Smith Estate v. M.N.R., 74 DTC 6291, [1974] CTC 317 (FCTD)

Gibson, J:—In this action under the Estate Tax Act the sole issue to be decided is what is the value of the “property” within the meaning of paragraph 58(1)(o) of the Act that is to be included in the aggregate net value of the deceased’s estate for taxation purpose by reason of 2,000 Class B shares of Wenonah Investments Limited passing on the death of the deceased.

The respondent firstly seeks to distinguish this case from the case of George Edwin Beament et al (A W Beament Estate) v MNR, [1969] 1 Ex CR 407; [1968] CTC 558; 69 DTC 5016; [1970] SCR 680; [1970] CTC 193; 70 DTC 6130, on the premise that the assessment can be sustained for taxation purposes under the provisions of paragraphs 3(1) (d) and (e) of the Estate Tax Act. In that case, Pigeon, J stated as follows:

The conclusion that the rights of the decedent’s children under clause 3 of the agreement were “property” does not mean that those rights could not possibly be brought into the estate for taxation purposes under s. 3(1)(d) or (e). However, as the Chief Justice has pointed out, when counsel for the respondent was invited at the rehearing to make a statement in that respect, he informed the Court that the assessment appealed from was not based on those provisions. They are therefore left out of consideration.

The respondent secondly also seeks to uphold the assessment for taxation purposes under the provisions of paragraph 3(1)(i) and subsection 4(1) of the Estate Tax Act.

The following facts were agreed to:

1. Miriam Irene Smith (herein called “the Deceased”) died at the City of Toronto in the County of York (as it then was) on February 12th, 1969 and at the time of her death was domiciled in the Province of Ontario.

2. Probate of the Deceased’s will was granted by the Surrogate Court of the County of York (as it then was) on the 3rd day of June, 1969 to James Desmond Smith (herein called “James”), Stephen George Smith (herein called “Stephen”), John Houston Milne and Canada Permanent Trust Company as executors thereof (herein collectively called ‘‘the Executors”).

3. At the time of her death, the Deceased owned beneficially 2,000 Class B shares of the par value of $1.00 each in the capital stock of Wenonah Investments Limited (herein called “Wenonah”), which shares were issued to the Deceased as fully paid and non-assessable.

4. Wenonah was incorporated as a private company under the Companies Act RSC 1952 c 53 by Letters Patent dated March 15th, 1961 with powers appropriate only to an Investment holding company and with an authorized capital divided into 10,000 Class A shares and 40,000 Class B shares all of the par value of $1.00 each. The provisions attaching to the Class A and Class B shares as set out in the Letters Patent of Wenonah confer a 5% preferential dividend on the Class A shares and limit the rights of the Class B shareholders on a dissolution or winding up of Wenonah to receive the par value of the Class B shares and no more. Clause (3) of the said provisions deals with the dividend rights of the Class B shares and reads as follows:

“(3) After payment of the said fixed cumulative preferential dividend on the Class “A” shares, the holders of the Class “B” shares shall be entitled to all the net earnings of the Company arising from income received by it declared as dividends, but no dividend shall be declared or paid in respect of the Class “B” shares of the Company until payment in full has been made of all dividends due upon the said Class “A” shares as above set forth and no dividend shall be declared or paid in respect of the Class “B” shares except out of the net earnings received by it and particularly no such dividend shall be paid out of profits or gains arising through the sale of investments or other capital assets of the Company.”

5. Supplementary Letters Patent dated October 17th, 1966 were issued to Wenonah by adding to the statement of the preferences priorities, rights, privileges, limitations and conditions attaching to the Class “A” and Class “B” shares of the capital of the Company the following provisions:

“(7) Subject to confirmation by supplementary letters patent the directors of the Company may at any time or times or from time to time pass a by-law or by-laws whereby the terms hereof and of the foregoing paragraphs may be altered, amended or repealed or the application thereof suspended in any particular case and changes made in rights, privileges, restrictions and qualifications attaching to the said Class “B” shares, but no such by-law shall have any force or effect until after it has been sanctioned by the vote of the holders of at least two-thirds (2/3) of the said Class “B” shares then outstanding and of at least two-thirds (2/3) of the Class “A” shares then outstanding, at a meeting specially called for the purpose.”

6. The Deceased was the beneficial owner of the three Class B shares of Wenonah subscribed for by the applicants for incorporation of Wenonah and on March 15th, 1961, she subscribed for 1997 Class B shares for which she paid the allotment price of $1,997.00. While the Deceased since such date beneficially owned 2,000 Class B shares of Wenonah as hereinbefore stated, 1,998 thereof were registered in her name and 2 thereof were registered, from time to time, in the name of nominees who held such shares for the purpose of qualification as directors of Wenonah.

7. On March 15th, 1961, James and Maurice Hamilton Fyfe (herein called “Fyfe”) as trustee for the Stephen Smith Trust Number One each subscribed for 12 Class A shares of Wenonah for which they each paid the allotment price of $12.00. 12 Class A shares of Wenonah were on March 15, 1961 issued to each of James and Fyfe as Trustees for the Stephen Smith Trust Number One as fully paid and non-assessable.

