of the numbered corporations and the assets of the Darmos Trust were primarily shares of the numbered corporations. There was a team of people KPMG which included managers Paola D'Agostino and Steve McHardy, and possibly another person named Noemia, providing professional services to the numbered corporations. With respect to the numbered companies, KPMG dealt with the directors of the corporations, primarily with Mr. Darmos. KPMG provided tax planning advice to the corporations. He could not recall the last name of the senior manager at KPMG in Calgary and could not recall having any involvement with KPMG in Calgary.
[166] KPMG was engaged to provide tax advice to the two trusts. He was the partner in charge of the two trusts in Toronto. He dealt primarily with Mr. Alexopoulos with respect to the trusts. He could not recall having any telephone conversations or written communications with either Mr. Malik or Mr. Kaye, the other two trustees of the trusts.
[167] With respect to the diffidence, he spoke primarily with Mr. Alexopoulos and dealt with Mr. Darmos. As for trust distributions, he primarily dealt with Mr. Alexopoulos.
[168] KPMG Calgary provided services related to administration and filing of the trust return, including responding to any questions that the trustees would have had on the trust returns.
[169] After the sale of Infostream, Mr. Bartucci provided advice to minimize tax to the numbered corporations and the trusts. Part of that advice involved paying dividends from the corporations to obtain the dividend refund. In order to achieve the overall tax minimization, dividends needed to be paid up the corporate chain to the trusts. Subsequently, the trusts distributed the dividends out to various beneficiaries.
[170] Mr. Bartucci’s advice also considered whether paying tax at the trust level or the beneficiary level would result in a lower amount of tax. Mr. Bartucci corresponded primarily with Mr. Alexopoulos with respect to the trusts and distributions – “he was the trustee, and was in Toronto, and quite honestly, it was the relationship that I had with Lou was closer.” He could not recall whether he had any telephone conversations or written correspondence with either Malik or Kaye.
[171] Mr. Bartucci provided instructions to Mr. Alexopoulos, who was also corporate counsel, to ensure that documentation was put together that reflected the steps in the tax plan in order to ensure its the integrity. He also made sure the documentation reflected the tax advice, and followed though and made sure the distribution and the documentation were done properly so that it could be reported when KPMG prepared the trust returns.
[172] Mr. Bartucci and KPMG provided professional services with respect to the preparation of the 2005 to 2007 tax returns for both trusts. Ms. D’Agostino prepared the returns and the Calgary office assembled and filed the returns. The Toronto office gave the advice and drove most of the trust return.
[173] Mr. Bartucci could not recall the specific reason for the amalgamation of the corporations but said they generally would have amalgamated because the corporations had a “useful life” to them, and they did not really need them anymore. It was just a matter of simplifying the organizational chart to minimize accounting costs and legal fees going forward. He agreed that his reference to “useful life” was a reference to the tax benefits achieved with multiple corporations and that once those tax benefits were achieved, the corporations were no longer needed.
IX. Credibility of Witnesses
[174] In general, I found all of the witnesses to be very credible. Where there was reliance on documents, it is understandable given the passage of time.
X. Analysis
[175] A trust is not a legal entity. "It is a legal relationship which arises whenever a person called the settlor, transfers property… to another person called the trustee, who then has the fiduciary obligation to hold and manage the property, for the benefit of other persons called beneficiaries": Elena M. Hoffstein and Corina S. Weigl, “Overview of the Twenty One Year Rule: a Trust Lawyer’s Perspective” (October 27, 2014), Tax Paper presented at the Canadian Tax Foundation Ontario Tax Conference, p. 2.
[176] Discretionary trusts afford trustees broad powers and flexibility:
A discretionary trust allows the trustees to postpone to a future date both:
i. the decision as to which beneficiaries should be benefitted, and
ii. the decision as to when to transfer the assets of the trust to those beneficiaries.
This flexibility arises because a discretionary trust provides the trustees with the discretion to determine:
i. which beneficiaries of the trust will receive capital (i.e., the assets of the trust), and income distributions, and
ii. when distributions of capital and income are to be made to the beneficiaries: Hoffstein and Weigl, pp. 2-3.
[177] Simple, administrative functions like the execution of documents is insufficient to locate central management and control in the hands of trustees: St. Michael Trust Corp v. Canada, 2010 FCA 309, at para. 66; Herman Grad 2000 Family Trust v. Ontario (Minister of Revenue), 2016 ONSC 2402, at paras. 206, 223.
[178] Wilton-Siegel J.’s comments on the differences between administrative and substantive decisions in Herman Grad are instructive: “The relevant powers and discretions are those regarding the management and control of the trust property, as opposed to more incidental, administrative decisions”: Herman Grad, at para. 81.
a) The Trust Property
[179] Mr. Darmos founded Infostream with hard work and sweat. This is an undisputed fact.
[180] Proceeds from the Infostream sale "found their way into a holding company", i.e., 336 Canada. This is an undisputed fact.
[181] Mr. Darmos and his wife, Calli are officers and directors in 336 Canada. This is an undisputed fact.
[182] RBC Dominion Securities in Toronto was the investment advisor for 336 Canada. This is an undisputed fact.
[183] KPMG in Toronto was the accountant for 336 Canada and the Appellants. This is an undisputed fact, but also incomplete, as KPMG in Calgary was also retained on behalf of the appellants.
[184] KPMG were the accountants for the corporations and the Appellant trusts. KPMG also created the tax plan pursuant to which Infostream was sold to Bell Canada. The Appellant trusts will show through evidence that Malik actively negotiated aspects of the sale transaction on behalf of the Appellant trusts.
b) Burden of Proof
[185] A taxpayer has the right to order its affairs as it sees fit to minimize tax payable: Inland Revenue Commissioners v. Duke of Westminster (1935), [1936] A.C. 1 (U.K. H.L.).
[186] It is trite law, and indeed it is conceded by the parties, that any tax assessment is valid and binding on its face, subject to the taxpayer's right to challenge it on grounds of fact and law. The result is to impose on the taxpayer the burden of proving that the assessment is wrong.
[187] The Crown has a concurrent burden to play fair: First Fund Genesis Corp. v. Canada (1990), 34 F.T.R. 313 (F.C.), 1990 CanLII 13571, at p. 26. In other words, the Crown must fully disclose to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy: Johnston, at para. 9.
