Irving's offshore split was a race against time — and taxes
Leaked documents reveal family faced deadline to avoid federal tax hit
As New Brunswick's Irving family raced to break up their multibillion-dollar corporate empire more than a decade ago, brothers J.K., Arthur and Jack Irving agreed on at least one common goal.
They needed to keep their tax bills down.
"The threat of a massive impending Canadian tax charge in December 2013" was a key driver for carving up the fortune as soon as possible, U.K. lawyer Andrew Hine wrote in a February 2010 court filing in Bermuda.
Hine was representing Arthur Irving's grandchildren, one of many lawyers negotiating the division of the empire, including tax-free offshore trusts set up in Bermuda by late patriarch K.C. Irving.
K.C.'s three sons, J.K., Arthur and Jack, had agreed to split the conglomerate, disentangling a complex web of cross-ownership.
A "growing conflict" between the three branches of the family was "increasingly problematic," Keith Bruce-Smith, a London lawyer representing some of J.K. Irving's grandchildren, wrote in a March 2010 legal affidavit filed in Bermuda.
Hine wrote that if the conglomerate did not break up, "tension and distrust" could "jeopardize the potential benefits available for current and future generations of the Irving family."
Those comments are contained in confidential court filings never made public that were reviewed by CBC News and Radio-Canada thanks to a leak known as the Paradise Papers.
Despite the tensions, the three branches of the family saw eye-to-eye on the need to finalize the reorganizing of their assets by the end of 2013 to beat a major change to Canadian laws on taxes and trusts.
New federal legislation would take effect to tax income from offshore trusts benefiting Canadian residents — such as K.C. Irving's sons, grandchildren and great-grandchildren.
"If the beneficiaries are Canadian, going forward after 2013, they're going to be paying tax on the investment income," Geoffrey Loomer, an offshore tax expert and professor at the University of Victoria Law School, said in an interview with CBC and Radio-Canada.
K.C. Irving established two trusts in Bermuda in 1976, one for his sons and one for his grandchildren. He created a third with his will when he died in 1992.
The plan that took shape in 2009 and early 2010 was to declare those two trusts void, fold their assets into the K.C. Irving Estate Trust, then divide that among the three families.
Otherwise, the tax bill from the Canada Revenue Agency "could potentially cripple the operating businesses," Bruce-Smith wrote in his affidavit.
Leak includes documents from Irving's Bermuda law firm
Details of the Irvings' tax-driven rush to split their empire are revealed in the Paradise Papers, documents leaked to German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists.
Many of the records come from Appleby, one of the biggest offshore services law firms on the planet. It was founded in Bermuda and counted Irving companies among its clients.
The Irving family is among Canada's wealthiest. J.K. Irving's fortune has been estimated by Forbes Magazine at between $4.1 billion and $8.3 billion over the last decade. His brother Arthur's has ranged from $1.9 billion to $5.5 billion. The third brother, Jack, died in 2010.
Forestry and paper operations overseen by J.K. Irving are New Brunswick's largest private-sector employer. Arthur's Irving Oil refinery is Canada's largest.
Tax-free Irving trust in Bermuda was worth $3 billion
Documents indicate the value of the Bermuda-based K.C. Irving Estate Trust was $3 billion — a large share of the family's total net worth — when its split was approved in 2010.
Bermuda does not charge corporate income tax on companies that don't produce or manufacture anything on the island. K.C. Irving began registering holding companies in Bermuda in 1968 and moved there after leaving New Brunswick at the end of 1971.
Following his death in 1992, his will created the K.C. Irving Estate Trust in Bermuda and named three trustees to oversee it: his widow, Winnifred, who lived on the island, and two of his lawyers in Bermuda and New York.
By appointing non-Canadian residents as trustees, Irving was ensuring the money could not be taxed in Canada, experts said at the time.
Back in New Brunswick, J.K., Arthur and Jack continued to manage the Irving companies as a team.
Most expensive trust rearrangement 'in legal history'
Preliminary family discussions of a split were underway in 2000 or earlier, says Hine's 2010 affidavit.
That's around the same time the federal government began looking at tightening the tax rules for offshore trusts, Loomer said.
"Their advisers would have been well aware of plans to change Canada's non-resident trust rules," he said.
