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Citation: 2003TCC608
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Date: 20030904
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Docket: 2000-1641(IT)G
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BETWEEN:
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ESTATE OF THE LATE CLÉOPHAS SAINT-AUBIN,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Archambault, J.T.C.C.
[1] The estate of the late Cléophas Saint-Aubin (Estate) is appealing a new assessment made by the Minister of National Revenue (Minister) under the Income Tax Act for the 1993 taxation year. The Minister made the new assessment by applying the rule (21-year rule) set forth in subparagraph 104(4)(b)(i) and subsection 104(5) of the Act.[1] Pursuant to this rule, the estate is deemed to have disposed of all capital property on January 1, 1993, and the Minister added a taxable capital gain totalling $640,200 to the estate's income for the 1993 taxation year.
[2] Not having indicated any taxable capital gain in its income, the estate invokes three basic means against the new assessment. First, according to the estate, the Minister was not entitled to make a new assessment, as it was made outside the normal reassessment period and the estate made no misrepresentation attributable to neglect, carelessness or wilful default in filing its return for the 1993 taxation year. Secondly, even if the Minister could make a new assessment outside the normal reassessment period, the estate is not a trust as defined in subsection 104(1) of the Act and, as a result, the 21-year rule does not apply to it. The executors are simply agents of the institutes of a substitution created by the will of the late Cléophas Saint-Aubin.
[3] Finally, even if the Minister could make a new assessment outside the normal reassessment period and the estate was in fact a trust, the new assessment should be vacated as a result of the provision set forth in section 32 of the Crown Liability and Proceedings Act (CLPA), a provision applied by the Supreme Court of Canada in its recent ruling in Markevich v. Canada, 2003 SCC 9, [2003] S.C.J. no 8 (Q.L.).
FACTS
[4] Cléophas Saint-Aubin, a plumber, died on September 25, 1931.[2] His last wishes were indicated in a holographic will signed on November 20, 1929, and duly probated by the Quebec Superior Court on October 15, 1931. As the second disputed issue deals mainly with the nature of the institution created by that will - whether it is in fact a substitution or a trust, or whether it is instead an unsettled estate - it is appropriate here to cite most provisions of the will:[3]
[translation]
I, the undersigned, hereby declare the following to be my last will and testament:
1. . . .
2. . . .
3. I want my debts to be paid as soon as possible without, however, causing problems for my estate.
4. . . .
5. I leave all that I have at the time of my death to any children that I may have at that time, but as usufruct and enjoyment and as institutes of a substitution only, for them to retain throughout their lives as explained hereinafter. I want my estate to be divided on the death of my last grandchild to the third generation in equal shares per stirpes, starting with my children, which shall be the final distribution.
6. As an express condition of my will, it is my desire and intention that the property left by me on my death and that acquired by my executors and their successors not be or be able to be allocated to or mortgage in any way any common-law or conventional dower in favour of wives or children, their descendants or each of them.
7. All income from the property in my estate as collected by my executors or their successors, a portion of which shall be capitalized and a portion allocated to my children and grandchildren, shall be non-transferable by them and unseizable by their creditors, even for support, for as long as long as this substitution lasts by my will.
8. My daughter, granddaughters and great-granddaughters shall themselves, independent of and without authorization from their husbands, receive or collect their shares of income, annuities, rent, etc. to which they are entitled under the terms of this will for as long as the substitution lasts.
9. Buildings in my estate, and those that shall be acquired, shall be maintained and all necessary repairs shall be made, and shall be insured for approximately two thirds of their value (buildings). In the event of a fire, the buildings shall be repaired or rebuilt using the insurance money. If that is not enough, income or capital shall be used.
10. The executors shall be entitled to five dollars ($5), for each meeting to deal with the affairs of my estate. Such meetings shall occur when there are important matters to resolve and at least once per year.
11. My executors may designate an agent, who may be released at their discretion at any time, to be paid by commission to not to exceed 5% of net income. If any of my children or grandchildren are qualified and wish to be the agent, they shall be given preference.