[188] The Minister, in making assessments, proceeds on assumptions: Hickman Motors Ltd. v. Canada, 1997 CanLII 357 (SCC), [1997] 2 S.C.R. 336, at para. 92; Bayridge Estates Ltd. v. M.N.R., 1959 CanLII 740 (Exc. Ct. Can.), 59 D.T.C. 1098, at p. 1101. The initial onus is on the taxpayer to “demolish” the Minister’s assumptions in the assessment: Johnston; Kennedy v. M.N.R., 1973 CanLII 2268 (F.C.A.), 73 D.T.C. 5359, at p. 843. The initial burden is only to “demolish” the exact assumptions made by the Minister, and no more: Fund First Genesis Corp. v. The Queen, 1990 CanLII 13571 (FC), [1990] 2 C.T.C. 24 (F.C.), at p. 27; Hickman, at para. 92.
[189] This initial onus is met where the taxpayer makes out at least a prima facie case: Hickman, at paras. 92-93; Kamin v. M.N.R. (1992), 93 D.T.C. 62 (T.C.C.); Goodwin v. M.N.R., 82 D.T.C. 1679, [1982] C.T.C. 2675 (T.R.B.). The burden of proof put on the taxpayer is not to be lightly, capriciously or casually shifted, considering that "it is the taxpayer's business": Orly Automobiles Inc. v. Canada, 2005 FCA 425, para. 20.
[190] A prima facie case is one "supported by evidence which raises such a degree of probability in its favour that it must be accepted if believed by the Court unless it is rebutted or the contrary is proved. It may be contrasted with conclusive evidence which excludes the possibility of the truth of any other conclusion than the one established by that evidence": Amiante Spec Inc. c. R., 2009 FCA 139, at paras. 23 and 24, citing Stewart v. Canada (Minister of National Revenue), 2000 CanLII 426 (TCC), [2000] T.C.J. No. 53 (T.C.C.), 2000 CarswellNat 4379.
[191] Unchallenged and uncontradicted evidence rebuts the Minister's assumptions: Hickman, at para. 96; MacIsaac v. M.N.R. (1974), 74 D.T.C. 6380 (F.C.A.), at p. 6381; Zink v. M.N.R. (1987), 87 D.T.C. 652 (T.C.C.).
[192] Where the Minister’s assumptions have been “demolished”, “the onus . . . shifts to the Minister to rebut the prima facie case” made out by the appellants and to prove the assumptions made: Hickman, at para. 94; Magilb Development Corp. v. The Queen (1986), 1986 CanLII 7389 (FC), 87 D.T.C. 5012 (F.C.), 7 F.T.R. 258, at p. 5018.
[193] The parties appear to dispute the standard of proof in tax cases. The standard of proof is the civil balance of probabilities, though there may be varying degrees of proof. In Hickman, at para. 92, the Supreme Court of Canada explained:
It is trite law that in taxation the standard of proof is the civil balance of probabilities: Dobieco Ltd. v. Minister of National Revenue, 1965 CanLII 81 (SCC), [1966] S.C.R. 95, and that within balance of probabilities, there can be varying degrees of proof required in order to discharge the onus, depending on the subject matter: Continental Insurance Co. v. Dalton Cartage Co., 1982 CanLII 13 (SCC), [982]1 S.C.R. 164; Pallan v. M.N.R., 90 D.T.C. 1102 (T.C.C.), at p. 1106.
[194] Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed: MacIsaac; Waxstein v. M.N.R. (1980), 80 D.T.C. 1348 (T.R.B.); Roselawn Investments Ltd. v. M.N.R. (1980), 80 D.T.C. 1271 (T.R.B.).
c) Residence of trust
[195] The Supreme Court of Canada noted in Fundy Settlement v. Canada, 2012 SCC 14[^1], [2012] 1 S.C.R. 520, at para. 13, that section 2(1) of the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), “is the basic charging provision of the Act” and the reference to a "person" must be read as a reference to the taxpayer whose taxable income is being subjected to income tax. The Court noted that this refers to the trust and not the trustee and pointed out that this conclusion follows from section 104(2) of the Income Tax Act, which separates the trust from the trustee in respect of trust property.
[196] Pursuant to subsection 104(2) of the Income Tax Act, a trust is deemed to be an individual: Fundy Settlement, at para. 13. In Fundy, the Supreme Court of Canada held that there was nothing in the context of section 104(1) of the Income Tax Act that would suggest that there be a legal rule requiring that the residence of a trust must be the residence of the trustee: at para. 12.
[197] The Supreme Court of Canada pointed out in Fundy Settlement at para. 7 that while there are certain deeming rules in the Income Tax Act with respect to residency, generally residence is a question of fact. The Supreme Court of Canada went on to review the jurisprudence relating to the central management and control of a corporation and noted the similarity between a corporation and a trust, and a unanimous court agreed with the determination of the judge at first instance that the residence of a trust is determined by where the central management and control takes place, which is the test for determining the residency of a corporation, as both share many similarities. Some of the similarities identified by the court at para. 14 included:
i. Both hold assets that are required to be managed;
ii. Both involve the acquisition and disposition of assets;
iii. Both may require the management of a business;
iv. Both require banking and financial arrangements;
v. Both may require the instruction or advice of lawyers, accountants and other advisors; and
vi. Both may distribute income, corporations by way of dividends and trusts by distributions.
[198] In Fundy Settlement, at para. 14, the Court referred approvingly to the comments of Woods J., the judge at first instance, wherein she noted that “[t]he function of each is, at a basic level, the management of property": Garron Family Trust (Trustee of) v. R., 2009 TCC 450, at para. 159. The Supreme Court espoused the principles articulated by the House of Lords in De Beers Consolidated Mines Ltd. v. Howe, [1906] A.C. 455 (U.K. H.L.). The Court noted:
As with corporations, residence of a trust should be determined by the principle that a trust resides for the purposes of the Act where "its real business is carried on", which is where the central management and control of the trust actually takes place.
[199] In Fundy Settlement, the Supreme Court revisited the issue of a residence of a trust and upheld the unanimous decision of the Federal Court of Appeal that the appropriate test for the determination of the residency of a trust is the location of the central management and control of the trust property.
[200] The Court reiterated that a trust resides where its real business is carried on, which is where the central management and control of the trust actually takes place. The Court once again referred, with approval, to the comments of Lord Loreburn in De Beers at para. 458, citing the following passage:
In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. . . . []company resides for purposes of income tax where its real business is carried on. . . . I regard that as the true rule, and the real business is carried on where the central management and control actually abides.
[201] The Supreme Court went on to state, at para. 9 of Fundy Settlement: “In general, the central management and control of a corporation will be exercised where its board of directors exercises its responsibilities.” The Court indicated that “where the facts are that the central management and control is exercised by a shareholder who is resident and making decisions in another country, the corporation will be found to be resident where the shareholder resides”: Fundy at para 9, citing Unit Construction Co v. Bullock, [1960] A.C. 351 (H.L.); St. Michael Trust Corp. v. Canada, 2010 FCA 309, at para. 56.