8. By indenture dated April 17, 1961 Fyfe transferred to The Toronto General Trusts Corporation (of which the successors were respectively Canada Permanent Toronto General Trust Company, and Canada Permanent Trust Company), (which trust company or its successors is herein called “the Trustees”) the assets of the Stephen Smith Trust Number One and the burden of the said Trust.

9. No other shares of Wenonah were issued before the death of the Deceased. On October 30th, 1968 the Trustee transferred the 12 Class A shares of Wenonah held by it in the Stephen Smith Trust Number One to Stephen in accordance with the terms of the Trust.

10. On the date of the Deceased’s death the issued shares of Wenonah were beneficially owned as follows:

The Deceased	2,000 Class B shares
James	12 Class A shares
Stephen	12 Class A shares.

11. James and Fyfe subscribed for the Class A shares of Wenonah, as stated in paragraph 7 hereof, on the faith of verbal representations by the Deceased that she would do all things necessary to insure that upon her death Wenonah would, if it had not done so at an earlier date, distribute its assets rateably among its shareholders in accordance with their respective interests and surrender its charter.

12. By agreement dated February 5th, 1963, James Fyfe, the Trustee and the Deceased (therein referred to as “Miriam’’) confirmed the matters set out in paragraph 11 hereof which agreement contained the following provision:

“Miriam covenants and agrees with James and the Trustee that the Company shall, as soon as conveniently may be after her death, pay its debts, distribute its assets rateably amongst its shareholders according to their interests in such assets and surrender its charter, and that she, the said Miriam, will do all things necessary to implement the generality of the foregoing, will maintain in her Last Will and Testament a direction to do and perform all acts and things which may be necessary for this purpose.”

13. The said agreement dated February 5th, 1963 recited that the Deceased by her then Last Will and Testament dated the 10th day of April, 1961 directed her trustees as follows:

“I DIRECT my Trustees as soon as conveniently may be after my death to exercise their powers as shareholders of Wenonah Investments Limited to pay the debts of the said Company, distribute its assets rateably amongst its shareholders and surrender its charter.”

14. The Deceased subsequently executed a new Will as of the 9th day of July, 1968, and a codicil thereto dated the 15th day of October, 1968, neither of which contained a direction in form similar to that set out in paragraph 13 hereof.

15. Immediately after the death of the Deceased the directors of Wenonah were the Deceased, James and John Houston Milne.

16. At the date of the Deceased’s death, there were no dividends declared but unpaid.

17. The financial statements of Wenonah as at February 12th, 1969 prepared by Messrs Price, Waterhouse & Co, Chartered Accountants disclosed that after paying the liabilities of Wenonah (including a debt of $367,858.10 owing to the deceased) there were available for distribution to the shareholders on the dissolution of Wenonah assets having a market value of $117,977.71 (which calculation is based on the valuation of a residential property owned by Wenonah at $102,000.00 being the appraised value of such property in 1967 when Wenonah acquired the said property), of which pursuant to the Letters Patent of Wenonah the estate of the Deceased as the beneficial owner of 2,000 Class B shares was entitled to received $2,000.00 and the holders of the Class A shares were entitled to receive the balance of $115,977.71.

18. At the date hereof, no proceedings have been taken to wind up Wenonah.

19. The value of the 2,000 Class B shares as declared by the Executors in their ET 60 Return dated April 14th, 1969 was based on the par value thereof, $1.00 each which value aggregated $2,000.00.

20. By Notice of Assessment dated January 15th, 1971 the Minister of National Revenue (hereinafter called “the Minister’) increased the value of the 2,000 Class B shares from $2,000.00 to $100,000.00 and indicated the particulars of such valuation as follows:

“2,000 “B” shares Wenonah Investments Limited Value of rights or property comprised in the disposition or settlement contemplated by the Agreement of February 8, 1963, and included in the Aggregate Net Value of the property passing on the death of the deceased by virtue of Section 3(1)(d) or Section 3(1 )(e) or alternatively by Virtue of Section 3(1 )(i) of the Act.”

21. On February 17th, 1971, the Executors filed a Notice of Objection to the assessment referred to in paragraph 20.

22. On November 29th, 1971, the Executors received a Notification by the Minister dated the 26th day of November 1971, wherein the Minister confirmed the said Assessment and stated the ground upon which such confirmation was based as follows:

“The Honourable the Minister of National Revenue having duly considered the facts and reasons set forth in the Notice of Objection and matters thereto relating hereby confirms the said assessment as having been made in accordance with the provisions of the Act and in particular on the grounds that the value of 2,000 Class B shares of Wenonah Investments Limited were correctly determined having regard to the value of rights or property comprised in the disposition or settlement contemplated by the Agreement of February 5, 1963, by virtue of the provisions of paragraph (d) or paragraph (e) of subsection (1) of Section 3 of the Act or alternatively by virtue of the provisions of paragraph (i) of subsection (1) of Section 3 of the Act.”

