Robertson, J.A. (Isaac, C.J., Létourneau, J.A. concurring):—This is an appeal from a judgment of the Trial Division which dismissed the appellant’s appeal from a reassessment of income tax in connection with Sidney Greenwood's 1979 terminal year [Greenwood Estate v. Canada, [1991] 1 C.T.C. 47, 90 D.T.C. 6690]. By notice of reassessment issued on July 10, 1987, the Minister of National Revenue treated Mr. Greenwood as having realized in 1979, upon his death, a taxable capital gain in the amount of $308,217.50. That sum represented half of the capital gain which, according to the Minister, was deemed to have been realized immediately before Mr. Greenwood's death on a deemed disposition of the shares he held in Haney-Greenwood Ltd.
This appeal bears upon the question of whether these shares subsequently vested indefeasibly in a spousal trust established under the terms of Mr. Greenwood's will. A positive response to the question has the effect of deferring payment of taxes on a substantial portion of the taxable capital gains in accordance with the spousal rollover provisions of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), subsection 70(6) and paragraph 40(1 )(a). A negative response dictates that the full amount is payable for the taxation year in question; see subsection 70(5) and paragraph 104(23)(a) of the Act. The learned trial judge arrived at the latter conclusion. The appellants, in their representative capacities as the executors and trustees of Mr. Greenwood's estate, seek to convince us that she erred in law.
1. Background
Sidney Greenwood was the owner of all of the issued shares of Haney- Greenwood Ltd. subject to an obligation, secured by a hypothecation of the shares, to repay certain moneys to one Robert Haney. On December 22, 1978, Mr. Greenwood entered into an agreement ("the December agreement") to sell the shares to his three sons for $800,000 and the assumption of liability with respect to the obligation to Robert Haney. Pursuant to the terms of that agreement, the sale was not to be completed until after Mr. Greenwood's death; specifically, on or before the thirtieth day following the appointment of the executors of his estate. The purchase price was to be secured by an interest bearing promissory note. Interest on the note would be payable to the estate during the lifetime of Mr. Greenwood's spouse. On her death, the principal would fall due. The agreement was expressly stated to be binding on the "successors and assigns” of the respective parties. The following are the relevant provisions of the December agreement:
1. Purchase and Sale of Shares
Subject to the terms and conditions hereof, upon the death of the vendor (the "time of death"), each of the purchasers shall purchase and the estate of the vendor shall sell, assign and transfer to the purchasers the Shares which the vendor may now or at any time hereafter beneficially own (the "purchased shares") in the following proportions: to James Sidney Greenwood, 1/3 of the purchased shares;
to Kenneth Neil Greenwood, 1/3 of the purchased shares;
and To Douglas Stephen Greenwood, 1/3 of the purchased shares.
2. Purchase Price
Subject to paragraph 3 the purchase price of the purchased shares (the “purchased price") shall be $800,000 payable in equal proportions by each of the purchasers. The purchasers shall be jointly and severally liable for the payment of the purchase price.
5. Closing
This transaction shall be completed on or before the thirtieth full day next following the date of the appointment of the executors of the last will and testament of the vendor ("date of closing"). . . .
9.(e) Survival of Benefits and Obligations: Subject to paragraph 9(d) and to the extent necessary to carry out and give effect to the provisions herein contained, this agreement shall extend to, and enure to the benefit of and be binding upon the parties hereto and their respective successors, heirs, assigns and legal representatives.
On the same day, Mr. Greenwood executed a will in which the residue of his estate accrued to the benefit of his widow by way of a spousal trust. The relevant provisions read as follows:
2. I NOMINATE, CONSTITUTE and APPOINT my wife, THELMA ARLENE GREENWOOD and ELGIN EVANS COUTTS to be executors of this my will and trustees of my estate. ...
3. I GIVE, DEVISE, BEQUEATH and APPOINT all my property, of every nature and kind, and wheresoever situate, including any property over which I may have a general power of appointment, to my trustees, upon the following trusts, namely:
(e) To keep invested the residue of my estate and to pay the annual net income derived therefrom to or for my wife during her lifetime, in such monthly or other frequent periodic payments as my trustees, in their absolute discretion, may deem advisable ....
(f) Without any intention of imposing a trust on her with respect thereto, it is my wish that my wife should be mindful of the opportunity that our three sons, James Sidney Greenwood, Kenneth Neil Greenwood, and Douglas Stephen Greenwood, have received from me in connection with their right to acquire my common shares of Haney-Greenwood Ltd. pursuant to the terms of an agreement into which I have entered or intend to enter with them ....
Sidney Greenwood died on July 8, 1979. He was survived by his wife, a coexecutor and trustee under the will and an appellant in her representative capacity, and his three sons. The will was probated on September 22, 1979. On October 24, 1979, the appellants, as the executors and trustees of the estate, sold the shares to the three sons pursuant to the December agreement.
2. Decision below
The trial judge framed the principal issue before her in the following terms at page 47 (D.T.C. 6691):
The issue in this case is very narrow: were the shares of Haney-Greenwood Ltd. transferred, on Mr. Greenwood's death, to a spousal trust for his wife’s benefit and indefeasibly vested therein. If the answer is yes, subsection 70(6) of the Income Tax Act . . . applies and there is a deemed rollover of the shares at their adjusted cost base. If the answer is no, subsection 70(5) applies and the shares will be deemed to have been disposed of by the taxpayer, Mr. Greenwood, on his death, at their fair market value.