12. To facilitate the provisions of my will and ensure the audit of income from my property to my children and descendants according to my wishes, I choose and designate as executors, my son Cléophas, my daughter Consuelo, my former colleague at the Collège, Dr. Arthur Trudeau, and Oscar Pierre Dorais, lawyer.
I ask that my executors, as early as possible, initiate my children into business. No woman other than my daughter may be executor of my estate. Neither my wife, Antonia M. C. Robillard, nor any member of her family may be directly or indirectly involved in the affairs of my estate or be designated as legal guardian. This is my express will. The majority of my executors who are family members may designate replacements for executors who have passed away or been dismissed for any reason. Such designations shall be approved by a Superior Court judge for as long as my estate exists. It is my wish that replacement executors be chosen, insofar as possible, from among my male descendants who are deemed able to fulfil such a role. For an outsider to be designated, the consent of two thirds of my adult children and descendants is required. It is my wish that the powers that I give to my executors last and be exercised by them for as long as such substitution lasts.
13. Children who I leave on my death, adult or minor, who are my lineage, shall equally share the net income as follows: until my debts are paid, they shall receive only that amount that is strictly necessary, which shall not exceed fifteen hundred dollars ($1,500.00) per year. After all my debts are paid, they shall receive half of all net income per stirpes. The rest shall be capitalized. Thirty years following my death, they shall be entitled to two thirds of net income instead of half. It is my wish that money accumulated be invested in property on commercial streets or lent, but not in excess of two thirds of the municipal appraisal, government bonds and debentures as deemed beneficial by my executors. If they get good prices for my properties, they may be sold, but in such a case, consent is required from two thirds of my adult male children and descendants.
14. In the event that any of my grandchildren and descendants dies without having any children, their share shall be shared equally among their brothers and sisters per stirpes. If any of my executors failing to work in the interests of my estate may be removed by a Superior Court judge.
15. If any of my children or descendants enters religious life, they shall be disinherited and their share shall be equally shared per stirpes between their brothers and sisters, unless they leave the religious life within five years, after which time this clause shall take effect. They shall not, however, be entitled to income from their share during the time in which they are in religious life. Their income shall be accumulated as capital in the estate.
16. ...
17. In the event that, to carry out my wishes, it is necessary to legally name one or more legal guardians for the substitution(s) created by this will, it is my wish, insofar as is possible, that the persons whom I have named above as executors and their replacements be also named as legal guardians for said substitution or estates as needed.
18. In the absence of one of my children or descendants who is executor, whether in Europe or elsewhere for a long time, he may give warrant of attorney to a qualified person to represent him. However, approval is required from my children or descendants who are then executors. Approval by a Superior Court judge shall not be necessary insofar as it is only for the time of the absence.
19. . . .
[Emphasis added.]
[5] At his death, Cléophas Saint-Aubin left three children: his oldest son, Georges, who suffered from schizophrenia (this was recognized by Cléophas when he wrote his will), Cléophas Jr., aged 21, and a minor daughter, Consuelo. Georges died in 1983 or 1984, Cléophas Jr. in 1986 and Consuelo in 1992. As Georges died without descendants, his share was divided between his brother and sister and their descendants. Cléophas had six children, including Louis Saint-Aubin, one of the executors in 1993. It was he who filed the estate's tax returns for 1993 through 1996 and he was the only witness for the estate. Louis Saint-Aubin is a labour lawyer and has, in the past, been a member of a Quebec administrative tribunal. He had one son and one daughter. The latter is now a grandmother. Consuelo, Mr. Louis Saint-Aubin's aunt, had two daughters, one of whom has two children and is also a grandmother. As a result, the grandchildren of the daughter of Mr. Saint-Aubin and the daughter of his cousin thus represent the fourth generation from Cléophas Saint-Aubin Senior and are the final beneficiaries of the latter's will.
[6] Due to the existence of constraints set forth in the will and because of the imprecision of some of its provisions, the executors of the estate were required on several occasions to have private bills passed by the Quebec legislature. Such was the case in 1940 in particular in order to authorize the executors to borrow an amount not exceeding $25,000 as mortgage to pay some of the estate's debts and to build housing projects.[4] In 1967, the Quebec legislature passed a new law[5] granting the executors the right, in particular, to receive $15 per meeting rather than $5 and authorizing them to borrow the amounts necessary to repair or improve properties or replace those that had been expropriated and to mortgage the estate's properties for that purpose. Finally, the legislature also recognized that some deeds of sale as not being invalidated either for having been carried out in the courts or because only three of the four executors had signed the deeds or the curator to the substitution did not appear to have given consent.