23. All documents relevant to this Appeal were filed as Exhibits to the examination of James, for discovery on the 26th day of July, 1972 or were subsequently provided to the Respondent, which documents are summarized as follows:

1. Notice of Appeal.

2. Estate Tax Returns.

3. Copy of Last Will and Testament and codicil of the Deceased.

4. Letters Patent incorporating Wenonah.

5. Supplementary Letters Patent dated October 7, 1966, issued to Wenonah.

6. By-laws, resolutions and minutes of directors and shareholders of Wenonah from the date of incorporation to the date of death of the Deceased.

7. Agreement dated February 5th, 1963, between James, Fyfe, the Trustee and the Deceased.

8. Financial Statements of Wenonah as at February 12th, 1969.

In assessing tax on the appellants, the respondent pleaded that he acted, inter alia, upon the following assumptions of facts:

(a) that the shares and/or assets and/or property of Wenonah Investments Limited (“Wenonah”) passed on the date of death of the deceased Miriam Irene Smith;

(b) that the deceased immediately prior to her death was competent to dispose of all or part of the shares, assets and property of ‘‘Wenonah” as she saw fit;

(c) that the holders of the Class A shares of “Wenonah”, Stephen George Smith (“Stephen”) and James Desmond Smith (“James”), did not at the date of death of the deceased hold their shares, property or assets in “Wenonah” by actual and bona fide possession of them either individually or by trustee or agent;

(d) that “Stephen” and “James” did not hold their shares, property or assets in “Wenonah” to the entire exclusion of the deceased whether by contract or otherwise;

(e) that the shares, property or assets of “Wenonah” held by “Stephen” and “James” at the date of death of the deceased were received by “Stephen” and “James” as a settlement or gift inter vivos made by the deceased;

(f) that by virtue of the charter and by-laws of “Wenonah” as well as the Dominion Companies Act the deceased had the power to restore to herself or reclaim absolute interest in the shares, property and assets of “Wenonah”;

(g) that if “Stephen” and “James” held any interest in the shares, property or assets of “Wenonah” at the date of death of the deceased or at any time prior thereto this interest was obtained by an agreement with the deceased whereby the said shares, property or assets of “Wenonah” were not to be transferred to “Stephen” or “James” until after the death of the deceased;

(h) that the amount paid by “Stephen” and/or “James” for the shares, assets or property of “Wenonah” was an amount or amounts paid which was less than full consideration in money or moneys’ worth for the said shares, assets or property.

The respondent’s submission in part was as follows, viz:

(In respect to) . . . whether the value at the date of the death of the deceased of certain assets previously owned by her were properly taken into account by the Minister of National Revenue in determining the aggregate value of the estate liable to Estate Tax passing on the death of the deceased, the Minister of National Revenue is acutely aware of the decision of the Supreme Court of Canada in The Estate of Arthur Warwick Beament v MNR, 70 DTC 6130, but that case dealt with proper principles applicable to the valuation of shares owned similar to those owned by the deceased in the present appeal (ie, s 58(1)(5) of The Estate Tax Act). However, the assessment in the case now before this Honourable Court is based not on the value of the Class B shares owned by Mrs Smith but on the value at the date of her death of the assets which she originally transferred to the Company, . . . (and that this) assessment was properly made, according to law, for the following reasons:

Sections 2(1) and 3(1)

First, sections 2(1) and 3(1) of the Estate Tax Act charge to estate tax ine aggregate value of all property passing on the death of a person. The value of the property upon which the tax is levied is the value at death. section 3(1) enumerates specific instances of property passing on death— the value of which at death is to be included in the aggregate upon which tax is to be paid.

Section 3(1 )(d)

Section 3(1)(d) charges to estate tax “property disposed of by the deceased under a disposition whenever made, of which actual and bona fide pos- session and enjoyment was not, at least three years prior to the death of the deceased,

(i) assumed by the person to whom the disposition was made . . .

and

(ii) thereafter retained to the entire exclusion of the deceased and to the entire exclusion of any benefit to him, whether by contract or otherwise;”

For a disposition to escape the charge to estate tax under section 3(1 )(d) the conditions in both of parts (i) and (ii) must be fulfilled. . . . parts (i) and

(ii) operate cumulatively, and not alternatively. Therefore, . . . if either part (i) or part (ii) of subsection 3(1 )(d)—on the facts of this case—is not fulfilled then the value at the time of death of the assets transferred by the deceased to the Company is properly to be included in determining the amount of estate tax payable.

