Van Son Estate v. The Queen, 90 DTC 6183, [1990] 1 CTC 182 (FCTD)

Joyal, J.:—The Court is asked to determine whether or not certain company shares owned by the late Philip Van Son were vested indefeasibly in his widow Hilda Jardine within 15 months of Mr. Van Son's demise in October, 1980.

The issue is of interest to the plaintiff estate as the defendant Crown, by notice of reassessment in 1984, applied the "deemed disposition” of the said shares under subsection 70(5) and claimed a taxable capital gain of $58,295.65 against the estate for the year 1980, increasing substantially the taxpayer's tax liability for that year.

The Facts

At the time of his demise, Mr. Van Son held some 245 common shares in the capital stock of The St. Lawrence Sun (1964) Ltd. (the Sun company). He had acquired these shares in 1964 at a capital cost of $37,500. In December 1978, some two years before his death, Mr. Van Son had entered into an agreement with the other principal shareholder of the Sun company, namely Madeleine Vigeant-Cyr which provided that if Mr. Van Son should predecease her, his shares would be purchased by her at fair market value as of the end of the calendar year preceding his death.

When Mr. Van Son died in 1980, he left an English form of will dated December 8, 1976. By the terms of his will, his surviving widow Hilda Jardine was appointed executrix and trustee and, apart from certain specific legacies payable to three daughters, the widow was appointed sole beneficiary of the remainder. The will, in due course, was duly probated and the estate duly administered by its executrix.

Upon Mr. Van Son's death, the estate availed itself of the provisions of subsection 70(6) of the Income Tax Act which provides an exception to the rules relating to the deemed disposition of property on death and allows that property to be valued at its adjusted cost base, in effect, a roll-over. The conditions for this provision to apply, however, are that the beneficiary be the spouse resident in Canada and that title to the property vest indefeasibly in the spouse within 15 months after the death of the taxpayer.

The existence of the prior agreement between the taxpayer and his partner Madeleine Vigeant-Cyr, to which I have already briefly referred, attracted the attention of the Crown and upon consideration of its provisions, the Crown concluded that it constituted a bar to the availability of the subsection 70(6) provisions of the statute for tax purposes.

In reassessing the estate in 1984, the Crown relied inter alia on the following facts:

1. On December 28, 1978, the deceased entered into an agreement for the sale of his shares to his partner;

2. Two years after his death, the widow, as executrix of the estate, pursuant to the 1978 agreement, transferred the shares to Gestion Lemontai Ltée.

3. Until that last transfer, the shares had continued to be registered in the name of the deceased.

Plaintiffs Submissions

The plaintiff suggests that on a proper reading of the 1978 agreement and upon a proper application of the provisions of the Quebec Civil Code relating to successions, Hilda Jardine, as widow, executrix and beneficiary of her husband's estate, acquired an indefeasible title to the Sun company shares.

The plaintiff notes in the 1978 agreement that the parties thereto did not enter into what has classically become known as a buy-and-sell agreement. After setting out that the respective shareholdings of the parties are 49 per cent to Mr. Van Son and 51 per cent to Madeleine Vigeant-Cyr, the agreement provides in paragraph 1 that on the prior death of Madeleine Vigeant-Cyr, the surviving partner is to have a 30-day option to buy her shares at end-of-the-year fair market value otherwise the shares may be sold to third parties.

Paragraph 2, however, provides that in the event of Mr. Van Son's prior death, his shares will have to be bought at end-of-year fair market value and the proceeds of the sale paid to his estate. Counsel for the plaintiff points out in this respect that the words used “will have to be bought", or more accurately the actual terms used in an agreement in the French language "devront être achetées" imposes an obligation on the survivor to buy but nowhere is there, as in a normal buy-and-sell agreement, an obligation to sell imposed on Mr. Van Son or his estate.

Counsel for the plaintiff also refers to corporate minutes of the Sun company Board of Directors dated November 5, 1980 when formal approval of the transfer of the deceased's shares to Hilda Jardine as estate executrix was approved and of her appointment as a director and signing officer of the company. Nowhere is there mention of the prior agreement of 1978. Neither is there a disclosure by Madeleine Vigeant-Cyr of her obligation to buy the shares, or for that matter, any suggestion by Hilda Jardine that she should respect that obligation.

There is also reference to an offer executed some two years later, namely September 22, 1982, whereby Madeleine Vigeant-Cyr "offers to buy” from the Van Son estate, as represented by Hilda Jardine, the shares of the deceased. In a preamble to that agreement it is recited:

Attendu que le Promettant-Vendeur désire vendre et que le Promettant- Acheteur désire acheter la totalité des actions détenues par le Permettant- Vendeur, le tout suivant une convention signée le 28 décembre, 1978 entre Philip Van Son et le Promettant-Acheteur, alors les seuls actionnaires.