[7] In 1968, the estate purchased two properties on Édouard-Montpetit Boulevard in Montreal. In the sales contract for these properties, the four executors of the estate are essentially described as follows:
[translation]
ALL FOUR [including Louis Saint-Aubin] herein act together as sole executors for the estate of Cléophas Saint-Aubin Sr., having been duly designated to that function, as it appears in a list of appointments and resignations . . .
ALL FOUR, in this capacity, hereby agree to ACQUIRE the following property, i.e. . . .
[Emphasis added.]
[8] From 1982 to 1992, the estate did not file tax returns. Returns for 1985 to 1992 were only filed on December 6, 1993, following a 1993 visit from a Ministry auditor. Mr. Saint-Aubin explained that the delay in filing for 1990, 1991 and 1992 was due to difficult personal circumstances, in particular, the death of his son. However, no explanation was given for the failure to file returns from 1984 to 1989. Nor did Mr. Saint-Aubin explain why the other executors were not able to file the estate's tax returns for the years from 1990 to 1992[6].
[9] The Trust Income Tax and Information Return (Form T3) (1993 return) for the 1993 taxation year was filed on May 2, 1994. On line 01 of that return, where taxable capital gains are declared, Mr. Saint-Aubin indicated "0". However, the income before allocations/designations was $135,036.52. As the "total income allocations/designations to beneficiaries" was $103,800, the estate's net income after allocations is thus $31,236.52.
[10] On the first page of the 1993 return, there are several questions, notably question 4: "Has the trust continuously resided in Canada since it was established (or since June 18, 1971, if it was established before that date)?" Mr. Saint-Aubin answered this question in the affirmative. For question 8, "Does the will, trust document or court order require the payment of trust income to beneficiary(ies)?" Mr. Saint-Aubin answered no.[7]
[11] On page three of the 1993 return, there are 17 additional questions. To the first, "Did the trust dispose of capital property during the year? (Report both actual and deemed dispositions.) Use Form T1055 to report deemed realizations from the 21-year rule," Mr. Saint-Aubin answered no. However, he did not answer question 14, "Did the 21-year deemed realization rule apply to the trust in the year?" He simply wrote [translation] "to follow?" To question 7, "Is the trust reporting investment income?" Mr. Aubin answered yes.
[12] Questioned at the hearing regarding the meaning of the term [translation] "to follow," Mr. Saint-Aubin stated that he wanted to indicate to the Department of National Revenue (Department) that [translation] "if they believed this information to be important, it could be forwarded". As the Department did not request anything, he did nothing. Mr. Saint-Aubin admitted that he did not consult with the Department or any tax expert for assistance in completing the estate's returns. When asked if he had consulted the relevant Income Tax Guide (Income Tax Guide), he stated that he did not remember.
[13] It is important to note that, on the estate's income tax returns for 1994, 1995 and 1996, basically the same answers are given as those indicated supra, except for 1996, when, instead of giving [translation] "to follow?" as an answer to question 13 (which corresponds to question 14, supra), he wrote [translation] "information to follow". Unlike the estate's other income tax returns, the 1996 return was not signed by Mr. Saint-Aubin. Although his name appeared as one of the executors. He states that, for 1996, he consulted a lawyer because he had questions, but could not remember the context or the nature of the questions.
[14] The 1993 income tax guide includes the following information. First, on page 7, a "Testamentary trust" is defined as "a trust or estate that begins when a person dies." On the same page, we find the following, under the heading "Residence of trust":
A trust may be a resident of Canada, or a non-resident of Canada. It may be a resident of a particular province or territory within Canada. Residency is a question of fact to be determined according to the circumstances in each case. However, a trust is generally considered to reside where the trustee, executor, administrator, or other legal representative who manages the trust or controls the trust's assets lives.
