IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
Louis Winkler Alter Ego Trust #3 v. Winkler, |
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2019 BCSC 30 |
Date: 20190111
Docket: S183294
Registry: Vancouver
Between:
Thomas Winkler, Trustee of the Louis Winkler Alter Ego Trust #3
Petitioner
And
Ibolya Winkler, Alexandra Perel-Winkler, Oliver Perel-Winkler and Julia Csoti
Respondents
Corrected
Judgment: The short name of the judgment
was corrected on January 15, 2019; the text of the judgment
was corrected on the front page on January 18, 2019
Before: The Honourable Mr. Justice Wilson
Reasons for Judgment
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Counsel for the Petitioner: |
J.L. Driedger |
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Counsel for the Respondents: |
M.S. Kerwin |
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Place and Date of Hearing: |
Vancouver, B.C. December 7, 2018 |
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Place and Date of Judgment: |
Vancouver, B.C. January 11, 2019 |
[1] Thomas Winkler applies to the court in his capacity as trustee for directions relating to his administration of a trust set up by his father, the Louis Winkler Alter Ego Trust #3 (“Trust”). The threshold question for which directions are sought is whether the trustee is permitted to deduct an allowance for depreciation from the income of the Trust when determining the amount of income to be distributed monthly to the income beneficiary Ibolya Winkler, who is both Louis’ widow and the respondent.
[2] If the trustee is so permitted, the trustee also seeks direction as to the appropriate rate of depreciation and whether those deductions should be recalculated retroactively.
[3] The Trust was settled by Louis Winkler on January 30, 2008, for his sole benefit during his lifetime and for the benefit of family members thereafter. As many of the parties involved in this matter share the same last name, I will, from time to time, refer to them by their first names.
[4] Louis was the initial trustee of the Trust. The petitioner, Thomas Winkler, was appointed as the substitute trustee in the event of the death or incapacity of Louis.
[5] Although Louis started his working life in Canada as a plumber, he soon transitioned into what became a lucrative property development business.
[6] Ibolya and Louis had been married for 35 years at the time of Louis’ death. They had no children together. Upon Louis’ death, the trustee was obligated to commence making monthly payments to Ibolya. Ibolya is entitled to the greater of $8,000 per month or one-half of the Trust’s income, calculated monthly on a cash basis.
[7] The purpose of the Trust, which is designed to remain until December 31, 2087 (the “Distribution Date”), can be divided into three distinct time periods:
a) during the lifetime of Louis, the trustee’s paramount concern is the comfort and happiness of Louis;
b) after Louis’ death, the trustee is to pay one-half of the income from the Trust or $8,000 per month, whichever is greater, to Ibolya;
c) on the date of death of the last to die of Louis and Ibolya, the Trust Fund is to be divided into four remainder trusts and held until the Distribution Date for the benefit of the following:
i. 20% of the Trust Fund for the benefit of Thomas;
ii. 35% of the Trust Fund for the benefit of Alexandra Perel-Winkler. Alexandra is Thomas’ daughter and Louis’ granddaughter;
iii. 35% of the Trust Fund for the benefit of Oliver Perel-Winkler. Oliver is Thomas’ son and Louis’ grandson;
iv. 10% of the Trust Fund for the benefit of Julia Csoti. Julia is Ibolya’s granddaughter.
[8] Louis became incapacitated in approximately November 2010 and passed away on April 6, 2013. Since that time, Thomas, in his capacity as the trustee, has paid Ibolya the greater of one-half of the net income from the Trust Fund or $8,000 per month. The method of calculation of the income from the Trust is the issue on this application.
[9] When the Trust was created, Louis owned three large mixed-use rental properties which were transferred into the Trust:
a) 2606 St. John’s Street, Port Moody (“Moody Bay”), a 3-1/2 story building with retail units on the main floor and residential units on the upper floors;
b) 2626 St. Johns Street (“Winkler Place”), a 3-1/2 story building with retail/commercial units on the main floor and apartments on the upper two floors, with underground parking and storage areas; and
c) 2914-2934 St. Johns Street (“2914”), an 8-unit 1-1/2 story brick industrial building with a parking area in front, mezzanines in the units and loading bays with land access in the rear.
[10] Until he became incapacitated, Louis continued to manage the three properties as he had before the Trust was created. When Thomas took over as the trustee, Winkler Place and 2914 were already under binding contracts for purchase and sale. Those sales, which included, in one instance, a vendor takeback mortgage, completed. The mortgage was repaid in full prior to Louis’ death.
[11] Thomas considered various investment opportunities before purchasing two industrial rental properties on behalf of the Trust. One property is located at 18503‑97th Avenue, Surrey, BC (“Port Kells”) and was purchased in February 2012 for $2,800,000 and financed in part with a mortgage in the amount of $984,000. Port Kells consists of two industrial buildings with a total of 22 rental units.