. . . at the times of the alleged purchases, by the company of assets from the deceased, the Company was established for the sole purpose of providing the deceased with a vehicle with which to avoid the payment of estate tax, and that the whole arrangement was a “sham” comparable to that in the decision of the Supreme Court of Canada in Minister of National Revenue v Cox, 71 DTC 5150. Accordingly, the Company was incapable of obtaining an actual and bona fide possession of the assets separate from the possession previously exercised by the deceased. Therefore, . . . the conditions laid down in part (i) of subsection 3(1)(d) are not fulfilled and therefore the value of the assets at the date of the death of the deceased was properly included in the assessment to estate tax (Fraser v MNR, 64 DTC 5224 at p 5226). Further, from a purely business point of view, the whole arrangement is a “sham”. The agreement of February 5, 1963, combined with the dissolution provisions of the Letters Patent, do not make sound economic sense. The Class A shareholders, whose Investment in the company is a mere $12, end up with 100 per cent of the capital of the Company (less $2,000) when the Company is wound up.

Alternatively, even if the Respondent is wrong and the criteria contained in part (i) of subsection 3(1 )(d) are met, . . . the enjoyment of the assets was not transferred to the Company and thereafter retained by it to the entire exclusion of the deceased. Under the original Letters Patent of the Company, each issued share had one vote. Mrs Smith owned all 2,000 of the issued Class B shares (either in her own name, or beneficially) and, on the general principles of Company law, she not only could have caused the Company to have been wound up and its assets distributed, she could have used her overwhelmingly predominant voting power to have altered the terms of the Letters Patent in such a way as to change the rights of the respective classes of shares. Effectively, she could have at any time recouped the very assets which she had earlier transferred to the Company. . . . therefore, . . . the enjoyment of the assets was not transferred to the Company to the entire exclusion of the deceased; and therefore part (ii) of subsection 3(1)(d) has not been fulfilled so as to exempt the value of the assets at the date of the death from aggregation and charge to tax under section 3(1). The fact that Supplementary Letters Patent were issued on October 17, 1966 (changing the terms under which the rights of the different classes of shares could be altered) is irrelevant. It is irrelevant because the deceased died on February 12, 1969—ie, within three years. If at any time within the three-year period immediately prior to the death of the deceased she could exercise the voting rights of her 2,000 class B shares under the original Letters Patent, . . . the conditions of part

(ii) of subsection 3(1)(d) have not been fulfilled. Further, . .. . merely because the deceased did not in fact avail herself of her rights to wind up the Company and/or alter the rights of each class of shares does not alter the properiety (sic) of the assessment under section 3(1 )(d).

Earl Grey v The Attorney-General, [1900] AC 124

Chick v Commissioner of Stamp Duties, [1958] AC 435 (PC), distinguished from

Munro v Commissioner of Stamp Duties, [1934] AC 61 (PC)

Commissioner for Stamp Duties, New South Wales v Perpetual Trustee Co [1943] AC 1 QB (CA)

Attorney General v Worrall [1895] 1 QB 99 (CA)

St Aubyn v Attorney-General, [1952] AC 15, considering

Oakes v Commissioner of Stamp Duties of New South Wales, [1954] AC 57

(PC) and

Attorney-General v Seccombe, [1911] 2 KB 688

Palmer's Company Law, 21st ed, chapters 52, 53

The Canada Corporations Act, RSC 1970, c C-32, ss 13(1), 51, 134

Moreover, . . . part (ii) of subsection 3(1)(d) is not fulfilled for another reason. Mrs Smith, up until the moment of her death, retained the right to enjoy all or substantially ail of the income from the assets transferred to the Company because she owned, or had a beneficial interest in, all of the issued Class B shares. It is irrelevant that this income also has the nature of being “dividends from shares in the Company”. The corporate veil does not alter the fact that the income did derive from the assets of the Company—and these assets were almost entirely the very assets transferred by the deceased to the Company. To the extent that any enjoyment of those assets accrued to the deceased at any time after their transfer to the Company (and within three years of her death), the conditions laid down in part (ii) of subsection 3(1)(d) have not been fulfilled, and the total value of the assets at the date of the death are properly charged to Estate Tax under section 3(1 )(d).

Section 3(1 )(e)

. . . the assessment to Estate Tax was also properly made under subsection 3(1)(e). The word “settlement” is defined in subsection 58(1)(q) as follows:

(q) “settlement” includes any trust, whether expressed in writing or otherwise, in favour of any person, and, if contained in a deed or other instrument effecting the settlement, whether or not such deed or other instrument was made for valuable consideration as between the settlor and any other person.

. . . the entire arrangement adopted by the deceased—the establishment of a Company, with two types of shares, each with different rights, the transferring of assets to the Company for a promissory note, the covenant by the deceased to bind her executors to wind up the Company upon her death—amounts to a “settlement”. The definition of “settlement” in subsection 58(1)(q) merely enumerates and includes certain specific instances in the broader category known as “settlements”. . . . these examples in no way are exclusive, or limit the general legal meaning of the term. . . . the very essence of a settlement (in all of its manifestations) is that property be limited by way of succession. Joint tenancies, trusts for sale, and strict settlements are merely examples, and all share the common characteristic of being interests limited by way of succession. It does not take a complicated definition section (cf the corresponding English legislation to make subsection 3(1 )(e) apt to tax all property limited by way of succession where the deceased either retains a present right to the income from the property, or the right to restore to himself or to reclaim the absolute interest in the property. See Crossland v Hawkins, [1961] 2 All ER 813; Mills v Inland Revenue Commissioners, [1972] 2 All ER 86 (reversed on a different point at [1972] 3 All ER 977).