[15] On page 34 of the income tax guide, under the heading "Form T1055 Summary of Deemed Realizations", there is a subheading entitled "Deemed realization (disposition) - 21-year rule". The first paragraph reads as follows:
On specified dates during the life of a trust, a trust is deemed to have disposed of its capital property, land inventory, and Canadian and foreign resource properties. Your have to report the resulting income, gains, or losses on the trust's T3 return in the taxation year in which the dispositions are considered to have occurred. For more information about those specified dates, see "Deemed realization day" which follows this topic.
[Emphasis added.]
The following is under the heading "Deemed realization day":
The deemed realization day is the day the trust is considered to have disposed of its capital property, land inventory, and Canadian and foreign resource properties. See the following table to help you determine the deemed realization day for your trust.
Three different scenarios are described in this table: a testamentary spousal trust, the inter vivos spousal trust and other trusts. For "Other trusts," we read the following: "Either January 1, 1993, or 21 years after the day the trust was created, whichever date is later."
[16] Mr. Saint-Aubin stated that he did not remember if the applicability of the 21-year rule in 1993 had been discussed at his meeting with the auditor that year.
[17] In May 1997, the Department asked one of its auditors to conduct an audit of the estate for 1994 and 1995. As the estate had answered [translation] "to follow?" to question 14 or 13, as applicable, of its income tax return for each of those years, i.e., the question regarding whether or not the estate was subject to "the 21-year deemed realization rule", the auditor consulted the 1993 return. Finding that the estate owned capital property, she asked Mr. Saint-Aubin to provide her with the fair market value of the estate's property as of January 1, 1993, and as of the assessment day, i.e., December 31, 1971. A tax expert, Mr. Yvan Brodeur, sent this information in a letter dated November 17, 1997. Mr. Brodeur's figures revealed a capital gain of $658,600. The auditor then asked the Department's assessment service to provide her with an assessment of the property in question. The last of four assessments was submitted to her on May 1, 1998.
[18] In her analysis of the estate's file, the auditor erred in determining the normal reassessment period for the 1993 taxation year. As the initial assessment[8] of the estate for that taxation year was only made on March 30, 1995, the normal reassessment period ended on March 30, 1998. Having assumed that the initial assessment was made in May 1994, the auditor thought she was too late. When, in November 1997, she received the letter from the tax expert for the estate, revealing a sizeable capital gain, the auditor would have still been able to make her assessment inside the normal reassessment period. Her error was due in part to the fact that she had been unable to find the initial 1993 assessment in the Department's file regarding the estate.
[19] The auditor found that there had been misrepresentation in the 1993 return and that she could make a new assessment outside the normal reassessment period. She was of the opinion that misrepresentation was apparent, on the one hand, in the date indicated for the creation of the testamentary trust, as "IX" was indicated for the month. She admitted at the hearing that she had not realized that the Roman numeral "IX" represented the Arabic numeral "9". On the other hand, the misrepresentation was apparent in the fact that Mr. Saint-Aubin had answered question 14 with [translation] "to follow?" and that no choice was made or other information later provided by the estate. In addition, a large amount of income had been omitted from the 1993 return.
[20] In making a new assessment on December 30, 1998, the Minister calculated a capital gain of $853,600 and included a taxable capital gain of $640,200 in the estate's income. Prior to the beginning of the estate's appeal hearing, the parties agreed on a new value for the properties and the capital gain was reduced to $753,500 (Exhibit A-2).
[21] Even though she believed that the taxpayer had made a misrepresentation attributable to neglect, carelessness, or wilful default, the auditor did not recommend that a penalty be assessed under subsection 163(2) of the Act. Only a late filing penalty was assessed. The initial penalty of $283 was increased to $10,408 in the reassessment.
Analysis
Misrepresentation Attributable to Neglect, Carelessness or Wilful Default
[22] It has been clearly demonstrated that the Minister's reassessment for the 1993 taxation year was made outside the normal reassessment period. The Respondent must thus show that the taxpayer made a misrepresentation attributable to neglect, carelessness or wilful default in filing the return or in supplying any information under the Act. The relevant passage from paragraph 152(4)(a) of the Act read as follows:
152(4) Assessment and reassessment. The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer's normal reassessment period in respect of the year only if
a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year;
. . .
