Boger Estate v. MNR, 91 DTC 5506, [1991] 2 CTC 168 (FCTD)

Jerome, A.CJ.:—This matter came on for hearing at Edmonton, Alberta on September 13, 1990. The executrix of the estate of Alexander Boger, deceased, (the "plaintiff") appeals a decision of the Tax Court of Canada dated November 3, 1988 which dismissed the plaintiff's appeal against a reassessment by the Minister of National Revenue (the "Minister") dated January 12, 1984 in respect of the 1979 Terminal Tax Return of Alexander Boger (the "taxpayer"). The reassessment disallowed a "rollover" pursuant to subsection 70(9) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") of farm land and depreciable property given to the taxpayer's children under his will because this property had not been "transferred or distributed" to the children and had not been established to have become "vested indefeasibly" within the time limit set out in subsection 70(9). At the time of hearing I reserved judgment pending further written submissions of counsel.

Facts

The facts are not in dispute and are outlined in the following summary of the “Partial Agreed Statement of Facts". The taxpayer, a farmer, died testate on March 10, 1979. Surviving him were his wife, Olga Boger (the "spouse") and four daughters (the "children") one of whom was a minor. In his will, the taxpayer named his daughter, Sharon Boechler, as Executrix and Trustee (the "plaintiff"). He disposed of his property as follows: widow—life estate in S.W. 1/4 14-38-13-W4 (the "home quarter"); children—1/4 share of residue each. Letters Probate were granted to the plaintiff on July 9, 1979. The taxpayer's estate consisted of the following land and farming interests as well as cash, shares, and personal effects having a total value of $446,180.42:

Land (Probate value)

S.W. 1/4 14-38-13-W4 (the “home quarter") $50,000.00

N.E. 1/4 15-38-13-W4		47,250.00
N.W. 1/4 15-38-13-W4		48,750.00
S.W. 1/4 17-38-13-W4		45,700.00
S.E. 1/4 18-38-13-W4		47 ,300.00
S. 1/2 7-38-13-W4		54,300.00
		$293,900.00
Farming Interests
Farming Equipment	$83,483.00
Livestock	18,490.75
Grain	860.50	$102,834.25

The land and farming interests were used by the taxpayer in the business of farming immediately before his death.

A Terminal Tax Return to date of death was filed and was received by Revenue Canada on April 30, 1980. A "spousal rollover" of the home quarter pursuant to subsection 70(6) and a "farm rollover" of the remaining land and farming equipment pursuant to subsection 70(9) were claimed. Consequently, no capital gains (or losses) were declared on what would otherwise be a deemed disposition of these assets under subsection 70(5).

In 1979 the spouse made an application under the Family Relief Act (then R.S.A. 1970, c. 134, as amended) for a greater share of the estate. The Minister issued a clearance certificate to date of death dated October 14, 1980. No distribution took place, however, until after the spouse's application was finally determined, 29 months after the date of death. By Court Order dated August 4, 1981 (the "Order"), the spouse received:

(a) $75,000. cash paid with interest to her in November, 1981;

(b) absolute title in fee simple to the home quarter (probate value $50,000.) transferred to her on January 6, 1982;

(c) some of the farming equipment which was delivered immediately:

(i) 1967 Chevrolet 1/2 ton truck with camper (probate value $4,000.); and

(ii) six grain bins on S. 1/2 15-38-13-W4 (probate value $4,200.).

Farm equipment remaining in the taxpayer's estate had been sold by auction in September, 1979. In April, 1981 the estate had been transmitted to the plaintiff, as executrix, and she became the registered owner of the property. Three quarter sections of land were sold in August, 1982 with the consent of the beneficiaries of majority age and the Public Trustee of Alberta on behalf of the minor. Payments were made from the estate to the spouse in accordance with the Order, and capital distributions were made to the children as follows:

In October 1982, after concern had been expressed by the estate accountants with respect to the 1979 Terminal Return and in view of the decision in Hillis v. The Queen, [1982] C.T.C. 293; 82 D.T.C. 6249 (F.C.T.D.), solicitors specializing in estate practice were retained and a meeting was requested with Revenue Canada in February, 1983. As a result of this meeting, the taxpayer's 1979 Terminal Return was reassessed on the following basis:

(a) a spousal rollover was applied to the home quarter;

(b) the rollover with respect to the remaining farm land was disallowed as the taxpayer was deemed to nave disposed of the remaining land at fair market value immediately prior to his death and capital gains were declared;

(c) the rollover with respect to farm machinery was disallowed. The auction proceeds were included as income in the taxpayer's 1979 return;

(d) adjustments were made concerning interest income.

The Minister also agreed that income earned in the 1980 and 1981 estate taxation years should be taxable in the hands of the Trustee because the spouse's litigation under the Family Relief Act was still pending in those years. Income and capital gains or losses, if any, in the 1982 estate taxation year and in subsequent years were to be allocated to the residuary beneficiaries.

The notice of reassessment reflecting these changes was mailed August 19, 1983. No objection was filed, however, the Minister issued another notice of reassessment on January 12, 1984 with respect to the Terminal Return. A notice of objection was filed by the plaintiff on March 14, 1984. On February 10, 1987 the Minister issued a clearance certificate to date of death stating that:

This is to certify that all amounts for which the taxpayer named below [Alexander Boger, deceased] is liable and for the payment of which you may reasonably be expected to become liable in your capacity as the responsible representative of the taxpayer for the period ending with date of death and any preceding taxation year under the provisions of [various actions including the Income Tax Act] have been paid or that security thereof has been accepted by the Minister.