Nevertheless, notes plaintiff's counsel, the agreement is an offer-to-buy, subject to acceptance by Hilda Jardine and made irrevocable until three days later, namely September 25, 1982. Although the offer was in fact accepted by Hilda Jardine, its operative provisions do not in any way reflect the contractual obligations of one party to buy and the other party to sell which the 1978 agreement would otherwise have imposed.

The shares were finally disposed of on October 25, 1982 when Madeleine Cyr, with the consent of Hilda Jardine, assigned all rights, title and interest to Gestion Lemontal Ltée. It is true that the sum payable to Hilda Jardine was $162,500, the agreed upon fair market value as at December 31, 1979, but argues counsel, this was not by reason of the 1978 agreement but on the meeting of minds of the parties that such was a fair price to pay and a fair price to receive.

Counsel for the plaintiff also submits that the “vesting indefeasibly" claim has been treated in an Interpretation Bulletin favourable to the plaintiff. In IT-449R it is stated :

2. Property is considered to vest indefeasibly in the person to whom it is bequeathed when that person has an enforceable right or claim to the ownership thereof. This right will be so even though the formal legal conveyance and registration of ownership of the property has not been completed. Accordingly, the ownership of property described in a specific bequest in a will will vest in the beneficiary immediately after the death of the testator.

Further, on page 2 of IT-449R, it is observed that:

Where the terms of the buy-sell agreement provide that it is compulsory for the executor of the taxpayer's estate to sell and the other party to buy the shares, the shares will not be considered to vest indefeasibly in the beneficiary. Where, however, the terms of the buy-sell agreement merely give the other party an option to acquire the taxpayer's shares which may or may not be exercised and the taxpayer's executors transfer the shares to the beneficiary before the option is exercised, the shares will be considered to vest indefeasibly in the beneficiary at the time of the transfer.

Defendant's Submissions

Counsel for the Crown argues that the Sun company shares were not vested indefeasibly in the widow. He submits that the agreement of December 28, 1978 takes precedence over the general provisions of Mr. Van Son's last Will and Testament and that such agreement prevented the transfer of the shares from the estate to its beneficiary.

Further, counsel suggests that the 1978 agreement, on a proper reading of it, constituted a mutual obligation, one to buy and the other to sell and that it was in furtherance of that obligation that the shares were ultimately bought and sold. The effect of the agreement, he says, is that the shares are automatically sold on the death of one of the parties, that they not become part of the estate but only entitle the estate to the proceeds. Counsel cites in support the case of Hillis v. The Queen, [1983] C.T.C. 348, 83 D.T.C. 5365, the case of Parkes Estate v. M.N.R., [1986] 1 C.T.C. 2262, 86 D.T.C. 1214, as well as Les Conventions entre actionnaires, Editions Wilson & Lafleur, Martel Ltée, 1985, under the authorship of Paul Martel.

Findings

The Court faces both issues of law and issues of fact in this case. Let me deal first with issues of fact. Dame Hilda Jardine gave evidence at the trial and confirmed the action taken by the Sun company shortly after her husband's death when she was appointed a director of the company and the transfer of shares from her husband to herself as executrix was approved. She stated that for some time thereafter, her relationships with Madeleine Vigeant-Cyr were cordial.

In fact, it was much later on, when Madeleine Vigeant-Cyr's son-in-law, Raymond Legault, became increasingly involved in the company's operations that certain stresses began to develop. She was told at one time by Mr. Legault that she had an obligation to sell her shares to which her own solicitor appeared to agree. It was only in May, 1982, a year and a half after her husband's death that she retained another solicitor who took a much more active role. He told her that in his opinion, she was under no obligation to sell but that it was in her interest to do so.

Several months later, on September 22, 1982, the offer to buy was made and accepted and eventually by right of assignment, the company shares were transferred to Gestion Lemontai Ltée, a company formed to hold the shares.

None of the foregoing evidence is contradicted and I must take as well- established the evidence given by Hilda Jardine. The inference I can draw from that evidence, however, is that if in the minds of the parties to the 1978 agreement, there was [a] binding buy-and-sell agreement, why did not either party seek to enforce it? The widow's position as of the date of death of her husband was not that much economically secure. The estate had been valued for succession duty purposes at some $356,000 of which a substantial portion constituted Mr. Van Son's shares in the Sun company. There was also a $50,000 charge on the executrix to pay the specific bequests to the daughters. It would, in my view, have been in the interest of Hilda Jardine to which any advisor would have subscribed, to make some effort to have Madeleine Vigeant-Cyr respect her contractual obligations and buy her out. Privately-held shares held in a private company and in which the widow had limited involvement would not be considered a desirable investment offering her the kind of liquidity which she would reasonably expect.