[202] The evidence at trial—documentary, admitted, and testimony of the witnesses—makes it clear that the appellant trusts have not established on the evidence that the central management and control of the trust was in Alberta. The documentary and other evidence indicates that it was Mr. Darmos who was actively involved with and directed the management of the trust property. In this case, the evidence establishes that the assets of the corporations were indirectly the assets of the trusts. This is conceded by the professionals. The Consent, Release, Discharge and Indemnity Agreement, signed by all the beneficiaries, makes this clear. Investments made by the corporations affected whether dividends or distributions to the beneficiaries could be made. Redemption of shares by the corporations affected not only the assets in the trusts, but also whether the trusts would pay taxes in the hands of the trust or whether the trusts would distribute to the beneficiaries and have them pay taxes, and also whether an election had to be made. As noted by Mr. Kaye: “Again, proper tax advice, in my view, when you have a structure like this, you need to consider both the dividend payor and the recipient to minimize taxation. There's no use saving tax at the corporate level but then paying the same or more tax at the trust level. It makes no sense.”
d) Consent, Release, Discharge and Indemnity
[203] Mr. Darmos signed a delegation agreement in which the trustees delegated their investment management and investment responsibilities to RBC Dominion Securities. In the result, Mr. Darmos and the other beneficiaries of the trusts signed “Consent, Release, Discharge and Indemnity” agreements in which they agreed to indemnify and hold harmless the trustee with respect to the two trusts. The indemnity agreements contained mirror provisions.
[204] Mr. Darmos admitted that he also signed the Indemnity in the matter of the Darmos Family Trust. His wife and children signed similar documents. The value of the trust property as at November 5, 2004, was approximately $38,200,000. The money came out of the proceeds of the sale of Infostream. Mr. Darmos agreed that by signing this document he confirmed his desire to delegate the investment management of whatever funds were in the corporations to RBC Dominion Securities.
[205] Mr. Darmos also signed the Consent, Release, Discharge and Indemnity agreement in the matter of the Ted Trust, dated December 23, 2004. The value of the trust property was noted to be approximately $5,600,000 as of November 5, 2004. The funds represented the proceeds from the sale of Infostream. His wife and children signed a similar document with respect to the Ted Trust. Mr. Darmos agreed that the document dealt with his request and consent to delegate the investment, management and investment responsibilities to RBC Dominion Securities. He conceded that by signing the document, he confirmed his desire to delegate the investment management of the trust property to RBC Dominion Securities in Toronto.
[206] The relevant clauses from the document read:
The Trust is presently comprised of the property described in Schedule “A” (the “Trust Property”).
The value of the Trust Property as that November 5, 2004 was approximately Five Million Six Hundred Thousand ($5,600,000) Dollars.
I acknowledge that trustees generally have a duty to protect the property of the trust for which they are appointed, to invest the property of the trust having regard to the standard of care expected of a trustee as established by law, to act impartially between beneficiaries when investing the property of the trust, to make any investment decisions personally and not to delegate investment responsibility to others, and to avoid conflict of interest, except in certain cases where the law, will or instrument creating the trust provide otherwise.
I acknowledge that I have been advised that Royal Trust has expertise within its own organization to manage the investment of the Trust And That If Any Other Party Is Permitted to Manage the investments, there is a risk that the investment performance of such a party may not meet or exceed the performance that might otherwise have been obtained. I further acknowledge that I have been advised that although Royal Trust and RBC Dominion Securities are related companies, they are separate entities and permitting RBC Dominion Securities to manage the investment of the Trust may be considered a delegation of duties of the Trustees which may not be authorized by law as well as a potential conflict of interest.
Notwithstanding my understanding of the foregoing I hereby confirm that it is my desire that the investment management of the trust property be delegated to RBC Dominion Securities. [Emphasis added}
[207] Schedule A of the indemnity agreement described the trust property as a 100% interest in 6235298 Canada. Under the indemnity agreement, the beneficiaries relieved the trustees of the obligations to diversify the investment of the trust. The agreement noted that the remuneration to RBC Dominion Securities was in addition to the amounts paid to the trustees and in addition to the compensation paid to Royal Trust. With respect to the indemnity agreement in relation to the Darmos Trust, Schedule A to the agreement described the trust property is 100% interest in 6235310 Canada Inc.
e) No Independent decision making of trustees
[208] Further evidence of the trustees’ lack of control and decision-making authority over the trust assets is evidenced by an email from Ms. Paola D'Agostino of KPMG to Mr. Darmos, copying Mr. Alexopoulos. The subject line of the email reads: "dividends payable". Mr. Darmos testified that it was his understanding that he received the email to prepare and complete different wire transfers from corporation to corporation, and then from the corporation to the Ted trust. He noted that: “That's for items 1, 2 and 3. And for items 4, 5 and 6, what Paola indicates here is the trust, the Ted trust will distribute dividends to Peter, to Demetri, and to Calliopi.” Mr. Darmos also testified about the email from Mr. Alexopoulos to himself, stating: “And then the email from Lou sent to me, he's asking me to transfer those funds from corporation 336 to 344, and then 344 to 298, and from 298 to the Theodoros Darmos Family Trust,” known as Ted Trust.
[209] The trustees were not actively involved in making any decisions in the acquisition and disposition of assets. Those decisions originated from Ontario were being made by KPMG and Alexopoulos, both residents of Ontario.
[210] Mr. Malik’s lack of knowledge of certain trust property was evident when he could not explain what happened to the $19,348,000 dividend declared in 2006, distributed up the chain from 6235336 Canada Inc. to the Darmos Trust. He speculated that it is possible that the money was loaned to 336 and then paid back, or held, or that the dividend was declared up the chain and loaned back.
[211] The banking and financial arrangements were carried out in Ontario, with Mr. Darmos opening accounts at RBC Dominion Securities and TD Waterhouse. Mr. Malik’s involvement was passive. He reviewed the statements. Royal Trust’s involvement was passive. Mr. Kaye admitted that Royal Trust did not manage the assets of the trusts. He admitted that with respect to the cash in the trusts, it was record keeping for the most part, and the payment of interest was not “active management” of the cash. For the most part, it was Mr. Alexopoulos, who had longstanding relationships with some of the professionals in Ontario, from whom the directives came, some time after consulting with his client “336 Canada Inc.”/Mr. Darmos. For example, in his email dated April 20, 2006 to his co-trustees, Mr. Alexopoulos wrote:
I am sending this email to advise you of some of the pending activity with the Darmos group of companies.