An initial deal between the three brothers on how to divide the assets broke down in 2007.
On Canada Day in 2008, they signed a new memorandum of agreement.
The process of slicing up the K.C. Irving Estate Trust, involving teams of international tax and trust lawyers, was "probably the most protracted and expensive trust rearrangement in legal history," Frank Hinks, a lawyer for Arthur Irving, said in written submissions in 2012.
'Sensitive negotiations' with Canada Revenue Agency
According to the leaked documents, the plan was to divide the assets between three holding companies set up by the three brothers: JKI Holdco, ALI Holdco and JEI Holdco.
Arthur's ALI Holdco would get two-thirds ownership of Irving Oil, while Jack's family would get the other third, along with construction companies and other businesses they had run for years.
J.K.'s branch got full ownership of the forestry, shipbuilding, food, paper and other enterprises they had long managed.
Each brother would create a new trust for his respective branch of the family.
The process required "sensitive negotiations" with the Canada Revenue Agency, according to submissions by Bermuda lawyer John Riihiluoma filed in 2009 asking for the proceedings to be kept confidential.
According to the Hine affidavit, the Irvings needed the CRA to provide a "favourable response" or else the division could not go ahead.
The leaked court filings do not spell out exactly what the family wanted the CRA to approve.
But Hine wrote in affidavit that a federal rejection could create "major difficulties" and the family might not be able to come up with a new plan before the December 2013 deadline.
2 trusts folded into K.C. Irving's estate
To split the empire, the family first had to eliminate the two trusts established by K.C. Irving on June 28, 1976, one for his sons and one for his grandchildren.
They were designed to avoid Canadian taxes, Arthur Irving acknowledged during a February 1980 discovery hearing in his divorce case.
When a lawyer for his wife Joan questioned what the lawyer called a "gift" of $4 million to the grandchildren's trust in 1976, Arthur responded, "It was good business, tax reasons."
By 2010, however, the sons' and grandchildren's trusts had become a potential tax problem.
Because their beneficiaries lived in Canada, the new legislation would make the trusts taxable at the end of 2013 — if they still existed.
Lawyers applied to a Bermuda judge to invalidate the trusts. If declared void, their property "falls into" the K.C. Irving Estate Trust, Riihiluoma wrote, helping the "tax efficient implementation" of the split.
Hine agreed: voiding the two trusts would produce "a significant tax saving," while failure "would substantially affect the amount of cash available to Irving Oil because of the need to fund the tax liability."
For Hine, that failure would jeopardize the oil company remaining a reliable source of wealth for Arthur's descendants, whom he was representing — and thus upend the carefully negotiated division designed to treat all branches of the family fairly.
Another benefit of invalidation, Riihiluoma noted, was that the Canada Revenue Agency would be the only party to "suffer financially" from the move.
Federal tax authorities didn't intervene
The CRA was aware of the split but "has given no indication of any desire" to intervene in the Bermuda court process, Riihiluoma added in the December 2009 filing.
To invalidate the two trusts, the lawyers argued to a Bermuda judge that they were never properly created in the first place.
In effect, K.C. Irving's heirs were second-guessing one of his offshore manoeuvres.
The trusts were not truly independent as required by law, Riihiluoma argued in his submissions, because Irving maintained "total dominion and control" over them while he was alive, including the power to "bless any trust transaction."
On March 22, 2010, Chief Justice Richard Ground of the Supreme Court of Bermuda agreed to invalidate the trusts, folding their assets into the main K.C. Irving Estate Trust.
The family had beaten the deadline and avoided a huge tax bill.
Ground also approved in principle the three-way split of the newly merged trust among the J.K., Arthur and Jack Irving families.
Lawyers were soon at work putting the division into effect.
The final legal bill was around $100 million, according to Bermuda's new chief justice, Ian Kawaley, in a 2012 ruling related to the case.
Spokespersons for J.D. Irving Ltd. and Irving Oil turned down requests for interviews from CBC News and Radio-Canada and, in emailed statements, did not respond to questions about the splitting of the offshore trust or its tax implications.
Jack Irving's son John did not respond to an interview request. Kenneth Irving, who left Irving Oil in 2010, said no to an interview.