Alternatively, . . . the Agreements of February 5, 1963, between the deceased and James Desmond Smith, Maurice Hamilton Fyfe and the Canada Permanent Toronto General Trust Company itself constitutes a “settlement” within the meaning of subsection 3(1 )(e). The said Agreement binds Miriam Smith to require her executors to cause the Company to be wound up as soon as possible after her death. . . . this Agreement creates a trust of that promise by the deceased, to enure for the benefit of, and capable of being sued upon by the very persons who would become entitled to the assets upon the winding up of the Company. The subject matter of the trust, it is submitted, is the promise by the deceased. But the value of this promise is represented by the assets which would be distributed to the owners of the Class A shares upon the fulfilment of the trust (when the Company is wound up). Accordingly, the ownership of the assets is determinable by reference to the death of the deceased, a circumstance which causes their value to be charged to Estate Tax under section 3(1 )(e). Further, if the Agreement of February 5, 1963, is a “settlement” within the meaning of sections 3(1 )(e) and 58(1 )(q), the fact that the deceased was entitled to the income from the property in the settlement for a period determinable by her death renders the value of the property at the date of her death taxable under section 3(1 )(e). Likewise, because the deceased could have, prior to the issue of the Supplementary Letters Patent on October 17, 1966, used her predominant voting power in the Company to alter the rights of the two classes of shares, and therefore caused the Company to be wound up in such a way as effectively “to restore to . . . (herself) . . . the right, by the exercise of any power, to restore to . . . (herself) . . . or to reclaim the absolute interest in such property”; and therefore the charging provision of section 3(1)(e) applies.

Section 3(1 )(i)

. . . the assessment to estate tax falls under section 3(1)(i), which reads as follows:

(i) property transferred to or acquired by a purchaser or transferee under the terms of an agreement made by the deceased at any time providing for the transfer or acquisition of such property on or after his death, to the extent that the value of such property exceeds the value of the consideration, if any, in money or money’s worth paid to the deceased thereunder at any time prior to his death;

Section 58(1 )(o) defines “property” so as specifically to include “a right of any kind whatever and a chose in action”. (See Beament v MNR supra at p 6135 and Fraser v MNR supra.) Under the Agreement of February 5, 1963, James Desmond Smith and Fyfe and Canada Permanent Trust Company (as former and present trustees for the second son of the deceased, who was then an infant) received the right to compel the executors of the deceased to wind up the Company. The only consideration given by “James” and “The Trustees” to the deceased in return for this right (or “property”) was: (1) five dollars; and (2) the purchase by each of 12 Class A shares at a price of one dollar per share. There were no other issued Class A shares at that time, nor have any subsequently been issued. . . . the value of this right to compel the winding up of the Company is to be assessed with reference to its market value. According to the principles of valuation laid down by the Supreme Court of Canada in Beament v Minister of National Revenue (supra), this value is the amount that a reasonable person would have been willing to pay in order to acquire the property—in this case, the right to have the Company wound up. . . . a reasonable person having all of the rights. of James Desmond Smith and Stephen George Smith under the charter of “Wenonah” and the agreement of February 5, 1963, would have been prepared to acquire the rights granted to them by the deceased for a sum of money not less than the total value of the underlying assets of the Company. Accordingly, because all or substantially all of the assets of the Company were comprised of the assets originally transferred to it by the deceased in 1961 (and subsequently in 1966), . . . it is the value of these assets which are charged to tax under subsection 3(1 )(i) of the Act. Further, in a case where there has been inadequate consideration, subsection 3(1 )(i) charges to tax the value of the assets at the date of the deceased’s death (subject only to a set off for the original, inadequate consideration).

It is irrelevant that the assets themselves were originally transferred to the Company for full value. The right under the Agreement of February 6, 1963, itself is property; and its proper value is the underlying value of the assets.

Section 4(1)

. . . the provisions of section 4(1) of the Estate Tax Act support the Respondent’s assessment in the case at bar. The payment of $1 per share by the beneficiaries and the agreement of February 5, 1963 (paragraph 11) clearly are a scheme to get into the hands of the beneficiaries the value previously owned by the deceased for an amount which is otherwise than “for full consideration in money or money’s worth . . .” (see Cox v MNR supra and Fraser v MNR supra).

The appellant’s submission in part was as follows, viz:

1. The issues involved are those left undecided by the case of Beament Estate v MNR, namely, do any or all of Sections 3(1)(d), 3(1)(e), 3(1)(l) or Section 4 apply in these circumstances.

