Grayson v. MNR, 90 DTC 1108, [1990] 1 CTC 2303 (TCC)

Kempo, T.C.J.:—These appeals concern the appellant's 1985 and 1986 taxation years wherein the respondent had reassessed the appellant's income so as to add the amount of $10,795.37 to his 1985 income and the amount of $17,041.95 to his 1986 income on the basis of the provisions of subsections 104(6), 104(13) and 104(24) of the Income Tax Act (the "Act").

The facts of the case were relatively clear. The appellant is a chartered accountant and stated that he has lengthy experience in the preparation of income tax returns for testamentary trusts. While this situation was his first one which involved the respondent's application of the subject fiscal attribution provisions, it became clear during the hearing that the appellant's knowledge of the jurisprudence concerning trust and tax law was extremely limited.

The respondent's position was reflected in his reply to notice of appeal, filed, of which paragraphs 1 to 11 inclusive read as follows:

A. Statement of Facts

1. He denies each and every allegation of fact set out in the Notice of Appeal except where expressly admitted hereafter.

2. The Appellant, a chartered accountant, lives in the City of Vancouver, British Columbia.

3. The Appellant was also a friend of the Late Robert J. B. Meirte whose Will provided that:

“2. I GIVE, DEVISE AND BEQUEATH 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 friend, William H. Grayson, Chartered Accountant, of the City of Vancouver in the Province of British Columbia, for his own use absolutely and I APPOINT him sole Executor of this my Will.”

4. Mr. Robert Meirte died July 19, 1984.

5. Although the Will referred to in paragraph 2 did not specify a trust be created, the Appellant caused a trust to be created of which he was the sole beneficiary.

6. The Appellant caused to be filed on behalf of the Estate of Robert J.B. Meirte a T3 - Trust Information Return for the period ending June 30, 1985 and June 30, 1986 in which he reported interest income of $10,795.37 and $17,041.95, respectively.

7. By Notices of Reassessment dated April 25, 1988, the Minister reassessed the Appellant's 1985 and 1986 taxation years so as to add to his 1985 income the amount of $10,795.37 and his 1986 income the amount of $17,041.95 on the basis of allocating the interest income from the trust referred to [in] the preceding paragraph.

8. By Notice of Objection dated July 12, 1988, the Appellant objected to the said reassessment and by Notification dated October 26, 1988, the Minister confirmed the said reassessment.

9. In so reassessing the Appellant, the Respondent, the Minister of National Revenue, relied upon the following assumptions of facts, inter alia:

(a) that the Will of the Late Robert J.B. Meirte dated December 11, 1978 bequeathed all his property of every nature and kind and wheresoever situated to his friend, William H. Grayson, the Appellant and appointed him sole Executor of his Will;

(b) although the Will did not specify a trust be created, the Appellant caused to be created a trust for the Estate of Robert J.B. Meirte of which he was the sole beneficiary;

(c) that the Estate received and reported the receipt of interest in the amount of $10,795.37 and $17,041.95;

(d) that the said amounts of $10,795.37 and $17,041.95 were the income of the Appellant, whether or not it was paid to him in the year;

(e) that the said amounts referred to above were considered to be payable in the above taxation years in that the beneficiary of the Estate had an enforceable right to the income; and

(f) that under the terms of the Will, and on the basis of the Appellant being the sole beneficiary of an Estate which he caused to be created, the amounts of $10,795.37 and $17,041.95 are considered to be payable to the Appellant, as the sole beneficiary, and should be included in his personal income.

B. The Statutory Provisions upon which the Respondent Relies and the Reasons which he Intends to Submit.

10. The respondent relies, inter alia, upon sections 104(6), 104(13) and 104(24) of the Income Tax Act, c. 63 S.C. 1970-71-72, as amended.

11. It is submitted that as the income of the trust at all material times was payable to the Appellant in the 1985 and 1986 taxation year, (sic) such income was properly included in computing the Appellant's income for the said years by virtue of subsection 104(13) of the Income Tax Act and notwithstanding that the trust in computing its income for the same taxation years, chose not to deduct the said sums as it was allowed to do so by virtue of subsection 104(6) of the Income Tax Act.