Specifically, Mr. and Mrs. Darmos have cause the corporation to be incorporated (6235361 Canada Inc. or the “Owner”). The shareholders of the Owner are Ted and Callie Darmos, each having 50% of the issued and outstanding common shares.
The Owner has entered into an Agreement of Purchase and Sale with an arm’s length third-party to acquire a commercial building on Yonge St., Toronto, (“the “Property”) in consideration of $6.5 million with a closing date of May 10, 2006. Subject to getting favourable tax advice from KPMG it is contemplated that the purchase of the Property will be financed by 6235336 Canada Inc. (the “Lender”) and that the loan be evidenced by a non-interest bearing “on demand”, first mortgage to be registered on title.
As you know, the Lender is indirectly owned by the Trusts. As such a loan may be perceived as benefiting some of the beneficiaries to the exclusion of others (which is entirely permitted by the Trusts) I am of the view that the Trustees have to document the exercise of their discretion. Please consider and advise if you have any objections to the proposal or if you believe that it is necessary to have a teleconference to discuss further. If either of you want more information please advise.
Thank you. [Emphasis added.]
[212] Mr. Kaye responded to Mr. Alexopoulos on April 25, 2006, stating:
We have no objection to the proposal. Will you draft the necessary document?
Related question-do the trust have voting control over 6235298 Canada Inc. or 6235310 Canada Inc.? [Emphasis added.]
[213] Mr. Malik’s response followed Mr. Kaye’s on April 25, 2025. Mr. Malik stated:
I am also fine with it subject consideration whether shareholder benefit may arise.
Specifically, a loan from one company to another, where the shareholders of the company providing the loan or beneficiaries of a trust to another company, the shareholders of which are 2 of the beneficiaries, may result in a shareholder benefit on your subsection 15(2) of the Income Tax Act, particularly where interest is not charged at the commercial or prescribed rates.
I just want confirmation that this negative tax consequences will not arise from the proposed structure.
[214] The negative tax consequences contemplated by Mr. Malik were to the shareholders as opposed to the trust. The shareholders, of course, were Mr. Darmos and his wife. KPMG ultimately provided a response to Mr. Darmos, which was reported by Mr. Alexopoulos to the co-trustees. KPMG provided the steps and Mr. Bartucci also suggested an alternative, that “we may simply distribute funds from the trust to Ted & his wife & they can then advance to the company to purchase the property.”
[215] The trustees also had no say in the conduct of the defence of the Bell litigation. It was Mr. Darmos’ suggestion that Mr. Groia be retained to defend the trusts as a cost-saving measure. Royal Trust objected to Mr. Groia being retained, and ultimately abstained from the decision to retain him. The decision to engage him was based on the majority, namely Mr. Malik, based in Alberta, and Mr. Alexopoulos, based in Ontario. It was Mr. Alexopoulos who provided updates on the Bell litigation. Even though he was initially named in the Bell litigation, in his capacity as trustee of the Darmos Trust, it is Mr. Alexopoulos who dealt with Mr. Groia and reported to the co-trustees. The defence strategy was driven from Ontario even though the Ted trust, the Darmos trust and Mr. Malik, in his capacity as trustee of the Darmos trust, were party defendants in the Bell litigation. This point is underscored by email exchanges between Mr. Alexopoulos and the co-trustees on May 25, 2007. In his originating email, Mr. Alexopoulos forwards Mr. Groia’s disbursement account related to a motion for particulars and reimbursement of Mr. Groia, who had paid the amount. Mr. Malik responded:
Thanks Lou.
I recall the update previously provided. I was in part asking why those questions posed now appear to be “proper” based upon the ruling of the Master.
Was it the response to those same questions which convinced Mr. Groia that it was appropriate to abandon the Motion for Particulars?
[216] Mr. Alexopoulos responded to Mr. Malik the same day stating, in part:
There were a number of factors that went into the decision to abandon. None of those had to do with answers that Mr. Darmos would provide……
Mr. Groia’s view was that the master was clearly wrong but there was no point in appealing’s order. 1 of the reasons we had brought the Motion Was to Show Bell that we were not going to “lie down and take” their offensive and that we had the resolve to defend vigourously. This is the strategy that we will be pursuing.
[217] Mr. Malik was appointed as trustee to the Darmos trust on May 7, 2004. On May 27, 2004, 352 Canada Inc., a corporation which the appellants concede is controlled indirectly by the Darmos trust, sold 89.99 common shares of Infostream to Bell Canada for proceeds of $56,693,700. The Ted Trust sold 2,950,026 Class A shares and 10.01 common shares of Infostream to Bell Canada. The sales were done in furtherance of a tax plan completed by KPMG in Ontario. There are no notes or minutes of Mr. Malik, who was the sole trustee at this stage, documenting any independent decision making on his part.
[218] The case law respecting trust residency indicates that the following factors may assist in a determination of central management and control:
i. whether the trustees of a trust are acting at the direction or instruction of another individual, or if they are exercising the powers and discretion afforded to them pursuant to a trust deed: Garron Family Trust (Trustee of) v. R., 2009 TCC 450, at paras. 198-200; Discovery Trust v. Ministry of National Revenue, 2015 NLTD(G) 86, at para. 41.
ii. whether trustees are exercising proper oversight over the trust property: Herman Grad, at paras. 93, 235.
iii. the nature of the services provided by the trustees: Herman Grad, at para. 223.
iv. the use of common advisors by the trustees and beneficiaries: St. Michael Trust Corp v. Canada, 2010 FCA 309, at para 67; and,
v. the existence of a protector clause: St. Michael Trust Corp v. Canada, 2010 FCA 309, at para. 66.
[219] In April/May 2004, KPMG (Ontario) developed a divestiture plan and recommended that certain distributions be made. At the time, Mr. Malik was the sole trustee of the Ted Trust. Then, in December 2004, Mr. Malik received correspondence from KPMG recommending that distributions in the amount of $2,250,000 be made prior to December 31, 2004 from the Ted trust. In their exchange of emails, Mr. Alexopoulos advised Mr. Malik, “I have now been requested not to make a distribution to Georgina Ardamis and would ask that you draft accordingly.” Mr. Malik asked in his responding email: “Why is Georgina now not getting a distribution?”. There is no responding email by Mr. Alexopoulos to this question but in a further email on the same date, Mr. Malik asked that Mr. Alexopoulos issue all trust checks for distribution from Toronto as there were no funds in Mr. Malik’s account, which Mr. Alexopoulos agreed to.