The plaintiff states that, by operation of the taxpayer's will, the taxpayer's interest in the property was transferred to and vested indefeasibly in the beneficiaries under the will, immediately upon his death or, alternatively, within the time prescribed by subsections 70(6) and 70(9). The plaintiff therefore claims:

(a) À Declaration that the Deceased is entitled to rollovers provided by subsections 70(6) and 70(9) of the Act, for the purpose of calculating the proceeds of disposition deemed to arise upon the death of the late Alexander Boger;

(b) À Declaration that the Defendant is estopped from collecting further taxes having issued two clearance certificates to date of death;

(c) All costs of this action.

In the present case, the rollover to the children is only being claimed with respect to the property passed to them as a result of the will as amended by the Order of the Court of Queen's Bench.

Issues

This action involves the proper interpretation of the farm rollover provision found in subsection 70(9) of the Income Tax Act and the effect of clearance certificates issued by the Minister pursuant to subsection 159(2) of the Act. The spousal rollover, provided for in subsection 70(6), is not at issue here. The specific issues and subissues to be addressed, therefore, are:

1. What is the meaning of the words "vested indefeasibly in the child” in s. 70(9)? Does an application under the Family Relief Act by the remaining spouse prevent the property from being "vested indefeasibly in the child"?

2. What is the meaning of the words "transferred or distributed” in s. 70(9)? Must the Executor and Trustee of the deceased's estate actually do something to transfer or distribute the farm property to the child of the deceased who is a beneficiary under the will? Is the "rollover" available where the Executor and Trustee subsequently sells the farm property directly to a third party purchaser?

3. Is the Minister prevented or estopped from asserting that the Deceased, the Executor and Trustee, or the beneficiaries are liable to tax once a clearance certificate has been issued?

Statutory Provisions

The relevant provisions of the Income Tax Act are subsection 70(9) which deals with the farm rollovers and subsections 159(2) and (3) which deal with clearance certificates:

70.(9) Where any land in Canada or depreciable property in Canada of a prescribed class of a taxpayer to which paragraphs 5(a) and (c) or paragraphs 5(b) or (d), as the case may be, would otherwise apply was, immediately before his death, used by him, his spouse or any of his children in the business of farming and the property has, on or after the death of the taxpayer and as a consequence thereof, been transferred or distributed to a child of the taxpayer who was resident in Canada immediately before the death of the taxpayer and the property can, within 15 months after the death of the taxpayer or such longer period as is reasonable in the circumstances, be established to have become vested indefeasibly in the child not later than 15 months after the death of the taxpayer, the following rules apply: .. . .

159.(2) Every assignee, liquidator, administrator, executor and other like person, other than a trustee in bankruptcy, before distributing any property under his control, shall obtain a certificate from the Minister certifying that taxes, interest or penalties that have been assessed under this Act and are chargeable against or payable out of the property have been paid or that security for the payment thereof as, in accordance with subsection 220(4), been accepted by the Minister.

(3) Distribution of property without a certificate required by subsection (2) renders the person required to obtain the certificate personally liable for the unpaid taxes, interest and penalties.

Other relevant statutory provisions include subsections 5(1), 5(4), 11(1), 17(1) and 18(1) of the Family Relief Act, R.S.A. 1980, c. F-2 and sections 3, 9 and 10 of the Devolution of Real Property Act, R.S.A. 1980, c. D-34, as amended:

Family Relief Act

5.(1) The judge in any order making provision for maintenance and support of a dependant may impose any conditions and restrictions he sees fit.

(4) Where a transfer or assignment of property is ordered, the judge

(a) may give all necessary directions for the execution of the transfer or assignment by the executor or administrator or such other person as the judge may direct, or

(b) may grant a vesting order.

11.(1) When an order is made under this Act, the order has effect from the date of the deceased's death and the will, if any, has effect from that date as if it had been executed with such variations as are necessary to give effect to the order.

17. (1) Until the expiration of 6 months from the grant of probate of the will or administration, the executor, administrator or trustee shall not distribute any portion of the estate to any beneficiary without the consent of all of the dependants of the deceased, or unless authorized to do so by order of a judge made on summary application.

18. (1) On notice of any application being given to the executor, administrator or trustee, the estate is subject to the provisions of any order that may be made and the executor, administrator or trustee shall not proceed with the distribution of the estate otherwise than in accordance with that order.

Devolution of Real Property Act

3. Subject to the powers, rights, duties and liabilities mentioned in this Act, the personal representative of a deceased person holds the real property as trustee for the persons by law beneficially entitled thereto, and those persons have the same right to require a transfer of real property as persons beneficially entitled to personal property have to require a transfer of the personal property.

9. The personal representative may sell the real property for the purpose not only of paying debts, but also of distributing the estate among the persons beneficially entitled thereto, whether there are or are not debts, and it is not necessary for the persons beneficially entitled to concur in any such sale except when it is made for the purpose of distribution only.

10.(1) Subject to this Act, no sale of real property for the purpose of distribution only is valid as respects any person beneficially interested, unless that person concurs therein.

