Crown Trust Co. v. Minister of National Revenue, 65 DTC 5176, [1965] CTC 295, [1965] SCR 723

ABBOTT, J. (all concur) :—This is an appeal from a Judgment. of the Exchequer Court of Canada, setting aside a decision of the Tax Appeal Board and confirming an assessment of the Minister whereby a pension benefit in the sum of $13,844.20 was added to the income of the estate of the late Kenneth J. McArdle for the taxation year 1959.

The facts are not in dispute. The late Mr. McArdle died on February 7, 1957 leaving a will in which he bequeathed the usufruct of his estate to his wife, during her lifetime, and the capital to his three children. His solicitor and the Crown Trust Company were appointed executors.

At the time of his death, McArdle was an officer of Public and Industrial Relations Limited and, as such, was a participant in a pension plan set up in 1946 under an Agreement between (1) Vickers & Benson Limited and its subsidiary Public and Industrial Relations Limited, (2) the employees of these two companies, and (3) R. H. Vickers and others as Trustees, which is hereinafter referred to as ‘‘the Agreement’’, The Agreement related to both insurance and pension benefits but we are here concerned with the pension benefits alone.

Upon McArdle’s death, his executors became entitled to receive, and did receive on April 9, 1958, under the terms of the Agreement, the said sum of $13,844.20.

For the purpose of this appeal it is admitted that this sum was received during the 1959 taxation year and that it is taxable. The question at issue is whether the amount is taxable as income of the estate or as income of the deceased.

By Notice of Re-assessment dated January 31, 1961, the Minister added the amount in question to the income of the estate. The appellant filed a Notice of Objection on the ground that the money received was income of the deceased by virtue of subsection (2) of Section 64 of the Income Tax Act. That was the sole point in issue before the Tax Appeal Board and the Exchequer Court.

Under the terms of the Agreement, the deceased, during his lifetime, had two principal rights namely (1) to receive a pension if he continued in the employ of the company and reached the stipulated retirement age, and (2) to elect, if he left the employ of the company prior to reaching retirement age, to receive a lump sum payment ‘‘equal to the aggregate of all his contributions or to the cash surrender value at the date of termination of employment of that portion of the contract or contracts paid for by his contributions”.

Employer and employee contributed equally to the premiums required under the Agreement. The pension benefit, which is in issue here, was bound to be greater than the lump sum payable on leaving the employ of the company, since under the Agreement such pension benefit was equivalent to the “aggregate of premiums paid prior to death’’ which would include the contributions made by both employer and employee.

The $13,844.20 received by appellant was clearly an amount “received out of or under a superannuation or pension fund or plan’’ and as such was income by definition, under the provisions of Sections 6(1) (a) (iv) and 139(1) (ar) of the Act. Indeed this is conceded by appellant.

Appellant’s submission, however, both here and below, has been that the amount should have been taxed as income of the late Kenneth J. McArdle under the provisions of subsection (2) of Section 64 of the Act, and not as income of his legal representatives.

The general rule under the Income Tax Act is that tax is payable on income actually received by the taxpayer during a taxation period. There are exceptions to this general rule and one of them is to be found in Section 64(2) which reads:

“Where a taxpayer who has died had at the time of his death rights or things (other than an amount included in computing his income by virtue of subsection (1) ), the amount whereof when realized or disposed of would have been included in computing his income, the value thereof at the time of death shall be included in computing the taxpayer’s income for the taxation year in which he died, unless his legal representative has, before the tax for the year of death has been assessed, elected that one of the following rules be applicable thereto:

(a) one-fifth of the value shall be included in computing the taxpayer’s income for each of his last 5 taxation years including the year of death but the resulting addition in the amount of tax payable for any year other than the year in which he died is payable 30 days from the day of mailing of the notice of assessment for the year in which he died; or

(b) a separate return of the value shall be filed and tax thereon shall be paid under this Part for the taxation year in which the taxpayer died as if he had been another person entitled to the deductions to which he was entitled under section 26 for that year,

in which event, the rule so elected is applicable.’’