In deciding the issue, the Trial judge held that although shares did vest, they did not vest indefeasibly. At page 49 (D.T.C. 6691) she concluded:
I have little doubt that this agreement ["the December agreement"] prevents there being an indefeasible vesting of the shares. Indefeasible vesting requires that the person in whom the property is vested has the right to determine whether or not the property will be retained by him or her or disposed of to another. There was no such discretion or control in the trustees with respect to the shares in question. Mr. Greenwood's representatives, the executors under the will, were compelled, on his death, by operation of paragraphs 1 and 9(e) of the purchase and sale agreement of December 22, 1978, to sell the shares to the sons.
3. Issues —— argument
The sole issue in this appeal is whether the shares vested indefeasibly in the spousal trust created under the will. The appellants contend not only that the shares vested in the spousal trust but that they vested indefeasibly.
First, it is argued that what was transferred to the spousal trust were not merely the shares but the shares as they were affected by the rights and obligations set out in the December agreement. The appellants rely on the "bundle of rights" theory as abstracted from a decision of the Supreme Court. The substance of their argument is as follows (appellants’ memorandum of fact and law at page 13):
44. Since the “bundle of rights" associated with the shares included the obligation to sell them to the late Sidney Greenwood's sons, the shares were not property in which the estate or trust had an absolute, unfettered or unlimited interest, but rather property in which the estate had "something less than an unlimited interest". It is respectfully submitted that it was this property interest which comprised the "property" which was transferred to the trust, within the meaning of subsection 70(6) of tne Act.
Second, it is argued that the shares vested indefeasibly in the spousal trust created by this will as there was no condition subsequent specified in the original grant (the will) which could operate to defeat or revoke the interest granted. The argument is summarized in the appellants’ memorandum of fact and law (at pages 14-15):
50. It is respectfully submitted that since the shares, as they were affected by the December agreement, were transferred to the trust and since the Will contained no condition subsequent which could have defeated or revoked the trust's interest in this property (and, thereby, Mrs. Greenwood's right to benefit from the income earned on the proceeds received for the shares during her lifetime), the shares "vested indefeasibly” in the trust within the meaning of subsection 70(6) of the Act.
The respondent maintains that the shares did not vest, much less indefeasibly, in the spousal trust. What did vest, She argues, is the promissory note received in consideration for the sale of the shares to the three sons.
4 Analysis
I accept, as the appellants contend, on the authority of Beament Estate v.
[1970] S.C.R. 680, [1970] C.T.C. 193, 70 D.T.C. 6130, that the property which passed on the death of the deceased was a bundle of rights, that is to say, the shares subject to the contractual obligations described in the December agreement. Those obligations were mandatory and binding both upon the legal personal representatives of the deceased, as vendor, and upon the three sons of the deceased as purchasers. They allowed for no discretion on the part of any of them. According to that agreement, the legal personal representatives of the deceased had to sell the shares to his three sons who had to pay the consideration provided for in the agreement by making a promissory note for the purchase price payable to the estate of the deceased.
Upon the death of the deceased, all his real and personal property passed to his legal personal representatives in accordance with the terms of the will and by virtue of the Devolution of Estates Act, R.S.O. 1970, c. 129, subsection 2(1).
With respect to the shares, which constituted the principal asset in the estate, the legal personal representatives were under an obligation, without discretion, to sell and did sell them to the three sons of the deceased for the consideration agreed upon in the December agreement.
It follows that the property that passed to the legal personal representatives of the deceased at his death was, as I have already said, not the shares in specie, but the shares subject to the obligation in the December agreement which required that they be sold to the three sons of the deceased. Under the terms of the will, this property passed in the first instance not to the spousal trust but to the legal personal representatives to be disposed of in accordance with the terms of the will.
Paragraph 3(e) of Sidney Greenwood's will created a spousal trust only with respect to the residue of his estate. By necessary implication, the shares which were subject to the December agreement and which were sold accordingly, never formed part of the residuary estate and, therefore, of the spousal trust. The fallacy in the appellants’ argument lies in their belief that the shares were transferred to the spousal trust with no condition subsequent which could have defeated or revoked the trust's interest in this property. However, the possibility of the shares vesting in the spousal trust vanished once the estate completed the sale to the testator's three sons. In my opinion, there is confusion in the appellants’ argument as to what property passed to the estate of the deceased and what property vested in the spousal trust created with the residue of the estate.
A plain and simple reading of the December agreement and the will leads to an inescapable conclusion: the shares did not and could not form part of the residue and therefore of the spousal trust created by paragraph 3(e) of the will and what vested in it was the purchase price secured by an interest bearing promissory note.
In light of this conclusion, I am of the opinion that the learned trial judge was right in concluding that the shares did not vest indefeasibly in the spousal trust created by the will. The appeal will therefore be dismissed with costs. I am indebted to both counsel for their helpful submissions.
Appeal dismissed.