[Emphasis added.]
[23] It is also appropriate to cite the relevant parts of subsection 152(4.01) of the Act, as that subsection was invoked by Counsel for the estate in support of his position. The passages in question read:
(4.01) Notwithstanding subsections 152(4) and 152(5), an assessment, reassessment or additional assessment to which paragraph 152(4)(a) or 152(4)(b) applies in respect of a taxpayer for a taxation year may be made after the taxpayer's normal reassessment period in respect of the year to the extent that, but only to the extent that, it can reasonably be regarded as relating to,
(a) where paragraph 152(4)(a) applies to the assessment, reassessment or additional assessment,
(i) any misrepresentation made by the taxpayer or a person who filed the taxpayer's return of income for the year that is attributable to neglect, carelessness or wilful default or any fraud committed by the taxpayer or that person in filing the return or supplying any information under this Act, or
(ii) matter specified in a waiver filed with the Minister in respect of the year.
[24] In its amended Notice of Appeal, the estate claimed that the Minister had all information needed for application of the 21-year rule, as that information had been provided [translation] "during the in-depth audit conducted in 1993". The estate also claimed that the relevant information-such as the date when the estate was created and the existence of property-were provided by the executors and that the latter had [translation] "never attempted, directly or indirectly, to hide the facts from the Respondent in 1993 or before or since 1993". Finally, the estate claims that [translation] "it is not reasonable to deem that the reassessment being appealed is related to misrepresentation by the taxpayer . . . as the relevant facts and information needed for making the reassessment being appealed were always correctly and fully reported to all representatives of the Respondent".
[25] Counsel for the Respondent cited two decisions by Strayer J. regarding the Minister's authority to make reassessments outside the normal reassessment period. First, she referred to the classic decision in this matter, Venne v. Canada, [1984] F.C.J. No. 314 (QL). In this decision, Strayer J. (as he then was) states, at page 6:
I am satisfied that it is sufficient for the Minister, in order to invoke the power under sub-paragraph 152(4)(a)(i) of the Act to show that, with respect to any one or more aspects of his income tax return for a given year, a taxpayer has been negligent. Such negligence is established if it is shown that the taxpayer has not exercised reasonable care. This is surely what the words "misrepresentation that is attributable to neglects" must mean, particularly when combined with other grounds such as "carelessness" or "wilful default" which refer to a higher degree of negligence or to intentional misconduct. Unless these words are superfluous in the section, which I am not able to assume, the term "neglect" involves a lesser standard of deficiency akin to that used in other fields of law such as the law of tort.
[Emphasis added.]
[26] In Nesbitt v. Canada, [1996] F.C.J. No. 1470 (QL), Strayer J. (as he then was) wrote the following at paragraph 8:
Even assuming that the letter of August 6, 1986, could be taken to prove the Minister's knowledge by that date (two months prior to expiry of the four-year limitation period) of the true facts and that there had been a misrepresentation, I do not believe this assists the appellant. It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form. It would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time.
[Emphasis added.]
[27] Counsel for the estate is correct in stating that the error indicated regarding the date of death of Cléophas Saint-Aubin Sr. is not an error. However, he is wrong in stating that Mr. Saint-Aubin made no misrepresentation in the 1993 income tax return. In my opinion, there is misrepresentation in two separate places in the return. First, the fact that no amount is indicated as taxable capital gain on line 01 constitutes misrepresentation. Then, on page three of the return, Mr. Saint-Aubin made another misrepresentation by answering the question "Did the trust dispose of capital property during the year? (Report both actual and deemed dispositions) Use Form T1055 to report deemed realizations from the 21-year rule". He should have answered yes, as the trust was subject to the 21-year rule and owned capital property.
[28] In my opinion, too much weight has been given Mr. Saint-Aubin's answer (which is not an answer, as he answered neither yes nor no) to question 14, i.e., whether the 21-year rule applied to the trust in the year. He simply indicted [translation] "to follow?". Such an answer is certainly very evasive, especially with the question mark.
