Davidson Estate v. The Queen, 96 DTC 1652, [1996] 3 CTC 2900 (TCC)

Bell J.T.C.C. : —

Issue

The issue in respect of the Appellant’s 1992 taxation year is whether each of

(a) the transfer of capital property from an individual to his surviving spouse on death, and

(b) the transmission of that property from the spouse to her Executor on her death

is a transaction or event between persons not dealing at arm's length within the meaning of Income Tax Application Rules (“ITAR”) 26(5).

Facts

John Davidson (“John”), owner of the shares (“Shares”) of John Davidson Ltd. (“Company”), died on November 11, 1979 having acquired such Shares before June 18, 1971. The Shares were transferred to Naida Marilyn Davidson (“Naida”), his wife, pursuant to the terms of his will. Naida died on April 14, 1992 owning the Shares which were transmitted to the Appellant.

The Company was wound up on June 30, 1992 and its assets were distributed to the Appellant as a winding up dividend. As a result of the deemed taxable dividends and proceeds of disposition, the Appellant computed a capital loss in respect of the disposition of the Shares on winding up and elected that it be deemed to be a capital loss of Naida in the year of her death. The Minister of National Revenue (“Minister”) reassessed the Appellant reducing the adjusted cost base of the Shares on the basis that they had, within the terms of IT AR 26(5)

...by one or more transactions or events between persons not dealing at arm’s length, become vested in another taxpayer ...

Accordingly, the court must determine, as initially indicated, whether each of the transfer of shares from John to Naida and from Naida to the Appellant fell within the meaning of the above quoted words.

Respondent’s Submissions

The pertinent portion of ITAR 26(5) reads as follows

Where any capital property ... that was owned by a taxpayer ... on June 18, 1971 has, by one or more transactions or events between persons not dealing at arm’s length, become vested in another taxpayer ... and the original owner has not made an election under subsection (7) in respect of the property, notwithstanding the provisions of the amended Act, for the purposes of computing, at any particular time after 1971, the adjusted cost base of the property to the subsequent owner,

certain computation rules apply.

Respondent’s counsel submitted that the word “events” is wide enough to include a testamentary disposition. That argument is consistent with the position presented by the Minister in Interpretation Bulletin IT-370, reading in part as follows

Subsection 26(5) of the ITAR was amended with effect after May 6, 1974, by the inclusion of the words “or events”. Although it is the Department’s view that transfers by a settlor to a trust whether inter vivos or testamentary and deemed dispositions and reacquisitions under subsection 104(4) are transactions and thus subject to subsection 26(5) of the ITAR since January 1, 1972, this interpretation was not accepted by some. After May 6, 1974, subsection 26(5) of the ITAR refers to “transactions or events” and thus applies to all such transfers and dispositions.

Counsel then referred to the May Estate v. Minister of National Revenue, [1988] 1 C.T.C. 2303, 88 D.T.C. 1189 to support her contention that a deceased and his estate do not deal with each other at arm’s length. The estate deducted, as a business investment loss, a loss suffered on the purchase by a company of its own shares owned by the estate. The Minister disallowed the loss deduction claiming that it was a capital loss. In accordance with the provisions of section 39, a business investment loss includes the disposition of shares

other than a share that was acquired ... from a person with whom the taxpayer was dealing at arm’s length.

In this case Goetz J. found that a trust created by a settlor could not alter the conditions under which shares were transferred because the same person could be said to dictate the terms of the bargain on behalf of both the settlor and the trust. On this basis he concluded that the estate was not at arm’s length with the deceased.

Analysis and Conclusion

Even if Respondent’s counsel is correct

(a) in the dubious proposition that the transmission of property on death occurs in an event between persons (for example between John and his estate) and

(b) in the submission that this does not occur at arm’s length,

the Appellant will succeed if it is determined that the transfer of the Shares from John’s estate to Naida took place between persons dealing at arm’s length.

Section 251 of the Income Tax Act (“Act”) provides that related persons are deemed not to deal at arm’s length and provides also that it is a question of fact whether persons not related are dealing at arm’s length. Since section 248 of the Act defines “person” to include the executors or other legal representatives of a person, the estate of John is a person for purposes of the Act. Assuming the transfer of the Shares by John’s estate to Naida was a transaction or event between persons, it remains to be determined whether, as a question of fact, it was between persons not at arm’s length. During the time that John’s estate was under administration by three executors, two of whom were unrelated to him, the estate had complete discretion as to whether it could sell the Shares or transfer them to Naida in specie. Naida was not the directing mind [1] so far as their decisions and actions were concerned and, therefore, as a question of fact, the person, being the legal representatives, dealt at arm’s length with Naida. The result is that ITAR 26(5) does not apply in computing the adjusted cost base of the Shares.

Accordingly, the appeal is allowed with costs.

Appeal allowed.