Beament Estate v MNR, 70 DTC 6130 (SCC)

2. In applying any or all of these sections the Minister must show that two very well established principles of corporation law do not apply in the circumstances.

a) that a corporation is a separate entity from its shareholders

Salomon v Salomon, [1897] AC 22 per Lord Halsbury LC at pp 30 and 33

Hydro Electric Power Commission of Ontario v Townships of Thorold and Pelham, 55 OLR 431 (Appellate Division SCO) per Ferguson JA at p 435

Balstone Farms Limited v MNR, 66 DTC 5482, Ex Ct per Cattanach J at p 5488

Shulman v MNR, 61 DTC 1213

Clarkson Co Ltd v Zhelka et al, [1967] 2 OR 565 per Thompson J at p 577

Goodman v Freeborn et al, [1968] 1 OR 105 (Ont CA) per Laskin JA at p 1

Re Chodikoff, [1971] 1 OR 321 (CA) per Arnup JA at pp 330-1

b) That the shareholders of a corporation are not the owners of and have no interest in the property owned by the corporation.

Macaura v Northern Assurance Company Limited, [1925] AC 613 per Lord Buckmaster at page 626;

Army and Navy Dept Stores v MNR, 53 DTC 1185 per Cartwright J at page 1193;

MNR v Granite Bay Timber Co Ltd, 58 DTC 1066 per Thurlow J at p 107

Davidson v MNR, 68 DTC 5086 per Sheppard DJ at page 6091;

Aqua-Land Exploration Ltd v Guarantee Company of North America, [1963] 1 OR 220 per McRuer CJHC at page 227.

3. The fact that the Deceased did not include a provision in her Will in the form required by the Agreement of February 5, 1963, between the Deceased and others is of no effect. The other parties to such agreement who were the beneficiaries of the Deceased’s covenant could have sued for specific performance thereof or damages for breach of contract.

Synge v Synge, [1894] 1 QB 466 (Ct of Appeal) per Kay, LJ at pages 471-472;

Central Trust v Safe Deposit Co v Snyder (1915), 25 DLR 410 (a decision of the Judicial Committee of the Privy Council on Appeal from a decision of the Supreme Court of Ontario, Appellate Division), per Lord Parker at pages 414-415;

Beament Estate v MNR, 70 DTC 6130 per Cartwright CJ Cat 6133;

Re Mann Estate, [1972] 5 WWR 23.

4. Unless she had the consent of the Class A shareholders the Deceased could not have restored to herself the property and assets owned by Wenonah without one or all of the following consequences:

(a) An action by the Class A shareholders to set aside the acts of either the directors or shareholders in carrying out such steps or

(b) An action by the Class A shareholders for damages equal to the value of the property “converted” by the Deceased:

Canada Corporation Act RSC 1952 Chapter 53 as amended, S 48(3) (as enacted by SC 1964-65, C 52, S 20)

Bonisteel v Collis Leather Company (1919), 45 OLR 195 per Rose J at page 199;

Martin v Gibson, 15 OLR 623 per Boyd C at pages 632-3;

Percival v Wright, [1902] 2 Ch 421 per Swinfen Eady J at page 425;

Piercy v Mills and Co, [1920] 1 Ch 77 per Peterson J at page 84;

Legion Oils Ltd v Barron, (1956), 2 DLR 505 per Cairns J at pages 514-516;

Grey v Lewis (1869), LR 8 E 526 per Sir R Malins VC at page 544

Canada Safeway Ltd v Thompson, [1951] 3 DLR 295

Burland v Earle, [1902] AC 83 per Lord Davey at page 93.

Wadell v Ontario Canning Company (1889), 18 OR 41;

Fiddes Estate v MNR, 70 DTC 1117.

5. The sections of the Estate Tax Act sought to be applied by the MNR require that the legal realities of the existence of Wenonah Investments Limited be ignored for the purpose of applying the Taxing Statute. It is a well defined principle that there must be either statutory authority or evidence of some fraud for the Courts to overlook the existence of a corporation in these circumstances.

Salomon v Salomon (supra)

The legal position of the parties must be given effect to in these circumstances.

Duke of Westminster v CIR, [1936] AC 1 per Lord Tomlin at page 19;

Pioneer Laundry & Dry Cleaners Ltd v MNR, 1 DTC 499 per Davis J at page 7; upheld by 1 DTC 499-69 (JCPC);

Shulman v MNR, 61 DTC 1213.

6. A departure may be made from the principles referred to in the cases mentioned in paragraph 5 by Parliament.

Wilson v MNR, 1 DTC 478

7. The provisions of Section 3(1)(d) cannot be applied in any manner to the transaction for the following reasons:

(a) The property sold by the deceased for Wenonah Investments Limited vested immediately in Wenonah Investments Limited. The transactions in question were all by way of sale for full value and the provisions of Section 4(1) of the Estate Tax Act apply in the circumstances.

Moreover such property was retained to the entire exclusion of the Deceased and to the entire exclusion of any benefit to her. The right of the Deceased to receive dividends on the 2000 Class B shares beneficially owned by her was not an interest in the property.