Subsection 70(9) is one of the "rollover" provisions in the Income Tax Act. It is an exception to subsection 70(5) which deems that a taxpayer has immediately before death disposed of his capital property and realized all accrued ain or losses. A rollover gives a measure of tax relief to surviving members of a family unit by delaying the tax consequences of the deemed realization until the recipient subsequently disposes of the property. Subsection 70(9) thus allows a tax-free rollover of farm land or depreciable property used in a farming business if it is "transferred or distributed" to the child on or after the death of the deceased and as a consequence thereof and if it is established within 15 months of the death of the deceased [or such longer period as is reasonable] that it has become "vested indefeasibly" in the child not later than 15 months after death.

Issue #1: Did the property vest indefeasibly in the children? What is the meaning of the words "vested indefeasibly in the child" in subsection 70(9)? Does an application under the Family Relief Act by the remaining spouse prevent the property from being vested indefeasibly in the child?

In support of their respective positions, the parties have both referred to the decision of the Federal Court of Appeal in Hillis v. The Queen, [1983] C.T.C. 348; 83 D.T.C. 5365. In Hillis the Court was called upon to interpret subsection 70(6) of the Income Tax Act, the "spousal rollover" provision, and to consider the effect of an order under the Saskatchewan Dependants Relief Act, R.S.S. D-25, increasing a widow's share of the deceased's estate. The operative words in subsection 70(6) are similar to those found in subsection 70(9) and Hillis, therefore, requires close examination. The three members of the Court of Appeal, however, took very different approaches to the matter before them and delivered separate and very distinct reasons. Accordingly, although Hillis is very much on point, the directions provided by the Court of Appeal are somewhat unclear.

In Hillis, the taxpayer died intestate in Saskatchewan. Under the provincial succession legislation his widow and two sons acquired an interest in his estate. Long after the 15-month requirement set out in subsection 70(6), the taxpayer's son executed a disclaimer by deed of his interest in the estate and the widow obtained an order under the Dependants' Relief Act vesting the entire estate in the widow. Pursuant to section 14 of that Act, the order purported to be retroactive to the date of the taxpayer's death. The administrators filed a terminal tax return and claimed a spousal rollover under subsection 70(6) of the Income Tax Act with respect to the entire estate. The Minister reassessed on the basis that no part of the estate was subject to the rollover.

Both Clement, D.J. and Pratte, J. held that the provincial legislation could not have effect for federal tax purposes. Therefore, section 14 of the Dependants' Relief Act could not alter the fact that the 15-month period had expired and that the property did not vest within the time limits set out in subsection 70(6) of the Income Tax Act, Clement, D.J. commented at page 353 (D.T.C. 5370):

When a relief order is made it operates to affect the vesting arising out of a testamentary disposition. . . . By no stretch can this language [section 14] import a deemed will into another statute or act for a different purpose.

He held that the succession legislation nevertheless effected an indefeasible vesting in the widow of $10,000 and one-third of the residue and he allowed the rollover with respect to that amount. He reasoned [at pages 352-53 (D.T.C. 5368-69)]:

The question of indefeasible vesting within the prescribed period is to be determined by provincial law, subject to what I have to say later. The Intestate Succession Act is necessarily the starting point. . . . In my opinion the provisions come into operation upon the death of the intestate and effect an indefeasible vesting in the beneficiary of the interest provided, to which the Administrators must give effect albeit subject to dealings with the vested interest by the beneficiary. In this view, the vesting of the interest is not dependent upon an order of the court granting administration of the intestate's estate: it takes place by force of imperative statutory provision operating at the moment of death of an intestate. .. . .

Beyond this, it may be observed that there is no certainty within the prescribed 15 month period that any part of the estate, beyond that already vested in her by the Intestate Succession Act, would be the subject of a relief order nor what terms the court might impose.

[Emphasis added.]

He acknowledged at page 354 (D.T.C. 5370) that the effect of the son's disclaimer and the order “was an accretion to the interest of the spouse of whatever net estate might then be left" but he determined that they occurred "at a time when the spouse's right to relief from tax had already crystallized under the provisions of the Intestate Succession Act”. He concluded, therefore, that the accretion did not vest indefeasibly in the spouse within the prescribed 15 months.

Pratte, J. dismissed the appeal. He agreed that the two-thirds interest in the residue granted under the order did not vest indefeasibly within the time period but he added that no portion of the estate was entitled to the rollover. He reasoned that, since the estate had not been fully administered within the time period, the widow did not obtain a specific interest in any of the property but only a right to receive certain sums of money. In his opinion, "Mrs. Hillis’ rights under the Intestate Succession Act were merely rights to a sum of money and to a share of the residue of the estate". He considered the question, "when did the estate become indefeasibly vested in Mrs. Hillis?” and he remarked at page 358 (D.T.C. 5374):

In my view, when the disclaimers were executed and when the order was pronounced since the effects of the disclaimers and the Court order, in spite of their retroactivity, did not exist as lon as the disclaimers were not executed and the Court order was not pronounced. It is only when the disclaimers were executed and the Court order was pronounced that Mrs. Hillis became entitled to the whole of her husband's estate with retroactive effect to the date of his death. If, therefore, the disclaimers and the Court order had, as contended by the appellants, the effect of vesting the estate in Mrs. Hillis, that effect did not take place within 15 months after the death of Mr. Hillis.