[12] The other property is located at 20110 Stewart Crescent, Maple Ridge, BC (“Stewart Crescent”) and was purchased in November 2013 for $4,550,000. Stewart Crescent consists of two industrial buildings with 11 units in each building.
[13] While the evidence would suggest that Ibolya was not happy with these purchases, there is no issue that they are authorized investments under the Trust and that Thomas was acting in accordance with the Trust when the purchases were made.
[14] The Trust continues to own the Moody Bay property, which has a mixture of retail units on the main floor and residential units on upper floors. Louis purchased the land in 1992 and oversaw the design and construction of the building which completed in 2000.
[15] Upon the death of Louis and until December 2016, the trustee treated the entirety of the mortgage payments, both principal and interest, as expenses for the purposes of determining net income. The trustee then paid to Ibolya half of that net income amount, or $8,000, whichever was higher. Ibolya objected to deduction of the portion of the mortgage payment that was allocated to principal for the purposes of calculating the net income, which seems on its face to be reasonable – Ibolya’s monthly income amount would be reduced by one-half of the portion of the mortgage payment allocated to principal, but only the residual beneficiaries would benefit.
[16] The trustee stopped charging the principal component of the mortgage payments effective December 2016. The amount of principal that was deducted when determining the monthly net income from April 2013 to December 31, 2016, was approximately $400,000 – presumably Ibolya would have received approximately $200,000 more in income over that period.
[17] Thereafter, the trustee deducted only the interest portion of the mortgage payments from income; however, he started to deduct an amount for depreciation at the capital cost allowance rate of 4% as permitted under the Income Tax Act.
[18] When calculating income for tax purposes, a taxpayer is entitled to deduct a capital cost allowance “(CCA”) for depreciable property. The purpose of this CCA deduction is to spread-out the cost of a capital asset over time, as opposed to allowing a deduction for the entire purchase price in the year of acquisition. The Income Tax Act regulates the maximum percentage allowed for CCA, which percentage depends on the nature of the asset. Assets that depreciate quickly, such as computers, have a much higher depreciation rate than buildings. The maximum allowable rate of CCA for buildings is 4%.
[19] After claiming the maximum allowable rate of CCA in 2013, the trustee has claimed an amount of CCA sufficient to reduce the Trust’s taxable income to zero.
[20] If the income from the Trust for the period between April 2013 and December 2016 were recalculated, with the principal portion of the mortgage payments added to income but the maximum allowable CCA then deducted, Ibolya would have actually received approximately $80,000 less. In other words, the maximum CCA exceeds the principal portion of the mortgage payments.
[21] The trustee estimates that approximately $800,000 will be required over the next five years by way of capital expenditures. The most significant of these expenses is the requirement for new roofs on at least three buildings. He seeks directions as to whether he is entitled to deduct from income a depreciation reserve to fund those expenditures.
[22] The parties agree that the trustee has the authority to bring this application pursuant to Rule 2-1(2)(d) of the Rules of Court, which provides as follows:
(2) To start a proceeding in the following circumstances, a person must file a petition or, if Rule 17-1 applies, a requisition:
. . .
(d) the relief, advice or direction sought relates to a question arising in the execution of a trust, or the performance of an act by a person in the person's capacity as trustee, or the determination of the persons entitled as creditors or otherwise to the trust property; . . .
[23] Further, the trustee has authority pursuant to s. 86 of the Trustee Act, R.S.B.C. 1996, c. 464:
86 (1) A trustee, executor or administrator may, without commencing any other proceeding, apply by petition to the court, or by summons on a written statement to a Supreme Court judge in chambers, for the opinion, advice or direction of the court on a question respecting the management or administration of the trust property or the assets of a will-maker or intestate.
(2) The application under subsection (1) must be served on, or the hearing attended by all persons interested in the application, or by those that the court thinks expedient.
(3) The costs of an application under subsection (1) are in the discretion of the court.
[24] The questions posed on this application for directions are as follows:
a) Is the trustee permitted to deduct depreciation expenses from the income of the Trust when calculating the amount of income to be distributed monthly to the income beneficiary?
b) If the answer to the previous question is yes, then:
i. What is the appropriate method for determining the rate of depreciation? and
ii. Should the trustee be required to recalculate the income for Trust purposes between April 2013 and December 2016 to include an allowance for depreciation? If so, the trustee seeks directions with regard to any overpayments or underpayments that may have been made.
[25] This Court recently confirmed the applicable principles of construction with regard to trust instruments in Stewart v. Stewart, 2018 BCSC 556. At paras. 50-51, Abrioux J. stated the following:
[50] In the construction of trust instruments, the primary purpose of the court is to determine the intention of the settlor, using the natural and ordinary meaning of the words used. The settlor’s intention is to be gathered primarily from the four corners of the trust by reading it as a whole: National Trust Co. Ltd. v. Fleury et al., [1965] S.C.R. 817 at 829.