8. The transaction in the present circumstances cannot be regarded as a settlement within any accepted definition of that term.

34 Hals (3rd) p 428

Words and Phrases Legally Defined (2nd) Vol 5, page 55 Estate Tax Act, Section 58(1 )(f)

Nor could the Deceased have restored the property owned by Wenonah Investments Limited to herself for the reasons set out above.

9. The provisions of Section 3(1)(i) are not applicable for the following reasons:

(a) The only property which was the subject of any agreement in the circumstances is the property transferred by the Agreement of February 5, 1963. This property was a right to compel the Executors of the Estate of the Deceased to wind up the Wenonah Investments Limited;

(b) Such property vested in James Desmond Smith (James) and Stephen George Smith (Stephen) not at the date of execution of the Agreement of February 5, 1963 but at the time James and the Trust for Stephen each subscribed for 12 Class A shares of Wenonah Investments Limited. The Agreement of February 5, 1963 merely confirms what took place at an earlier time. In any event this “right” vested in James and Stephen In 1961 or 1963 and not at the date of death of the Deceased.

Re McCreath, [1973] 1 OR 771

In this case it should be noted that the “purported assumptions of facts” upon which the respondent pleads he acted, are in the main not assumptions of fact at all.

Assumptions (a) and (b) quoted above are assumptions of fact.

Assumption (c) is a conclusion of law not supported by the evidence.

Assumption (d) is a conclusion of law not supported by the evidence.

Assumption (e) is a conclusion of law not supported by the evidence.

Assumption (f) is a conclusion of law not supported by the evidence.

Assumption (g) is an assumption of fact not supported by the evidence.

Assumption (h) is an assumption of fact not supported by the evidence.

Notwithstanding the above, I do intend to discuss the matter of onus of proof.

The relevant facts for decision are as follows:

After the agreement dated February 5, 1963 was executed and shares of Wenonah Investments Limited were issued as set out above, the deceased in the year 1967 sold certain stocks then owned by her for full market value to Wenonah Investments Limited. As consideration she received from Wenonah Investments Limited a promissory note of an amount equal to the full market value of those stocks.

The intent of these transactions was to “freeze” for estate tax purposes the estate of the deceased and to permit the capital growth, if any, in the value of those stocks to accrue to and belong to the said sons of the deceased.

First of all, in my view, all of the transactions were bona fide transactions. After their completion, the deceased owned 2,000 Class B shares and the sons owned all of the Class A shares of Wenonah Investments Limited.

Secondly, at the death of the deceased, Wenonah Investments Limited (after provision for the payment to the estate of the deceased the amount of the then face value of the promissory note namely $367,858.10 and other liabilities) owned assets available for distribution to its shareholders on dissolution having a market value of $117,977.71. Of this latter sum, according to the agreed statement of facts, “pursuant to the Letters Patent of Wenonah Investments Limited the estate of the deceased as the beneficial owner of 2,000 class B shares was entitled to receive $2,000.00 and the holders of Class A shares were entitled to receive the balance of $115,977.71”. (Both sums of course would have to abate rateably by reason of the deduction of winding up costs.)

Thirdly, the parties to the agreement of February 5, 1963, other than the representatives of the estate of the deceased, have the right to have the agreement specifically enforced against this estate requiring the winding up of Wenonah Investments Limited even though the deceased did not include a provision so directing that to be done, in her will, in a form required by the agreement.

It follows therefore that this latter right to enforce the winding up of Wenonah Investments Limited, being “property” within the meaning of paragraph 58(1)(o) of the Estate Tax Act, as a consequence established that 2,000 Class B shares have a value of $2,000 at the death of the deceased. (See George Edwin Beament v MNR, [1970] SCR 680; [1970] CTC 193; 70 DTC 6130.)

This leaves only one other question for decision namely, whether or not there is any additional “property” within the meaning of paragraph 58(1)(o) of the Estate Tax Act which can be brought into the estate of the deceased for taxation purposes under paragraph 3(1)(d) or (e) or (i) and subsection 4(1) of the Estate Tax Act.

The notice of reassessment stated that this additional “property” did exist and could be brought in for taxation purposes in that it consisted of a “value of rights or property comprised in the disposition or settlement contemplated by the Agreement of February 5, 1963” and therefore such was properly “included in the Aggregate Net Value of the property passing on the death of the deceased”.

If this constituted “property” within the above provisions, then it was represented at the date of the death of the deceased by the capital gain of the stocks which were owned after acquisition and at all material times by Wenonah Investments Limited, which amount of capital gain (after deduction of the costs of winding up that company) will go to and belong to the children of the deceased on this winding up. That sum, as stated, before deducting winding up costs is $115,977.71.