Heald, J., on the other hand, was of the opinion that the wording of subsection 70(6) clearly shows that [at page 361 (D.T.C. 5376)] “Parliament contemplated that the law of the provinces in respect of the disposition of property on or after death, being matters relating to property and civil rights, would apply so as to control the application of subsection 70(6)". He, therefore, held that in accordance with section 14 of the Dependants’ Relief Act, the order took effect from the date of death and from that date “vested the entire estate of the deceased taxpayer in the widow which vesting is deemed to have had effect from the taxpayer's death". The spouse's interest was established within a reasonable time and thus the entire estate was subject to the rollover.

The result in Hillis then was that, under subsection 70(6) of the Act, the deceased taxpayer's estate was allowed a spousal rollover of the sum of $10,000. and one-third of the residue that had passed to her in accordance with the succession legislation. However, a rollover of the additional property given to the spouse under the dependants' relief legislation was not allowed. It should be noted that by virtue of subsection 9(2) of the Saskatchewan Dependant's Relief Act, no order thereunder could give the wife of a testator less than she would have obtained under the succession legislation.

Submissions—Issue #1:

The plaintiff submits that the property had "vested indefeasibly" in the children, notwithstanding the spouse's application under the Family Relief Act. As "vesting" is a concept known to Equity, equitable concepts must be applied to determine its meaning. Accordingly, the plaintiff submits that an interest is "vested indefeasibly” if the gift is not contingent upon a condition precedent or subject to a condition subsequent or determining event. The statutory power to rearrange beneficial interests as found in the Family Relief Act is irrelevant to the concept of "vested indefeasibly" in that, according to the common law of real property, an interest which has vested can only be defeasible if there is a condition subsequent contained in the document creating the interest. The plaintiff submits that if this were not the case, the mere existence of dependant relief legislation, or any other statutory power to rearrange beneficial interests (such as expropriation and municipal taxation statutes which provide for the forfeit of property in the event of a failure to pay municipal property taxes), would defeat the vested interest whether or not an application is made. Thus no rollover would ever be available to a deceased taxpayer.

The plaintiff states that the fact that in Hillis the widow's interest under the provincial succession legislation could not be reduced by an order under the dependants' relief legislation was not critical to the Court's determination that such interest had vested indefeasibly. The Saskatchewan Dependants' Relief Act is extraordinary in that corresponding legislation in other provinces does not contain a similar provision maintaining that a widow's portion is irreducible. Thus, if irreducibility were the test for indefeasibility, then rollovers under the Income Tax Act would only be available to widows in Saskatchewan. Similarly, because provincial dependant relief legislation does not grant an irreducible share to children, no rollovers could ever operate in favour of children.

If, however, the dependant relief legislation is deemed to have the same effect as a condition subsequent, the plaintiff submits that the children are entitled to the rollover with respect to the property which they actually received and which was not affected by the Order. Because only a successful application under the Family Relief Act is operative to divest the beneficiaries of their interests under the original will, the Order does not affect the remaining portion of the property left to the children. Therefore, the rollover applies to the property not affected by the Order as it was always vested in the children and remains so even after the Order. The plaintiff suggests that if, as in Hillis, the widow was not vested with the incremental property until the actual date of the Order, it must follow that the children were not divested of their interest therein until the same date.

The defendant submits that even if the property had vested in the beneficiaries immediately upon the death of the taxpayer, it was not capable of "vesting indefeasibly" until the application was settled and an Order was issued under the Alberta Family Relief Act within the time limits set out in subsection 70(9). Although the children acquired rights to the residue under the terms of the will, the particulars of those rights were not ascertained until after the Court Order was made. The Family Relief Act allows a dependant to make an application within six months of the grant of probate of a will and provides that, upon notice of the application to the executor, the distribution of the estate shall not proceed otherwise than in accordance with that Act. By virtue of section 5, the Court has power to divest title to property left to a beneficiary under a will. Therefore, the defendant submits that, in Alberta, property can only vest indefeasibly in a beneficiary either upon the expiry of the six-month period where no application has been made or upon Court Order. Until then, the children do not have a specific or certain interest in the property.

The defendant states that this interpretation of subsection 70(9) is consistent with the public policy purpose of assisting children who want to stay on the land and continue to use the depreciable farming property. Furthermore, the "transferred or distributed” requirement tests the seriousness of their commitment to continue farming. The defendant recognizes that the fifteen- month period places a constraint on the parties to ensure that the taxation issue will be determined in a timely fashion. It is suggested that, in the event of a family relief application, the parties will have to conduct their affairs accordingly as the application may frustrate their ability to take advantage of the subsection 70(9) exemption from taxation.

The defendant submits that the "no risk” aspect of the widow's one-third share of the residue in Hillis was crucial to Mr. Justice Clement's conclusion that such share vested indefeasibly. In the defendant's opinion, the combined decisions of Clement, D.J. and Pratte, J. indicate that if there is any doubt or uncertainty which is not resolved within the time frame established in subsection 70(9), a deemed disposition pursuant to subsection 70(5) will apply. Here, because there was no certainty at any time during the 15-month period as to who would finally be entitled to any particular parcel, the defendant submits that an interest in the property was not vested indefeasibly.