[220] On February 2, 2006, the Trustees of the Ted Trust approved the distribution to three beneficiaries of the Ted Trust. There were no minutes of debate or discussion.
[221] In July 2007, Mr. Kaye wrote to Mr. Alexopoulos to inquire whether the cash balance held in either trust should not be invested by Royal Trust. Mr. Alexopoulos responded: “I wish to confirm that the cash balances not to be invested. There is currently approximately 130,000 in the Darmos Family Trust account which should remain in a liquid form to pay on-going expenses as they occur.”
f) Royal Trust Fees
[222] The fee agreement with Royal Trust indicates that Royal Trust would charge an annual trustee fee of $8,500 per year if the trust held only private holding company shares or, alternatively, a fee based on the percentage of the average market value of the assets under administration, excluding holding company shares.
[223] Mr. Alexopoulos testified that he negotiated the fee agreement on behalf of the trustees with respect to what Royal Trust wanted to charge because “on my analysis of the work that would be done by them, I thought that it was exorbitant.” He explained:
And the rationale for that was Royal Trust, they were a subsidiary, Royal Trust Dominion Securities was already earning fees because it had a direct relationship with the corporations and they were providing investment advice to the corporations. And, for that, they were charging a fee.
And so when it was time for Royal Trust to be added as a co-trustee, I didn't think it was appropriate for them to charge a fee basically on the same assets. So I took an aggressive, what I thought was an aggressive stance with them in terms of negotiating the fee on behalf of the trust. [Emphasis added.]
[224] Royal Trust Dominion Securities was already earning fees because it had a direct relationship with the corporations and they were providing investment advice to the corporations. And, for that, they were charging a fee.
g) Management of the Trust Assets/Investment Strategy
[225] The two trusts held holding shares, 97 by the Darmos Trust and 3 by the Ted Trust, with the holding company, 336 Canada, holding the actual shares. The investment strategy that was put in place was a conservative one, which was that of the beneficiary, Mr. Darmos. There is no other investment strategy before the court for the years under audit or, for that matter, any other year.
[226] Mr. Kaye was asked about the management of the assets of the numbered companies. The following exchange occurred:
Q. Did Royal Trust provide management of the private company's assets in the case of the corporation ending in digits 336?
A. No, Royal Trust did not provide management of those assets.
Q. What entity provided management of the assets held in 336?
A. They were managed by RBC Dominion Securities.
[227] Mr. Kaye also explained why Royal Trust required the indemnity agreement. He testified that:
A. And, secondly, I believe there was an instance where there was a request to have the assets held in the numbered companies managed by RBC Dominion Securities. And our standard policy would have required us to get releases from the beneficiaries before we would allow that to happen.
In a normal trust account, Royal Trust manages the assets, stocks, bonds, portfolios, but this was not the norm.
Here, the only assets in the two Darmos trusts was shares of two holding companies, numbered companies, and Royal Trust did not actively manage the assets within those holding companies.
And that, in the normal course of business, is a concern for us so we would have required releases from the beneficiaries that basically said that they were okay with the fact that RBC Dominion was managing those assets.
[228] 336 Canada Inc. used RBC Dominion Securities as its investment manager. An investment policy statement was put in place between RBC Dominion Securities and 336 Canada, whereby the majority of the funds were held following the sale of the Infostream shares to Bell Canada. A number of accounts were opened at RBC Dominion Securities in Toronto. RBC Securities and Infostream had a pre-existing relationship. Frank Aiello at RBC Dominion Securities developed an investment policy for 336. Mr. Darmos signed the Darmos group of companies & 336 Canada investment policy statement dated February 1st, 2005 as the president of 336; his wife, Calliopi Darmos, also signed as the secretary of 336. Mr. Darmos testified that the investment plan was developed in conjunction with Mr. Alexopoulos because he was the legal counsel.
[229] On May 16, 2007, Mr. Alexopoulos forwarded statements of investments received from RBC Dominion Securities and TD Waterhouse, totaling $24,760,000. He noted:
Please review the mix of investment and provide your comments at the next scheduled teleconference. If there is any reason to communicate before that please contact me.
I will also send to you, in due course, the investment strategy which is in place with RBC Dominion Securities and will ask Mr. Darmos to get one from TD Waterhouse if there is one in place.
[230] The Statement set out the client's objectives and portfolio goals as well as risk tolerance, among other things. The statement was only provided to the Alberta trustees, Mr. Malik and Mr. Kaye, 15 months after it had been in place. This is a consistent with Mr. Darmos being in charge of making investment decisions based on his own objectives and risk tolerance. Although in re-examination Mr. Malik testified that the trustees had an impact on the asset mix, it is not clear when that would have started, and there is no evidence of that before the court during the audit years.
[231] Mr. Alexopoulos had been introduced to Mr. Aiello through Michael Lagopoulos, the deputy chair of the Royal Bank of Canada. Mr. Alexopoulos had had a relationship with Mr. Lagopoulos. Mr. Alexopoulos testified that the investment policy statement: “sets out the objectives of the investment portfolio. As you can see from the headings, the risk tolerance, you know, for the customer; the allocation of the assets that were being administered, et cetera” (emphasis added).
[232] The investment plan was tailored to Mr. Darmos’ objectives, which included preservation of the capital from the sale of Infostream with some growth for the inflation. Mr. Darmos testified that he was willing to accept some fluctuations. He agreed he wanted the money to be grown conservatively, and he agreed the wanted the investments to be conservative with a high credit quality.
[233] RBC Dominion Securities Inc. sent copies of the statements of the investments to Mr. Malik with respect to 336 Canada Inc. Mr. Malik testified that he would have reviewed the RBC Dominion Securities statements describing the investments during the course of looking at the asset mix of 336 Canada.
h) Distribution to Beneficiaries
[234] Mr. Malik testified that he would have considered various factors prior to making distributions from the trusts. There is no contemporaneous documentation in support of this assertion. The documentary evidence, which includes the trustee minutes that are in the record, do not refer to any of these considerations.
[235] Mr. Darmos, who delegated the management of the investments to RBC Dominion Securities and TD Waterhouse, was involved directly or indirectly with the trust property. This point was highlighted by Mr. Bartucci, who highlighted how the investments made by the numbered corporations, and any redemption of shares, impacted the dividends and perhaps the distributions made to the trust beneficiaries. He testified that a distribution by the trust was driven by the tax position of the corporations. He noted that the corporations would have earned investment income, and after the amount of tax being paid by the corporation was determined, “that drove our advice in terms of the amount of dividends that should go up to get that refund of the tax I mentioned previously back to the corporation.” KPMG was involved in recommending the amount of dividends that should be paid. Mr. Bartucci stated:
Q. What was your involvement in, at the corporate level, the declaration of dividends?
A. Our involvement – my involvement was that we would, we would receive the information from the directors, calculate the taxable income in the companies and then recommend the amount of dividends that should be paid to recover the tax in the corporation. And that's pretty common practice in the tax community. It's not anything unusual.