I should therefore find it surprising that both Madeleine Vigeant-Cyr and Hilda Jardine continued in a silent yet amiable partnership for some two years after the demise of Mr. Van Son with no evident attempt by either of them to enforce what would otherwise have appeared to be an enforceable agreement.

I should also find that the 1978 agreement is some distance removed from the usual buy-and-sell agreement common among shareholders and where there is a mutuality in the rights and obligations which it contains. On a reading of this agreement, the right conferred by Madeleine Vigeant-Cyr to Mr. Van Son is a mere 30-day option to buy her shares at fair market value. No obligation is imposed on Mr. Van Son. The obligation imposed on Madeleine Vigeant-Cyr is to buy her partner's shares but nowhere is there imposed on him or on his estate a concomitant obligation to sell them.

As no collateral evidence was adduced to vary, add, subtract or otherwise explain what is otherwise a valid written instrument, I must of necessity interpret it in the light of its actual wording and give to its terms their ordinary meaning.

Let me now deal with issues of law. In the Parkes Estate case, supra, the shares devolving to the widow were subject to a buy-and-sell agreement. As Goetz, T.C.J. stated in the concluding paragraph of his judgment at page 2266 (D.T.C. 1217):

Unfortunately, the widow's right to have the title to the shares vest in her indefeasibly was precluded by the 1973 agreement which made it compulsory for her to sell the shares and compulsory for the deceased's brother to buy them.

[Emphasis added.]

In the Hillis Estate case, supra, a majority of the Federal Court of Appeal respected and applied the provisions of The Intestate Succession Act, R.S.S.,

c. 1-13, and The Dependant's Relief Act, R.S.S., c. D-25, of Saskatchewan, to find that certain property, by order of a court, going to the widow in an intestate succession long after the death of her husband enjoyed the privileges of a subsection 70(6) roll-over.

The Hillis Estate decision is also authority for the principle that the actual transfer of property from an executor to a beneficiary need not take place within 15 months. It may take place within a reasonable time thereafter. Clement, D.J. at page 355 (D.T.C. 5371) said this:

The purpose of s. 70(6) is to give a measure of tax relief to the surviving spouse of a family unit. This is laudable. One can well understand the reasons and motives that moved Parliament to its enactment. They set the spouse apart from the commercial aspects of the tax. What is executed is a remission of tax burdens arising on the death of a taxpayer that would otherwise fall upon a surviving spouse. She (or he) is to be helped. The enlargement of time jurisdiction should be given a generous operation so that this purpose is not highly defeated: it should not be construed stringently and unsympathetically for the purpose. The result of the enlargement is no more than to enable the spouse to obtain the same tax relief which was available to her in the beginning. Nothing new, nothing offensive to the intent of Parliament.

Conclusions

The foregoing, in my view, sufficiently counters any inferences or conclusions which might be drawn from the fact that in the various instruments to which I have referred, the shares in question would not have been formally transferred from Hilda Jardine qua executrix to Hilda Jardine qua beneficiary. Nothing follows from this, especially when the executrix and beneficiary are one and the same person.

Admittedly, the offer to purchase of September 22, 1982, does refer in its preamble to the 1978 agreement and the price offered for the shares is in harmony with that agreement. Again, I should suggest that nothing flows from this. The operative terms of the offer to purchase are much more consonant with a consensual arrangement between the parties than with an endorsement of a previous and irrevocable obligation.

I should therefore conclude that the plaintiff has successfully rebutted the Crown's assumptions on which it based its reassessment. I agree with plaintiff's counsel that the interpretation given by the Crown to the 1978 agreement imposes a construction which, on a strict reading of it, the language of the instrument will not bear.

I will say more. If it should be argued that any difficulty of interpretation is by reason of a flaw in the drafting of the document and if at the time of its execution, it could be established that the intention of the actual parties was to be irrevocably bound to buy and sell the individual shareholdings, a proposition which of course invites extraneous evidence, I should find that the subsequent conduct of both Madeleine Vigeant-Cyr and Hilda Jardine over a period of some two years following Philip Van Son's death provides a sufficient answer.

On the death of her husband, the shares of the Sun company became indefeasibly vested in Hilda Jardine within the meaning and the time prescribed by the statute. The plaintiff's appeal is accordingly allowed and the Minister's reassessment is vacated.

The plaintiff is entitled to its costs.

Finally, I should acknowledge the able assistance of counsel for both sides in the orderly presentation of this case.

Appeal allowed.