The said $13,844.20 unquestionably became payable by reason of covenants contained in the pension plan Agreement but it was not received nor was it receivable prior to McArdle’s death and indeed the amount could be definitely ascertained only upon the happening of that contingency. In fact, the amount was not paid by the appellant until April 9, 1958. The sum involved was derived from three sources namely, payments made to the trustees by (1) the deceased, (2) his employer, and (3) interest earnings. It could never have become payable in the lifetime of the deceased and in my view it was clearly a death benefit under article XI of the Agreement. I can see no difference in principle between such payment and any other pension benefit payable after death from a pension fund or plan to which a deceased person has contributed.

It follows that in my opinion the right to such payment was not a right or thing ‘‘the amount whereof when realized or disposed of would have been included in his (McArdle’s) income”, had he lived, within the meaning of Section 64(2).

Counsel for appellant made another submission before this Court, which he stated had not raised before the Tax Appeal Board or the Exchequer Court, and which is not referred to in his factum. It was based upon Section 63(4) of the Income Tax Act which reads:

“For the purposes of this Part, there may be deducted in computing the income of a trust or estate for a taxation year such part of the amount that would otherwise be its income for the year as was payable in the year to a beneficiary or other person beneficially interested therein or was included in the income of a beneficiary for the year by virtue of subsection (2) of section 65.”

I find it difficult to understand this submission. The T-3 Income Tax Return filed by appellant as executor, for the taxation year February 8, 1958 to February 7, 1959 reported all the net income of the estate as having been allocated to the widow. This return, of course, did not report the sum of $13,844.20 as income. That amount was added by the assessment of January 31, 1961, which is in issue on this appeal.

In paragraph 10 of its Reply to the Notice of Appeal to the Exchequer Court, when dealing with the said assessment, appellant stated :

‘10. Later, the appellant (the Minister) issued an assessment in respect of the taxation year 1958 claiming tax on the said refund as pertaining to the income of Mary I. McArdle, widow of the deceased and income beneficiray under his Will. On Notice of Objection, the Appellant decided, amongst other things, that said refund, as income of the said Mary I. McArdle, appertained to her income for the 1959 taxation year instead of 1958. A new, similar assessment was then issued in respect of the year 1959. Notice of Objection was rejected, but was maintained by a judgment of the Tax Appeal Board, which judgment is the subject of the present appeal to this honourable Court.’’

It would seem therefore that the provisions of Section 63(4) were recognized. Under the terms of that section, income pay- able in a given year by the executor to a beneficiary is not of course taxable in the hands of the executor.

Appellant also stated that credit had not been given to the executor for a payment of $2,728.59 made in August 1957 with a return of income of the late Kenneth J. McArdle for the period from January 1, 1957 to February 7, 1957, the date of his death. This return was not produced. The payment is not dealt with in the judgment below and is not referred to in the assessment of January 31, 1961 in issue on this appeal. The record does not contain tax returns made by the executor on behalf of the estate for the years 1957 or 1958 or any of the personal returns of the income beneficiary. It does indicate that another appeal with respect to 1958 income is pending before the Tax Appeal Board.

It is impossible to say on this record what person, if any, is entitled to a tax credit or refund. The payment should, of course, be taken into account in assessing interest or penalties and I have no doubt the Minister will do so. In my view, however, it has no bearing on the issue to be determined on this appeal.

I would dismiss the appeal with costs and confirm the assessment of the sum of $138,844.20 as being income of the estate and not income of the late Kenneth J. McArdle. In the circumstances, however, and particularly with respect to the possible application of Section 63(4) of the Income Tax Act, I would refer the assessment of January 31, 1961 back to the Minister in order that consideration may be given to the effect of the present judgment and the payment of $2,728.59 said to have been made by appellant in August 1957.