[236] I find that the trustees did not make any independent decisions with respect to distribution to the beneficiaries. These decisions originated from KPMG in Toronto or from a request from Mr. Darmos, the beneficiary; were conveyed to Mr. Alexopoulos; and then were conveyed to the trustees, where they were thence merely papered over. Mr. Alexopoulos, who had a good relationship with KPMG, was the person who communicated with KPMG to ask any questions or deal with any recommendations. For example, in December 2007, Paola D’Agostino, a manager at KPMG, forwarded her recommendations to Mr. Alexopoulos with respect to distributions within the Darmos group of companies. In turn, Mr. Alexopoulos forwarded the letter to the co-trustees. In his email dated December 19, 2007 to his two co-trustees with the subject line: “FW: distributions within the Darmos Group”, Mr. Alexopoulos indicated:
Here is an amended letter that I received from KPMG relative to the Darmos trusts.
You will see that KPMG is now recommending an additional distribution of $1.0 to Ted and Callie Darmos out of the capital of the Ted trust. I contacted KPMG to inquire why they are making this recommendation and they indicated that there is a belief among tax practitioners that the Ontario government may take steps to tax foreign (extra-provincial) trusts whose beneficiaries are residents of Ontario as if the trusts are Ontario residents. As a result, they are recommending to Mr. Darmos to gradually have the capital paid out of the tech trust to the beneficiaries. I am advised that the proposed distribution will be tax-free to the Ted trust and the beneficiaries. Please consider this request and we can discuss in the morning.
i) Professional advisors
[237] The bulk of the professional advisors for the trusts had pre-existing or long-standing relationships with either Mr. Alexopoulos or Mr. Darmos. Some had conflicts of interest.
[238] KPMG (Ontario) provided tax planning advice to the numbered corporations and ultimately to the amalgamated corporation, 336. KPMG and Calgary only performed an administrative function and did not actually prepare the tax returns. KPMG also provided tax and planning advice to the trusts.
[239] Mr. Alexopoulos was general counsel to the numbered companies, a long-standing friend to Mr. Darmos, and the trustee appointed to the two trusts.
[240] Mr. Darmos had a pre-existing relationship with RBC Dominion Securities.
[241] All the professional advisors were located in Ontario, except Mr. Malik who was initially retained to deal with the migration of the two trusts to Alberta.
j) Loan to 336
[242] 6235361 Canada Inc., a company controlled by Mr. Darmos and his wife, received a loan from 6235336 Canada Inc., which was effectively ratified by the trustees. There is no evidence of any independent debate amongst the trustee as to whether and how the loan would impact the trusts and the other beneficiaries. The only concern raised by Mr. Malik was the tax impact on the shareholders, which Mr. Alexopoulos then asked KPMG to look into.
k) Tolling Agreement
[243] Mr. Alexopoulos forwarded a tolling agreement to be signed by the trustees in relation to the Bell Canada litigation. Mr. Malik was prepared to sign it. Royal Trust declined to sign it without the benefit of external legal counsel. The tolling agreement was signed by Mr. Malik and Mr. Alexopoulos; Royal Trust abstained.
l) Bell Canada Litigation
[244] If Mr. Kaye was the public face of Royal Trust when he was assigned to the two trusts, then Mr. Alexopoulos was the public face for the trustees with respect the Bell litigation. The claim was issued in May 2005. Mr. Malik says they became aware of the claim in June 2006.
[245] Mr. Malik testified that the trustees discussed the settlement of the Bell litigation by phone prior to signing off. He said a range of settlements were discussed amongst the trustees. There are no notes or emails in the record.
[246] Pursuant to the Settlement Agreement and Mutual Release signed, Mr. Darmos agreed, on behalf of the Darmos Trust as well, "to immediately deliver to Bell all of the corporation’s business records in their power, possession or control…"
[247] It was Mr. Darmos and Mr. Alexopoulos, as well as the defence lawyer Mr. Groia, who negotiated the settlement in 2010. While the settlement took place beyond the years under audit, the manner in which the process unfolded speaks to who was in the driver’s seat. It was not the trustees. It was Mr. Darmos who suggested that the trusts also use Mr. Groia. Mr. Groia was already defending Mr. Darmos and his wife as well as the numbered companies. The information was patched through from Mr. Alexopoulos to Mr. Malik and Mr. Kaye. Mr. Malik agreed with the suggestion. As noted above, Royal Trust abstained from making a decision in engaging Mr. Groia.
[248] Mr. Alexopoulos was the primary contact with counsel on the Bell litigation. He reported to the co-trustees.
[249] It was Mr. Darmos who attended at the mediation with Mr. Alexopoulos and Mr. Groia. Mr. Darmos testified that Mr. Alexopoulos recommended the settlement figure demanded by Bell. He claimed both Mr. Alexopoulos and Mr. Groia told him to sign the documents. Mr. Darmos is the only one who signed the Settlement Agreement and Mutual Release. Although Mr. Malik testified that Mr. Alexopoulos was authorized to sign on behalf of the trustees, there is no settlement documentation signed by any of the trustees. The preamble of the release reads:
SETTLEMENT AGREEMENT and MUTUAL RELEASE main as of April 9, 2010, between Theodoros Darmos (“Darmos”), Calliopi Darmos, Shashi Malik in his capacity as Trustee of the Theodoros Darmos Family Trust, 6235344 Canada Inc., 6235352 Canada Inc., 623-5298 Canada Inc., and 6235310 Canada Inc. (Collectively the “Vendor Parties”)
[250] Mr. Malik also testified that there was a conversation amongst the trustees with respect to the settlement, and the conversation was initiated by Mr. Alexopoulos, who was requesting authority because there was a number that appeared reasonable and that Mr. Groia had recommended. He indicated that the trustees discussed a range of settlements. The range discussed by the trustees is not in evidence before the court. Mr. Malik also referred to a settlement meeting and not the mediation. He testified that: “Mr. Alexopoulos then attended the settlement meeting and reported back that we were in that range that we had agreed upon.” On the other hand, Mr. Darmos testified that at the mediation, Bell Canada came up with the settlement number at the last minute. His evidence is that Mr. Groia agreed and before he signed it, he asked Mr. Alexopoulos, who was representing the trustees, who told him it was okay to sign it.