Analysis-Issue #1:

It is useful to consider dictionary definitions of the terms at issue:

Vested Interest. A present right or title to a thing which carries with it an existing right of alienation, even though the right to possession or enjoyment may be postponed to some uncertain time in the future, as distinguished from a future right, which may never materialize or ripen into title, and it matters not how long or for what length of time the future possession or right of enjoyment may be postponed, if the present right exists to alienate and pass title. . . . It is not the uncertainty of enjoyment in the future, but the uncertainty of the right of enjoyment, which makes the difference between a ''vested" and a “contingent” interest. . . .

Defeasible. Subject to be defeated, annulled, revoked, or undone upon the happening of a future event or the performance of a condition subsequent, or by a conditional limitation. Usually spoken of estates and interests in land. For instance, a mortgagee's estate is defeasible (liable to be defeated) by the mortgagor's equity of redemption.

Defeasible Title. One that is liable to be annulled or made void, but not one that is already void or an absolute nullity.

Indefeasible. That which cannot be defeated, revoked or made void. This term is usually applied to an estate or right which cannot be defeated.

Black's Law Dictionary, 5th Edition

Indefeasible. Not to be made void.

Dictionary of English Law

Indefeasible. Not defeasible; not liable to be made void or done away with, that cannot be forfeited;

Shorter Oxford Dictionary, 3rd Edition

Thomas G. Feeney in The Canadian Law of Wills, Vol. 2, (Toronto: Butterworths, 1987), discusses the meaning of "vest" at [page 258]:

The word “vest” is also used in the sense of the gift vesting in possession, or of it being payable or transferable, in the case of a pecuniary legacy or other gift of personal property, of the devisee being entitled to possession, in the case of land. This is the sense of "vest" where a gift is absolutely vested on the testator's death and is not postponed at all. . . . Also, a gift becomes vested in possession when it is no longer subject to a legal postponement.

Whether property was "vested indefeasibly" in a spouse as required by subsection 7(1) of the Estate Tax Act, S.C. 1958, c. 29, was considered in Dontigny Estate v. M.N.R., [1974] C.T.C. 532; 74 D.T.C. 6437 (F.C.A.). In that case, the deceased's will provided that his widow would inherit all his property subject to the condition that if she remarried his real estate should pass to his children or grandchildren at that time. Jackett, C.J., for the Court, held [at page 534 (D.T.C. 6439] that the property was not “vested indefeasibly" in the widow in the light of this condition:

Regardless of whether the will created a “substitution”, within the meaning of the word in the Civil Code of Quebec, when it gave to the widow the testator's real property subject to the requirement that, if she remarried, the real property would pass to the children or the grandchildren at the time of the remarriage, . . . the widow received the property under the will, not absolutely, but subject to title passing to the children or grandchildren if she remarried. /n my view, such a will does not vest the property in the widow "indefeasibly". A gift that is subject to being defeated or terminated on an event such as remarriage is defeasible and does not, therefore, fall within the principal part of paragraph 7(1)(a).

[Emphasis added.]

In Mr. Lucky v. M.N.R., [1972] C.T.C. 2412; 72 D.T.C. 1369 (T.R.B.) Maurice Boisvert, Q.C. referred to the definition of "defeasible" in Osborn's Concise Law Dictionary— "an estate or interest in property, which is liable to be defeated or terminated by the operation of a condition subsequent or conditional limitation.” He observed [at page 2415 (D.T.C. 1371)] that “[t]here was nothing in the will which could render [the] vested property indefeasible" and concluded that "from the moment the will was probated, the appellant had an absolute title to the estate". Finally, in Greenwood Estate v. M.N.R., [1991] 1 C.T.C. 47; 90 D.T.C. 6690 Madame Justice Reed stated that "[i]ndefeasible vesting requires that the person in whom the property is vested have the right to determine whether or not the property will be retained by him or her or disposed of to another.” In that case, the deceased taxpayer's estate was subject to an Agreement of Purchase and Sale executed by him prior to his death and the property affected by the Agreement was not found to be indefeasibly vested in the Spousal Trust created by the will.

I do not agree with counsel for the defendant that concepts and terminology from estates and real property law do not assist in the interpretation of the Income Tax Act. Language associated with these areas has been used and any interpretation must take into account the meanings ascribed to the terms. In the law of real property a distinction is drawn between "vested" and "contingent" interests. A "vested interest” may be "vested in possession" where the recipient has a present right of enjoyment, or "vested in interest” where the right of enjoyment is postponed even though an already subsisting right in property is vested in its owner. An interest is vested if two requirements are satisfied: (i) the person(s) entitled to it must be ascertained; and (ii) it must be ready to take effect in possession forthwith, and be prevented from doing so only by the existence of some prior interest(s): Megarry and Wade, The Law of Real Property, (London: Stevens & Sons Limited, 1984) pages 231-32. A "contingent interest", on the other hand, is one which will give no right of enjoyment unless or until a future event, called a condition precedent, occurs.

A vested interest is liable to be defeated or "defeasible" if it is subject to a condition subsequent or determinable limitation. There is ample authority for the proposition that the condition or limitation must be contained in the grant. For instance, in Oosterhoff & Rayner, Anger & Honsberger on Real Property (2d Ed.) (Canada Law Book, 1985), page 125 it is stated that "[a] condition subsequent is created by the addition of a condition to a grant which may cut the estate short at the instance of the grantor". It thus appears that to be vested "indefeasibly" an interest must not be subject to a condition subsequent or a determinable limitation set out in the grant.