[51] The court must also construe the words used by the settlor according to their ordinary or primary meaning. When the settlor has used a word which, in view of the events that have occurred, can only have one reasonable meaning, the court cannot make the assumption that the settlor would probably have had a different intention (and have used a different word with regard to those circumstances), had he or she thought about the events occurring: James Mackenzie, Feeney's Canadian Law of Wills, 4th ed. (Markham: Butterworths, 2000) at para. 10.44.
[26] In Kenoras v. Smith, 2017 BCSC 339, Macintosh J. considered the extent to which extrinsic evidence might be admitted, even if the language in the deed appears unambiguous, and held the following at para. 16:
[16] The two relatively recent Court of Appeal pronouncements cited above, Smith Estate in 2010 and TLC The Land Conservancy in 2014, lead me to conclude that the weight of authority in this province remains that if the will is not ambiguous, extrinsic evidence will not be admitted to interpret it. In my view, that rule does not mean that a court must keep itself oblivious to what, in contract interpretation cases, is referred to as the factual matrix. If it did, it would be almost impossible to know what many of the words in any will were intended to refer to, no matter how clearly drawn and free from ambiguity the will may have been.
[27] It is common ground that the trust deed does not include language that makes specific reference to depreciation, a depreciation reserve or to CCA. In the absence of an express authorization, the inquiry is whether a deduction for depreciation is impliedly authorized. The Trust deed contains the following discretionary powers:
a) Clause 4(a): Invest in real property of whatsoever nature and wheresoever situate, whether involving liability or not and whether producing income or not;
b) Clause 4(b): Retain any of the investments or other property at any time forming part of the Trust Fund, whether or not they are producing income;
c) Clause 4(g): Deduct and pay out of either the income or capital of the Trust Fund all necessary expenses incurred by the Trustee in managing the Trust Fund;
d) Clause 4(j): Grant leases or options for any real and personal property and to expend money out of the capital of the Trust Fund in repairs, improvements and general management;
e) Clause 4(l): Make any allocations, elections, determinations or designations allowed and exercise any options or rights arising under any taxing statute which the Trustee shall in his absolute discretion consider in the best interests of the beneficiaries;
f) Clause 4(n): To do all things the Trustee in his discretion considers necessary or advisable for the carrying on, incorporation, winding up or disposal of any such business, and to employ as capital in such business such part of the capital of the Trust Fund as in his absolute discretion the Trustee shall think advisable and generally to act in all matters relating to such business as if the Trustee were beneficially entitled thereto; and
g) Clause 4(t): Generally exercise all the foregoing rights and powers in all respects as if the Trustee were beneficially entitled to the Trust Fund absolutely.
[28] Where the trust is intended to be operated as a business, there may be an exception to the general rule that no allowance for depreciation should be taken. Such an intention can give rise to an implied exception to the general rule.
[29] In Robertson Estate; Chartered Trust Company v. Robertson Estate, [1953] 2 S.C.R. 1 [Robertson], the trustee was directed to carry on the settlor’s newspaper business, with income to be divided in part to his widow and with a remainder, if any, to be invested. At pp. 6-7, the Supreme Court of Canada stated the following:
Apart from the question as to the proper rate or rates at which write-offs for depreciation in any particular case should be made, and in the case at bar there is no question of that sort, such write-offs are, in my opinion, necessary and proper, and profits or income cannot be ascertained until such write-offs have been made. The theory of such write-offs is maintenance of capital.
[30] Later the Supreme Court of Canada stated the following:
Apart from the fact that it may be resorted to at any time for the purposes for which it was set up, a depreciation reserve of the nature of that here in question is intended merely to keep up the initial value of the property and not to add to it.
[31] Robertson was considered by the Ontario High Court of Justice in Re Katz (1980), 29 O.R. (2d) 81 (H. Ct. J.). In Re Katz, the estate consisted primarily of nine wholly-owned residential properties, a partnership interest in two apartments and two shopping centres. Similar to the case here, the contest was between the trustee, who wanted to deduct a depreciation reserve, thus lowering the income of the income beneficiary, and the remainder beneficiaries. Maloney J. distinguished Robertson on the basis that the testator in Robertson specifically directed that the business was to be kept intact. On the facts in Katz, the court held that the testator had only ever been a passive investor and to the extent that management was required, it only applied to the nine residential buildings as he was merely a partner or participating investor in the other properties. Importantly, the court also held that there was implied obligation on the part of the trustee to sell the properties.
[32] Did Louis intend that the Trust be run as a business? I conclude that he did.