[251] No settlement documentation has been produced in this litigation with the signature of any of the trustees. Mr. Darmos therefore signed on behalf of the Darmos Family Trust.
m) Groia Representation
[252] It was Mr. Darmos who suggested retaining the law firm of Groia and Company to defend the action brought by Bell Canada. That action named both Mr. Darmos and his wife, individually, as well as four numbered companies, 344 Canada Inc., 352 Canada Inc., 298 Canada Inc. and 310 Canada Inc. The claim also added, as party defendants, the Darmos Trust and Mr. Malik, in his capacity as Trustee of the Darmos Trust. Mr. Alexopoulos advised the co-trustees of Mr. Darmos’ suggestion to appoint Groia & Company to also represent the trustees. Mr. Malik agreed with the suggestion. Royal Trust did not, and ultimately abstained from making any decision. The idea originated from one of the beneficiaries of the trust, and the shareholder and director of the companies named as party defendants. I find that there was no majority decision made in Alberta to engage Mr. Groia’s firm in the Bell litigation.
n) Tax Installment
[253] KPMG recommended that the trusts pay taxes in instalments. Mr. Malik disagreed with this approach. Royal Trust indicated that it could go either way. This is one of the only decisions where possibly the majority vote in Alberta carried the day, though ultimately Royal Trust was inclined to proceed as recommended by KPMG.
o) Billing of the Alberta Trustees
[254] Mr. Malik billed the trusts for professional services rendered at his regular hourly rate as a partner of Gowlings. He did not delineate on his invoices what part related to legal services and fees and what part related to trustee services.
[255] Royal Trust billed the trusts based on the fee agreement, for an annual fee and not based on assets under administration. By Mr. Kaye’s own admission, Royal Trust was not managing the assets of the trusts.
p) Dividend of $19,348,000 declared to Darmos Trust
[256] This issue is discussed below.
XI. Conclusion
[257] The appellants have failed to meet their initial onus of "demolishing" the Minister’s assumptions, with respect to either trust, by making out at least a prima facie case.
[258] I find that with respect to each of the trusts, Royal Trust, which did not hold or manage or invest the assets of the two trusts, carried out primarily record keeping and administrative functions. While performing administrative tasks in and of itself is not conclusive, this case is distinguishable from Discovery Trust, where Royal Trust was called upon to approve corporate transactions on behalf of the trust, such as the articles of amendment and articles of amalgamation. In this case, the trustees can point to no notes or minutes indicating any independent decision-making process.
[259] In the case of the Darmos trust, there is a protector clause which allowed Mr. Darmos’ nephew, Mr. Ntarmos, to appoint and fire trustees and approve certain steps.
[260] The bulk of the proceeds of the sale of Infostream flowed into the numbered corporations, and ultimately ended up in the amalgamated company 336. Mr. Kaye’s evidence is that the only assets in the Darmos and Ted trusts were shares of two holding companies, which were not being managed by Royal Trust, but rather by RBC Dominion Securities. RBC Dominion Securities is in Toronto.
[261] While Mr. Malik is a director of 336 and was a director of each of the numbered companies, he has always been outnumbered by Mr. Darmos and Callie Darmos, who were also directors and, in Callie’s case, also an officer of the corporations. Mr. Darmos was the person making the investment decisions which impacted the assets of the trusts. It is Mr. Darmos whose objectives and risk tolerance were put in place in determining what type of investment to make.
[262] On the evidence, the trustees delegated the management of the trust property to Mr. Darmos during the years under audit. The trustees’ lack of knowledge about investment decisions merely underscores that the controlling mind behind the investment decisions was Mr. Darmos. Decisions originated in Ontario and were ratified in Alberta, then papered over.
[263] Mr. Malik confirmed that he provided all documents relevant to the matters in issue pertaining to 2006 and 2007 and certain documents with respect to 2004, 2005, 2008 and 2009. There are no handwritten or typed notes authored by Malik in the record and he provided no testimony to suggest that such notes once existed but have since been destroyed or no longer exist.
[264] Malik explained that most communication throughout was by email and that if he printed an email, he would have put it in a physical file. When asked where that physical file was located, he replied “possibly in my office. Possibly, possibly right here in my office. Possibly in storage.” There are no emails in the record printed from Malik’s account. All emails were printed from Alexopoulos’ account.
[265] When confronted with the fact that 336 Canada did not have $19 million in its investment account in September 2007, Mr. Malik’s response was, “I am not the investment broker and I wasn’t the one who produced the accounting.” He could not say for certain what 336 Canada did with the funds at this point in time. Malik could not recollect whether there was a trustee minute evidencing the Darmos Trust making a loan of $19,348,000 to 336 Canada. He was also not aware of any document about the loan or some kind of promissory note in either 2006 or 2007. The appellant trusts have not tendered any trustee minute relating to the receipt of the dividends or what the Darmos Trust did with the funds received.
[266] When asked, on cross examination, what happened to the dividends of $19,348,000 declared by 6235310 Canada Inc. in 2006 to the to the Darmos Trust, Mr. Kaye’s response was: “I have no idea. This is news to me.”
[267] Despite Malik’s contention, during re-examination, that several components would have gone into his decision not to make a distribution to Ms. Ardamis, there is no contemporaneous evidence of this in the record.
[268] With respect to the Bell litigation, Mr. Malik said he considered whether or not, in fact, the interests of the trusts aligned with Mr. Darmos, Callie and the numbered corporations, as well as the costs associated with retaining different counsel. There are no notes or emails in the record that evidence such considerations having occurred.
[269] Although Mr. Malik testified that the trustees received advice from KPMG with respect to the amalgamation of the numbered corporations, there are no notes of discussions by the trustees or even of Mr. Malik’s considerations. Mr. Malik testified that he independently considered the tax consequences associated with the amalgamation and the nature of the expenses being incurred from an administrative and compliance perspective. There are no notes or emails in the record with respect to this exercise. There are also no notes, resolutions or minutes of the trustees consenting to that amalgamation, nor did Mr. Alexopoulos recall any.
[270] On the advice of KPMG five companies were set up to deal with the proceeds of the sale. He was a director of all the corporations as was his wife and Mr. Malik. He was the president of the numbered corporation, and his wife was the secretary of the numbered corporations. In January of 2007, the five corporations were amalgamated, and the successor corporation was 336 Canada Inc., which, Mr. Malik testified, was the holding corporation for the investments from the proceeds of sale, having, as assets its marketable securities, investment in funds, and cash at various stages.