Here, the interest in the property is unquestionably vested: there is no condition precedent to be fulfilled before the gift can take effect; the children, the persons entitled to it, are ascertained; and, they are ready to take possession forthwith, there being no prior interests in existence. The children's vested interest is also not defeasible as it is not subject to a condition subsequent contained in the will. Clearly the taxpayer has not otherwise restricted the children's right to retain, deal with, or sell the property, as they have done in this instance. The interest is then “vested indefeasibly" in accordance with the ascribed meanings of the terms. This is consistent with the decision of Clement, D.J. in Hillis, that upon the death of the intestate, the provisions of the Intestate Succession Act become operative and effect an indefeasible vesting in the beneficiary of the interest provided therein.

However, there is one other troublesome matter. In Hillis, Clement, D.]. noted [at page 352 (D.T.C. 5369)] that the widow's interest under the Intestate Succession Act was irreducible in the light of subsection 9(2) of the Dependants' Relief Act:

Subsection 9(2) ordains in mandatory terms that no allowance of relief to a spouse shall be less than would go to the spouse on an intestacy and this, I think, expresses public policy in Saskatchewan as to the minimum rights of a spouse in the deceased spouse's estate— subject, of course, to restrictions that are not applicable here. No order under this statute can affect adversely the vesting affected by the Intestate Succession Act.

However, Mr. Justice Clement's earlier comments [at page 352 (D.T.C. 5369)] support the plaintiff's position that, despite the fact that the children’s interests were indeed adversely affected by the Order, they nevertheless were indefeasi- bly vested, at least to the extent that they were not affected by the Order:

Section 4 [of the Intestate Succession Act] in imperative terms entitles the spouse to $10,000 and secures payment to her by a charge on the estate. It further provides that one-third of the residue shall go to her, and this is also in imperative

terms. By necessary implication the remaining two-thirds of the residue goes to the children in similar fashion. In themselves these provisions allow for no equivocation or subsequent divesting ab initio: no doubt the interest given can be dealt with subsequently but not on the basis of repeal of the statutory grant. In my opinion these provisions come into operation upon the death of the intestate and effect an indefeasible vesting in the beneficiary of the interest provided, to which the Administrators must give effect albeit subject to dealings with the vested interest by the beneficiary. In this view, the vesting of the interest is not dependent upon an order of the court granting administration of the intestate's estate: it takes place by force of imperative statutory provision operating at the moment of death of an intestate.

[Emphasis added.]

Here, the children’s property interest under the will, as amended by the Order, had vested indefeasibly in accordance with subsection 70(9). An application under dependant relief legislation, of course, may result in a transfer of the interest away from the children. Nevertheless, if as held by Clement, D.J. and Pratte, J. in Hillis, additional property received pursuant to an order under dependant relief legislation, does not vest until the actual date of the order, it follows here that the children are not divested of their interest therein until that date as well. Thus, the interest given to the children under the will that is not affected by the Order must certainly be found to have been vested indefeasibly in the children.

I find it would be inconsistent for the Minister to deny the subsection 70(6) rollover with respect to the incremental property given to the spouse as in Hillis, yet also deny the subsection 70(9) rollover with respect to the property left to the children under the will as reduced by the Order in this instance.

This result accords with what I believe to be the object of subsection 70(9) and the comments of Heald, J. in Hillis [at page 362 (D.T.C. 5377)] appear to support this position:

The net effect of those subsections [70(5)] is to provide for a deemed capital gain on the death of a taxpayer where the fair market value of property at date of death exceeds the adjusted cost base to the taxpayer of that property. This is clearly an onerous provision and, in many cases, this notional concept of capital gain imposes considerable hardship on the beneficiaries of an estate, particularly an estate comprised largely of real property with few liquid assets from which the income tax made payable because of the notional capital gains, can be paid If the benefit of the rollover provisions of subsection 70(6) is restricted to those widows who have been successful in obtaining a Court order within 15 months of the date of death of the taxpayer, the result is to subject all widows to a number of contingencies beyond their control. . . . I perceive that a significant number of spouses of deceased taxpayers would be deprived of the subsection 70(6) exemption were the interpretation proposed by the respondent to prevail.

The time frames set out in subsection 70(9) in any event do not pose a problem in this instance as I am willing to give some latitude to the taxpayer in that there is no evidence that the parties did not act expeditiously in this matter.

Issue #2: Has the remaining farm land and depreciable capital property (the

"Property"), on or after the death of the taxpayer and as a consequence thereof, been "transferred or distributed" to the taxpayer's children?

Submissions:

The plaintiff submits that, by virtue of the will, which speaks from the moment before death, a vested beneficial interest in the remaining farm land and depreciable property (the "property") was effectively "transferred or distributed" to the children. The children's rights in the property were determined immediately upon the taxpayer's death and no further action was required to give them full ownership. She submits that the ordinary meanings of "transfer" and "distribute" are very broad and do not require a conveyance of legal title or physical possession. As well, no such requirement is found in subsection 70(9) which provides for a transfer "on or at the instance of a taxpayer's death and as a consequence thereof" and the plaintiff notes that the term "property", as broadly defined in subsection 248(1), must include property recognized by Equity. An executor under a will, therefore, need not take a super-added mechanical step or action to "transfer" the property to the children.