The appellant has taken issue with the respondent's interpretation of the relevant fiscal provisions and has asserted a want of authority in the Act permitting attribution of income from a testamentary trust to a beneficiary. He said that he was not in receipt of any proceeds of the estate, either by way of income or capital.

The relevant and applicable provisions of the Act are paraphrased as follows. Paragraph 104(6)(b) provides that for the purposes of Part I of the Act there may be deducted in computing the income of a trust for a taxation year such part of the amount that would be its income for the year as was payable in the year to a beneficiary.

Paragraph 104(13)(b) provides that such part of the amount that would be the income of a trust for a taxation year if no deduction were made under subsection 104(6), supra, as was payable in the year to a beneficiary shall be included in computing the income of the person to whom it so became payable whether or not it was paid to him in that year.

Subsection 104(24) provides that for the purposes of subsections (6) and (13), supra, an amount shall not be considered to be payable in a taxation year unless it was paid in the year to the person to whom it was payable or he was entitled in that year to enforce payment thereof.

Returning to the facts of this case, it appeared that all of the assets of the estate of the deceased had been converted to cash shortly after the death and that a loss had arisen respecting the disposition of the testator's house. This was because the value had dropped between the date of death and its disposition.

The appellant testified that as sole executor and sole beneficiary of the estate, he intends to make no distributions of income or capital to himself in the foreseeable future. Two reasons for this were advanced. Firstly he felt that maintaining the current situation would prevent his interest from falling into the domain of family property. Secondly it was perceived to be the only way in which the estate's capital loss could be utilized as there were no fiscal flow- through provisions to pass it on to himself as a beneficiary.

Considerable discourse passed between the Court and the appellant concerning the purported maintenance of an ongoing "trust" when no such thing had been set up by the subject will in the first place.

In my view the efficacy of the two reasons advanced for maintaining the purported trust need not be determined here. Rather, the matter falls to be resolved under the tax provisions as earlier noted.

The appellant has submitted that since all calculations are normally finalized after a fiscal year end, he would not be entitled to enforce payment of an amount which is to be payable “in a taxation year". In the case of Wood v. M.N.R. (1964), 37 Tax A.B.C. 37 at 47; 64 D.T.C. 780 Board Member Davis, in reference to subsection 63(7) of the former Act, [now subsection 104(24)] correctly noted that the "entitlement to enforce payment" was dependent upon whether the beneficiary was in a position where he could have, in law, enforced payment. The facts of the case at bar support the appellant's legal entitlement to enforce payment in both of the subject years, 1985 and 1986. The further cases of Marguerite Johnson v. M.N.R. (1958), 20 Tax A.B.C. 266; 58 D.T.C. 592 (T.A.B.) and Max Margles v. M.N.R., [1985] 2 C.T.C. 2414; 85 D.T.C. 703 (T.C.C.) are also supportive of the enforceability being that of legal entitlement. Indeed there is a very strong inference here that the appellant was in the legal position, as the sole beneficiary, to enforce the wind-up and full distribution of the estate to him prior to the end of the estate's first fiscal year end as all administrative matters had apparently been completed before that time.

The case of Grant Brown v. The Queen, [1979] C.T.C. 476; 79 D.T.C. 5421 (F.C.T.D.) is authority for the proposition that a trust may be taxable even where the amount is taxable in the hands of the beneficiary by virtue of subsection 104(13) of the Act. The appellant agreed that he was aware of the provisions of subsection 104(6) of the Act, supra, but that as executor he had chosen not to claim the deduction on behalf of the estate. The inference here is that the appellant was at all times attempting to maintain the trust as a separate entity notwithstanding the fiscal provisions.

The Brown decision also reiterates the authoritative principals respecting the legal effects concerning the respondent's interpretative bulletins.

Further, and given the above, I do not agree with the appellant that he has been treated either unfairly or differently from other Canadian taxpayers. As a tax preparer, and as a purported professional in this field, and had he read the jurisprudence, the appellant could have made himself aware of these authorities.

Finally, the matters raised by the appellant concerning self-assessment and recent amendments to the Act are devoid of any relevance to the merits of the appeals and the issues raised in the hearing.

In conclusion then, as error has not been shown on the part of the respondent, the appeals are to be dismissed.

Appeals dismissed.