[271] Mr. Alexopoulos testified that: “I had been involved in the amalgamation of the corporations that were underneath the trusts”. He was the one who worked with Mr. Darmos and with KPMG on the amalgamations of the entities. He believes the amalgamation would have required the consent of the shareholders. He could not recall if the consent of the trustees was required. Based on the evidence of Mr. Alexopoulos, the amalgamation was carried out to simplify the corporate structure in order to get the money up to the trusts instead of going through the various corporations and to reduce administration. He stated: “without the amalgamation, in order to get the money up from the trust's hand, you would have to go from one corporation to the other, to the other, to the other and then ultimately to the trusts”. Mr. Alexopoulos reported to Mr. Darmos after the amalgamation was completed.
[272] The underlying assets of the corporations before and after the amalgamation into 336 were managed by RBC Securities in Toronto, with the objectives and risks of Mr. Darmos, the beneficiary, in mind. Mr. Darmos also opened investment accounts at TD Waterhouse, which he managed, or which were under his control to invest as he saw fit.
[273] The professional advisors are common to the trusts and to the numbered corporations controlled by the beneficiaries. KMPG provided tax planning advice to both the numbered corporations and to the trusts. Investment income earned by the corporation would flow up to the trusts. KPMG dealt primarily with the directors of the numbered corporations, primarily Mr. Darmos.
[274] Mr. Darmos managed and controlled the investment strategy. The timing of distributions was tied to recommendations made by KPMG. Mr. Alexopoulos was in routine contact with KPMG with respect to the payment of dividends and distributions from the trusts. He worked with Mr. Bartucci and Ms. D’Agostino in this regard.
[275] KPMG Calgary only provided services related to administration and filing of the trust return, including responding to any questions that the trustees would have had on the trust returns. The actual trust tax returns were prepared in Toronto.
[276] Mr. Kaye indicated that the trusts were not part of the Bell Canada Litigation. In fact, the Darmos Trust was sued as was Mr. Malik in his capacity as trustee to the Darmos Trust. I can only infer that Royal Trust took an arms length approach to the litigation, as it did by not voting on whether to engage Mr. Groia, even though the larger of the two trusts was a party defendant.
[277] Mr. Alexopoulos was in regular contact with Mr. Darmos, who he referred to as ‘the client’, in his invoices for legal work sent to the trusts. When Mr. Kaye emailed Mr. Alexopoulos to confirm that the cash balances in the trust accounts were not to be invested, he sought instructions from Mr. Darmos before writing back to confirm that the amounts were not be invested. When Mr. Darmos wanted a distribution out of the “small trust” he called Mr. Alexopoulos, who then called Mr. Bartucci to get instructions. Mr. Darmos called Mr. Alexopoulos to confirm he agreed with KPMG’s proposal and Mr. Alexopoulos consulted with him about whether he wanted the distribution allocated between his sons. When Mr. Darmos, or any of his family wanted a distribution, he would call Mr. Alexopoulos because he was the main contact. When Mr. Darmos wanted the trusts to open investment accounts at RBC DS, he called Mr. Alexopoulos, who added it to the trustee agenda.
[278] There are no notes or emails in the record that speak to a pause in distributions as a result of the Bell litigation or a resumption of distributions as a result of discussions with counsel.
[279] With respect to the Bell litigation, if there were settlement ranges recommended by the trustees and provided to Mr. Alexopoulos, that information is not before the court. There is no contemporaneous record of any discussion amongst the trustees about the final approval of the settlement, the propriety of the settlement, or about the settlement at all. Mr. Alexopoulos did not sign the Settlement Agreement and Mutual Release that was ultimately concluded by the parties to settle the Bell litigation. Only Mr. Darmos signed the agreement and release, including on behalf of the Darmos Trust.
[280] There is no evidence that the trustees, or co-trustees had any say in approving any of the corporate restructuring or amalgamations. It was Mr. Alexopoulos, Mr. Darmos and KPMG working in concert, with Mr. Alexopoulos reporting to the trustees. The only two Royal Trust minutes in evidence pertain to distributions made from the Ted Trust, despite several six- and seven-figure distributions made from the Darmos Trust during the years Royal Trust was trustee. The Royal Trust minutes were internal minutes prepared and signed by Royal Trust. They were not signed by Malik or Alexopoulos.
[281] Mr. Kaye testified that Royal Trust kept all of the documentation and paperwork on file “for basically forever.” He said that “if there was a cash balance within a trust account, it was Royal Trust’s job to record every single debit leaving the trust account, every single cheque, every single payment, and keep all of it in very detailed record for, you know, for everyone to see.” Despite that money flowed in and out of both trusts, the appellant trusts did not produce any of the accounting records described by Kaye, for any years.
XII. Disposition
[282] For the reasons above, I conclude that the central management and control of the two trusts was in Ontario.
[283] The appeals are dismissed.
XIII. Costs
[284] If the parties are not able to agree on costs, I will consider written submissions based on the following schedule:
i) the respondent shall deliver costs submissions, including a Bill of Costs, Costs Outline, and dockets (or computer-generated dockets) no later than 30 days of the date of these Reasons;
ii) The appellants shall deliver her responding submissions and supporting materials within 20 days thereafter.
iii) Reply submissions, if necessary, on behalf of the defendant, shall be delivered no later than five days thereafter.
iv) The Costs submissions, excluding the Costs Outline, Bill of Costs and any supporting case law, must be no longer than 5 pages, double spaced.
v) Any authority referred to may be hyperlinked to a free online source for decisions.
vi) The Costs Submissions should also be provided in Word format and emailed to Ms. Diamante. All submissions and supporting materials on Costs must also be uploaded to Caselines to the Trial bundle.
A.P. Ramsay J.
Released: December 4, 2023
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CV-14-508968
THEODOROS DARMOS FAMILY TRUST, BY ITS TRUSTEE, SHASHI R. MALIK
Appellant
– and –
THE MINISTER OF FINANCE
Respondent
AND BETWEEN:
CV-14-508969
DARMOS FAMILY TRUST, BY ITS TRUSTEE, SHASHI R. MALIK
Appellant
- and –
THE MINISTER OF FINANCE
Respondent
REASONS FOR JUDGMENT
A.P. Ramsay J.
Released: December 4, 2023
[^1] Garron Family Trust (Trustee of) v. R., 2012 SCC 14, 2012, (sub nom. Garron Family Trust v. Canada) 343 D.L.R. (4th) 670, (sub nom. St. Michael Trust Corp. v. R.) 2012 D.T.C. 5063, (sub nom. St. Michael Trust Corp. v. Minister of National Revenue) 428 N.R. 202, (sub nom. Fundy Settlement v. Canada) [2012] 1 S.C.R. 520 (S.C.C.)