It would seem that it should follow that if this gain of $115,977.71, notwithstanding that the estate of the deceased has no title to it or claim on it, can be brought into the deceased’s estate for taxation purposes under the said sections of the Estate Tax Act, then if the situation were different and Wenonah Investments Limited had at the deceased’s death a capital loss in respect to these said stocks, that it should be possible to bring in such loss as a deduction under section 5 of the Estate Tax Act for the purpose of determining the “aggregate taxable value” of the estate within the meaning of section 2 of the Estate Tax Act. But this does not follow. The meaning of section 5 of the Estate Tax Act which provides that there may be “deducted” the “value” of “debts” and “encumbrances” was exhaustively discussed in George Edwin Beament v MNR, [1969] 1 Ex CR 407; [1968] CTC 558; 69 DTC 5016.* [1] In this latter situation, which I have supposed, the hypothetical capital loss on the stocks could not be brought in as a deduction because it would not have to be paid by the deceased’s estate.

In my view, the market value of Class B shares from 1967 on, owned by the deceased after the sale by her for full market value of her stocks to Wenonah Investments Limited, was only $2,000 because of the provisions of the agreement dated February 5, 1963, and I am of the view that the fact that the sale of these stocks by her to this said company was within three years of her death is irrelevant. She could not at any time after such sale and prior to her death nor could her executors after her death have caused any corporate action to be taken by issuing further class A shares, which would have resulted in the said capital gain accruing to those stocks in the company to have become her property or the estate’s property either by way of dividend or by distribution on winding up of the company. (See Piercy v S Mills & Company, Limited, [1920] 1 1.Ch 77, and Boni- steel v Collis Leather Co Limited (1919), 45 OLR 195.t [2]

Specifically, in respect to (1), paragraph 3(1)(d) of the Estate Tax Act, such has no application to the facts of this case because both conditions of that subsection do not obtain in so far as this alleged “property” is concerned (cf 34 Halsbury (3rd ed), p 428*); [3] (2) that in respect to paragraph 3(1)(e) of the Estate Tax Act, such also does not obtain because the alleged creation of this “property” by this “estate freeze planning” as set out in these reasons was not a “settlement” as defined in paragraph 58(1)(q)t [4] of the Act and as referred to in paragraph 3(1)(e) of the Act; and (3) that in respect to paragraph 3(1)(i) and subsection 4(1) of the Act, such are not applicable in that the sale of the stocks by the deceased to Wenonah Investments Limited in 1967 was at full market value and there is nothing in the agree-

Feldmann, 219 F 2d 173 (2d Circuit 1955) cert denied, 349 NS 952 (1955), in respect to which there are many satellite decisions and a large body of commentary in legal periodicals. See eg: The leading articles are those of Professors Jennings (“Trading in Corporate Control’’, 44 Calif L Rev 1 (1956)) and Leech (“Transactions in Corporate Control’’, 104 U Pa L Rev 725 (1956); Bayne, “The Sale-of-Control Premium: The Definition”, 53 Minn L Rev 485 (1969) and 11 Corp Prac Commentator 139 (1969); Bayne, “The Sale-of-Control Premium: The Intrinsic Illegitimacy”, 47 Texas L Rev 215 (1969); Andrews, “The Stockholder’s Right of Equal Opportunity in the Sale of Shares”, 78 Harv L Rev 505 (1965); Bayne, “The Sale-of-Control Quandary”, 51 Cornell LQ 49 (1965); Berle, “The Price of Power: Sale of Corporate Control”, 50 Cornell LQ 628 (1965); Javaras, “Equal Opportunity in the Sale of Controlling Shares: A Reply to Professor Andrews”, 32 U Chi L Rev 420 (1965); Berle, “Control in Corporate Law”, 58 Colum L Rev 1212 (1958); Hill, “The Sale of Controlling Shares”, 70 Harv L Rev 986 (1957). See re the explication of this fiduciary duty by the California Supreme Court by its decision in Jones v H F Ahmanson & Company (1969), 81 Cal Rptr 529; 460 P 2d 464, noted, 70 Colum L Rev 1079 (1970). In this case, majority shareholders were held to have actionably damaged the minority by transferring the majority block to a newly formed holding company in exchange for shares of the holding company. The minority was not given an opportunity to participate in the exchange. The holding company then went public, giving the majority a ready market for their shares while keeping the minority effectively locked in. Chief Justice Traynor, writing for the Court, held that the minority had an individual and not derivative cause of action (no actual or potential harm to the corporation having been found) against the majority for breach of fiduciary duty. Cf Honingman v Green Giant Co, 309 F 2d 667 (8th Cir 1962); Manacher v Reynolds (1960), 39 Del Ch 401; 165 A 2d 741. Quaere whether a breach of fiduciary duty in Canada?

ment dated February 5, 1963 which otherwise abrogates or abridges this fact.

In the result therefore, in my view, there is no additional “property” within the meaning of paragraph 58(1)(o) of the Estate Tax Act which can be brought into the estate for taxation purposes under any of the said provisions of the Estate Tax Act which were argued in this case.

The appeal is therefore allowed with costs and the matter referred back for reassessment not inconsistent with these reasons.