[29] In my opinion, the fact that the auditor did not refer to the two elements that I have raised here in her testimony is not important. As Strayer J. indicated in Nesbitt, whether or not there is misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. Furthermore, even though the Minister could have identified the misrepresentation in the 1993 return by careful analysis of the documents provided by the estate, that does not constitute a means of defence for the estate. I fully entirely agree with the opinion of Strayer J. when he states that "it would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error . . ."[9].
[30] In my opinion, if Mr. Saint-Aubin had exercised reasonable care in completing the 1993 return, he would have answered yes to questions 1 and 14 on page three of the return. This finding is even more necessary when we consider that he was a lawyer, even having had the honour of being a member of an administrative tribunal.[10] He was thus able to understand the scope of the rule set forth in the income tax guide. That guide clearly indicates that a trust is deemed to have disposed of its capital property at a specific time during its existence. That specific time is defined in the following terms in the table on page 35: "Either January 1, 1993, or 21 years after the day the trust was created, whichever date is later." As the trust was created in 1931, it is clear that January 1, 1993 is the later of the two dates.
[31] In the 1993 income tax guide, a "testamentary trust" is defined as "a trust or estate that begins when a person dies". Mr. Saint-Aubin was well aware that the estate was a "testamentary trust", as is indicated in several ways. He used the T3 income tax return, entitled "Trust Income Tax and Information Return," to report the estate's income, not only for 1993, but also for the years from 1985 to 1993. On the 1993 return, he signed his name where it asks for the "Signature of trustee, executor, or administrator". On the 1995 return, he lists himself as [translation] "an executor", then, the line where he was to sign, the form indicates simply "Signature of authorized person". Mr. Saint-Aubin refers to the estate as the "estate of Cléophas Saint Aubin" on the first page of the 1993 return, under the heading "Identification", on the "Name of trust" line. On that return, he also placed the estate in the "Testamentary trust - Other" category.[11] He also indicates on the return that the estate was a trust resident in Canada and that the "trust" was reporting investment income.
[32] All of these elements lead me to an inevitable conclusion: Mr. Saint-Aubin knew that the estate was a Trust within the meaning of the Act. Furthermore, in light of the clarity of question 1 on page three, I can only conclude that Mr. Saint-Aubin, in completing the 1993 return, at the very least made a misrepresentation attributable to neglect or carelessness. In his testimony, he stated that he did not remember whether he had consulted the guide. On the one hand, if he did not do so, he was then negligent in answering no to question 1 without referring to the guide to understand its scope. If such is the case, he did not exercise the reasonable care, as he should have done, according to Strayer J. in Venne. On the other hand, if he consulted the guide and read the passages dealing with the 21-year rule, then he wilfully neglected to report capital gain from the deemed disposition pursuant to subsections 104(4) and 104(5) of the Act.
[33] I would add that it was not possible for the estate to elect, as set forth in subsection 104(5.3) of the Act, to defer the deemed realization day, as no living beneficiary of the trust met the conditions defining an "exempt beneficiary" on the day on which the deemed realization was to occur. This definition is provided in the income tax guide. On page 37, an "exempt beneficiary" is defined as follows:
An exempt beneficiary must be a living beneficiary of the trust. He or she must also be one of the following individuals:
· the trust's "designated contributor";
· the designated contributor's:
- spouse or former spouse; or
- grandparent, parent, brother, sister, child, niece, or nephew;
· the grandparent, parent, brother, sister, child, niece, or nephew of the designated contributor's spouse or former spouse.
[Emphasis added.]
Of the beneficiaries of the will of the late Cléophas Saint-Aubin, only his children could have been exempt beneficiaries. All of his children died prior to 1993.
Type of Institution Created by the Will
[34] In his oral arguments, Counsel for the estate attempted to show that the estate was not an estate within the meaning of the Act and that, as a result, could not be a trust subject to the 21-year rule. The estate, according to Counsel, was not an estate and the executors were simply agents of an institute of a substitution created by the will of Cléophas Saint-Aubin. Subsection 248(3)[12] of the Act did not have the effect for the estate in 1993 of assimilating the substitution into a trust as did the new wording of subsection 248(3)[13] enacted by S.C. 1991, ch. 49, applicable after 1990 to property acquired after 1990 or property subject to a substitution after 1990.