The plaintiff submits that the fact that she held legal title to the property as trustee, in accordance with section 3 of the Devolution of Real Property Act, R.S.A. 1980, c. D-34, when it was sold to a third party does not, in this instance, affect the fact that the Property had been transferred to the children as a consequence of the taxpayer's death. Once the debts of the estate had been paid, the children were entitled to call for the property at any time and at that point, the plaintiff became an agent for the children. The property was sold by the plaintiff to a third party on the instruction of and with the concurrence of the beneficial owners. In accordance with usual estate practice in Alberta, there was no actual conveyance of the legal title to the beneficiaries before it was transferred to the third party purchaser. Finally, the plaintiff submits that the spouse's application under the Family Relief Act does not prevent the property from being “transferred or distributed" to the children immediately upon the taxpayer's death for the purposes of the subsection 70(9) rollover although the possibility of such an application may prevent a personal representative from conveying the property.

The defendant submits that because the property was never legally conveyed to the taxpayer's children and because the property was sold by the executor to a third party, it was not "transferred or distributed" to the children in accordance with subsection 70(9). The defendant submits that the definitions and judicial consideration of the terms "transferred or distributed" connote a legal conveyancing. Reference is made to Willis Estate v. M.N.R., [1968] Tax A.B.C. 177; 68 D.T.C. 204 (T.A.B.) at 186 (D.T.C. 210) where it was held that a Court order directing an executor to transfer all property of a deceased does not, in itself, transfer the property. The order only empowers the executor to act and it is only when he actually gives effect to the direction that the transfer occurs. Relying on Mr. Justice Rip's decision in Hrycej v. M.N.R., [1984] C.T.C. 2115; 84 D.T.C. 1089 (T.C.C.) the defendant further submits that the fact that the property was sold by the executor to a third party supports the position that it had never been transferred to the children. The defendant notes as well that the taxpayer did not leave specific pieces of land or equipment to his children. Rather, the will provides that they are to receive the "residue" of the estate in equal shares. The defendant suggests, therefore, that what was to be distributed to the children presumably was funds and not property subject to subsection 70(9).

Analysis-Issue #2:

The parties have referred to the following definitions of "transferred" and “distributed”:

Transfer, v. To convey or remove from one place, person, etc., to another; pass or hand over from one to another; specifically, to change over from one to another; specifically, to change over the possession or control of (as, to transfer a title to land). To sell or give. Chappel v. State, 216 Ind. 666, 25 N.E. 2d 999, 10001.

Transfer, n. An act of the parties, or of the law, by which the title to property is conveyed from one person to another. The sale and every other method, direct or indirect, of disposing of or parting with property or with an interest therein, or with the possession thereof, of or fixing a lien upon property or upon an interest therein, absolutely or conditionally, voluntarily or involuntarily, by or without judicial proceedings, as conveyance, sale, payment, pledge, mortgage, lien, encumbrance, gift, security or otherwise. The word is one of general meaning and may include the act of giving property by will. Hayter v. Fern Lake Fishing Club, Tex.Civ. App., 318 S.W. 2d 912, 915.

Transfer means every mode, direct or indirect, absolute or conditional, voluntarily or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest.

Distribution The division of the personal property of an intestate among his next- of-kin, . . .

Black's Law Dictionary (5th Ed.)

Transfer (transferred) 1. To convey or take from one place, person, etc. to another; to transmit, transport; to give or hand over from one to another. 2. Law. To convey or make over (title, right or property) by deed or legal process.

Distributed 1. To deal out or bestow in portions or shares among many, to allot or apportion as his a share to each; to dispense, administer (justice, etc.) . . . 3. To divide and arrange. 4. To divide and place in classes or other divisions; to classify.

5. To separate and allocate to distinct places . . . 7. To make distributive.

Shorter Oxford English Dictionary, 3rd Edition

In J.S.D. Tory Estate v. M.N.R., [1973] C.T.C. 434; 73 D.T.C. 5354 (F.C.A.) (appeal by Minister to S.C.C. dismissed [1976] C.T.C. 415; 76 D.T.C. 6312), Bastin, D.J. discussed the meaning of the words "transferred or distributed to the beneficiaries” in what was then subsection 64(3) of the Act. He concluded [at pages 436-37 (D.T.C. 5356-57)]:

The word “distributed” is used to cover cases where the conveyance is to several beneficiaries. The word "transferred" is inserted to provide for a case where the conveyance is to only one person.

The meaning of "transferred" in this clause is limited by its association with the word “distributed”. The rule is expressed in the phrase noscitura sociis. To quote from Maxwell on Interpretation of Statutes, 12th Edition, at page 289:

Where two or more words which are susceptible to analogous meaning are coupled together, noscitur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.

Bastin, D.J.'s comments in Tory, however, do not suggest that there must be a formal conveyance before there can be a "transfer" or “distribution”. The dictionary definitions are clearly broad enough to include the act of giving property under a will. In Fasken v. M.N.R., [1948] C.T.C. 265 ; 49 D.T.C. 491 (Ex. Ct.) Thorson,

P. held [at page 279 (D.T.C. 497)] that:

The word "transfer" is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband to a wife that it should be made in any particular form or that it should be made directly. All that is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.

[Emphasis added.]

He referred to Gathercole v. Smith (1880-81), 17 Ch.D 1 at 9 where Lush L.J. stated, "[t]he word "transferable", . . . is a word of the widest import and includes every means by which the property may be passed from one person to another."