[33] During his lifetime Louis was a property developer who bought, improved and managed commercial buildings. Although the trustee has subsequently purchased two buildings that were not developed by Louis, they are similar in nature and kind to the properties that were in the Trust when it was created. There is no question that the trustee’s acquisition of Port Kells and Stewart Crescent accords with the terms of the Trust Deed.
[34] Moreover, the Trust is intended to remain until December 31, 2087, or another 69 years. Ibolya is currently 82 years of age. Unlike the facts in Katz, there is no obligation, express or implied, on the part of the trustee to liquidate the real properties under the Trust. Louis intended that the Trust would be managed for many years after the deaths of both he and Ibolya.
[35] In Re Zive (1976), 77 D.L.R. (3d) 669 (N.S. S.C.), supp. reasons 77 D.L.R. (3d) 669 at 686 [Zive], the estate was comprised primarily of income producing real property. The court concluded that it was appropriate for the executors to deduct a depreciation reserve from income. However, the court did not rely simply on the question of whether the trust was carrying on business and instead focussed on the perceived unfairness that would result if assets depreciated to the detriment of the remainderman. The court held the following at p. 680:
It seems to me that the true test of whether or not executors should take depreciation allowances should not be based upon whether they are operating a business but on whether the assets composing the estate are in fact depreciating to the point where the remainderman is suffering an actual disadvantage over the income beneficiary. There is, of course, no problem when the executors are in fact operating a business and there is a direction for the executors to pay only the net income or net profits from the business to the life tenants, because such a reserve is an integral part of the ordinary accounting of a business operation. The authorities all hold that an amount must be retained out of income to offset the estimated decline in value of the depreciable assets before determining the net profit of the business.
[36] Would an unfairness arise here if repairs are paid solely from capital as opposed to from income? On the facts of this case, I conclude that it would not.
[37] Unlike the circumstances in Zive, the residual beneficiaries under the Trust see up to one half of the income added to the capital of the trust. While the payments of principal under the mortgages are not sitting in a cash account, the reductions in mortgage principal nonetheless contribute to the equity of the residual beneficiaries. Between April 2013 and December 2016, the amount added to the capital account, which is in addition to the approximately $400,000 of mortgage principal reduction, was as follows:
2013 $90,883
2014 $78,649
2015 $114,764
2016 $60,155
[38] As such, even if one ignores the increase in the value of the properties as a result of market forces, which will benefit the residual beneficiaries in the long run, there is ample accretion to capital to pay for the larger repairs identified by the trustee.
[39] Does the fact that Louis intended that the Trust be operated as a business give rise to the right on the part of the trustee to create a depreciation reserve? On the facts of this case, I conclude that it does not, based on the wording of the Trust Deed.
[40] Paragraph 4(j) of the trustee’s powers provides the following:
4(j) Grant leases or options of or upon any real or personal property comprised in the Trust Fund on such terms and conditions and for such periods as the Trustee may in his absolute discretion think proper and so long as any freehold or leasehold property shall form part of the Trust Fund the Trustee may expend money out of the capital of the Trust Fund in repairs and improvements and generally manage such property; [emphasis added]
The trustee says that the proper interpretation of 4(j) is that the paragraph is permissive, not mandatory. He says that such clauses are often included to take account of situations where trust repairs are needed and there is not enough liquidity to pay for those repairs. Rather than forcing the trustee to sell the property, the trustee is authorized to dip into capital.
[41] While clause 4(j) is permissive rather than mandatory in nature, it would appear on its terms to give the trustee discretion both as to whether or not to enter into leases, and also whether to effect repairs and improvements. However, the clause would appear to contemplate that if monies are to be expended for repairs and improvements, those funds must come out of capital, as opposed to income.
[42] This wording of 4(j) can be contrasted with clause 4(g) which authorizes the trustee to use either income or capital for all necessary expenses associated with administration and performance of the Trust:
4(g) Deduct and pay out of either the income or capital of the Trust Fund all necessary expenses incurred by the Trustee in administering or performing this trust and in managing the Trust Fund;
[43] In other words, Louis appears to have deliberately left the trustee with discretion regarding the source of funds for expenditures on the administration of the Trust while not providing such discretion for repairs and improvements.
[44] Since clause 4(j) does not authorize the trustee to expend money out of the income of the Trust Fund for repairs and maintenance, but instead provides that any expenditures are to be made by way of encroachment from the capital, I conclude that taking a depreciation reserve from the Trust’s income for the purpose of determining Ibolya’s entitlement cannot be implied under the Trust Deed and, therefore, the first question on the application for directions must be answered in the negative. The remaining questions do not arise.
[45] On the issue of costs, absent further submissions from the parties, costs of this application should be paid from the capital of the Trust.
“Wilson J.”