Here, the taxpayer's will appointed the plaintiff executrix and trustee and left all his property to the plaintiff in trust for his wife and children. Therefore, upon his death the legal title to his property vested in the trustee to assist her to manage and administer the estate and the equitable or beneficial title vested in the beneficiaries. The taxpayer had in this way divested himself of ownership in his property. In this instance, the creation of a valid will passing the taxpayer's property to his spouse and children is a sufficient "transfer" for purposes of subsection 70(9). The fact that the "residue" of the estate was left to the children does not, in my opinion, change the character of the property entitled to the rollover. Surely Parliament did not intend that a specific bequest of each item of farm land and depreciable property be made before a "farm rollover" could occur, the object of subsection 70(9) being to provide a measure of tax relief when transferring these assets from one generation to another.

The defendant, and the Tax Court below in Boger v. M.N.R., [1989] 1 C.T.C. 2110; 89 D.T.C. 15 at 2117 (D.T.C. 20), rely on Hrycej, supra, to support the position that, because the property was sold directly by the executrix in her Capacity as executrix, "there was no transfer or distribution of the land to the children of the deceased". In Hrycej, the deceased taxpayer's will gave his daughter an option to purchase certain farm equipment which, if not exercised within a specified period, would fall into the residue of the estate left to his widow. The daughter exercised the option and the widow received the cash proceeds of sale. The estate claimed a subsection 70(6) rollover on the basis that the widow had been vested with the equipment upon the death of the taxpayer, however, Rip T.C.J., held that, because the farm equipment was subject to the option, it was not vested in the widow. Although Rip, T.C.J. stated that "the farm equipment was never transferred or distributed to the wife", I note that a specific finding on the transferred or distributed issue was not in fact made as the parties had admitted that the farm equipment "remained in the possession of the executors and was not transferred or distributed to Mrs. Hrycej."

Finally, [at page 352 (D.T.C. 5368)] Clement, D.J. in Hillis also appears to have recognized that a formal conveyance may not be necessary:

In effect the spouse must be able to establish that in law in the circumstances of the case the property vested indefeasibly in her within the prescribed 15 months. In the whole of the context it is clear that it is not necessary that actual conveyance of the property to her shall have been completed within that time: if she makes the required proof, then in law the conveyancing must follow as a matter of course and of right. What must inevitably occur is to be taken as having occurred. This interpretation affords an intelligible reconciliation of the phrase with the preceding phrase which speaks of property that has on or after the death been transferred or distributed: it gives some recognition to the difficulties and complexities attendant in some cases on the due administration and distribution of estate and which may have to be resolved, particularly when the construction and operation of a will is contested, before distribution can be made.

[Emphasis added.]

I find that the sale of the farm land to a third party by the Trustee, was upon the direction and consent of the children and that she was not acting on behalf of the taxpayer at that time but on behalf of his children as owners of the land. I note that, following the Order, title to the Home Quarter was transferred to the spouse on January 8, 1982. Presumably, title to the remaining farm lands could have been transferred as well to the beneficiaries when they were sold in August, 1982 and I accept the plaintiff's explanation that title was not transferred to the children in accordance with “usual estate practice in Alberta". I therefore accept that “transfer or distribute" includes the passing of property under a will and I am satisfied that the property was "transferred" to the taxpayer's children in the sense required by subsection 70(9).

Finally, I do not accept the defendant's argument that the fact that the property was sold within the 15-month period is detrimental to the application. Subsection 70(9) simply does not say that the property must remain in the hands of the children for the rollover to apply. So long as the property is transferred to the beneficiaries, the estate may claim a rollover under subsection 70(9). However, when the property is subsequently disposed of by the beneficiaries, as has happened here, the beneficiaries, as owners of the property, become liable for any capital gains upon disposition even if the sale is made by the trustee.

Issue #3: Do the clearance certificates issued by Revenue Canada prevent it from asserting that the deceased, the executor/trustee, or the beneficiaries are liable to any tax?

In the alternative, the plaintiff submits that the Minister is estopped from reassessing the plaintiff in the light of the clearance certificates issued on October 14, 1980 and February 10, 1987 respectively. Conversely, the defendant submits that the issuance of the clearance certificates is not applicable to this action in that they are issued to Sharon Boechler in her personal capacity and do not, in any respect, estop the Minister from assessing the tax liability of Alexander Boger, deceased.

I am in total agreement with the Tax Court below that the fact that a clearance certificate has been issued to an executor of an estate, the "personal representative” does not free the estate from its liability under the Act. Subsection 159(3) simply provides that if the personal representative does not obtain a certificate as required under subsection 159(2) before the distribution of property over which she had control in her capacity as personal representative, then she will become personally liable for the unpaid taxes, interest and penalties. The estate is by no means relieved of its liability for tax. Put simply, the personal representative remains liable as personal representative, but she is relieved of the personal liability imposed under subsection 159(3). Accordingly, the plaintiff's appeal on this issue is dismissed.

Conclusion

The subsection 70(9) rollover applies to the farm land and equipment passed to the children under the taxpayer's will, as amended by the Order, and the plaintiff's appeal with respect to issues #1 and #2 is allowed. I would invite counsel to prepare a draft judgment for my signature in accordance with these reasons. The plaintiff is allowed costs.

Appeal allowed in part.