[35] The relevant provisions regarding the idea of a trust for the purposes of the Act are as follows:
Definitions 248(1) In this Act,
. . .
"trust" has the meaning assigned by subsection 104(1).
104(1) In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property.
[Emphasis added.]
[36] In my opinion, the position of Counsel for the estate on this matter is ill-founded for several reasons. First, there is no doubt that the will written by the late Cléophas Saint-Aubin leaves a lot to be desired and several of its provisions are confusing, unclear or incomplete: Cléophas Saint-Aubin was a lay person. However, if we look at all provisions of his will, one conclusion is clear: without putting it directly in writing, Cléophas Saint-Aubin created a trust within the meaning of section 981 of the Civil Code of Lower Canada (Civil Code or C.C.). That section states:
Art. 981a. All persons capable of disposing freely of their property may convey property, moveable or immoveable, to trustees by gift or by will, for the benefit of any persons in whose favour they can validly make gifts or legacies.
[37] The definition provided by P.-B. Mignault in Le droit civil canadien, Volume 4, 1899, Montreal, C. Théoret, at page 154 is much more revealing:
[translation]
1. Nature of a trust.- A trust, as set forth in this chapter, can be defined as the provision of a man, by which administration of certain properties is assigned to one or more people, called trustees, who receive those properties as a deposit and are responsible for administering them until they are to be given to those who to whom the settlor wished them to go and in whose interest he established the trust.
[38] Even though he stated that he was leaving his property to his children [translation] "as usufruct and enjoyment and as institutes of a substitution only", this does not necessarily mean the Cléophas Saint-Aubin created a substitution. Professor Madeleine Cantin Cumyn examines this question in "Les droits des bénéficiaires d'un usufruit, d'une substitution et d'une fiducie", McGill Legal Studies, No. 4, Wilson & Lafleur Ltée, 1980. At page 29, paragraph 40 of this excellent study of the institutions of usufruct, substitution and trust, Professor Cantin Cumyn appropriately notes two principles of interpretation from the Civil Code. She writes:
[translation]
. . . Section 928 C.C. states on the one hand that a substitution may exist notwithstanding provisions setting forth usufruct when, in effect, it is that which results from the whole tenor of the act and the intention expressed by the settler.
[39] At the same page, she adds that [translation] "section 964 C.C., on the one hand, provides that a person who is qualified as an institute of a substitution cannot benefit from the advantages stemming from that situation if, in reality, the act only charges the person with administering the estate's property". She also states:
[translation]
No express mention is made in these sections of the trust in sections 981a et seq. C.C., as it was introduced after the Civil Code was drafted. The fact remains that these interpretation rules are just as important in terms of what can be designated usufruct or substitution and what, on examination, would be a trust.
[Emphasis added.]
[40] At page 29 of her text, however, she admits that:
[translation]
. . . Jurisprudence also offers examples of situations in which judges did not hesitate to find creation of a trust where the settlor did not say so formally or spoke in terms of a substitution or usufruct.[14]
[Emphasis added.]
[41] Professor Germain Brière, in Donations, substitutions et fiducie, Montreal, Wilson and Lafleur Ltd., 1988, at page 225, provides the following definition of substitution:
[translation]
The following formula, however, seems more expressive: a double gift, where the mission of the first beneficiary to retain the object, while using it himself, to pass it on, at his death or at a time set by the gift, to another beneficiary named by the settlor.
[Emphasis added.]
[42] Article 944 C.C. describes the rights and responsibilities of the first beneficiary, called an institute, as follows: "The institute holds the property as proprietor, subject to the obligation of delivering over, and without prejudice to the rights of the substitute." To hold "as proprietor" is a key element in a substitution. Professor Cantin Cumyn is of the same opinion and expresses it at page 12, paragraph 17 of her work, supra, where she writes:
[translation]
. . . During the substitution, no one but the institute may benefit from the property. The institute shall share the attributes of the property with no other person.
She further adds, at page 15, paragraph 21:
[translation]
The institute has sole right of usus, fructus and abusus. The requirement to hand it over does not affect the exercise of the first two prerogatives . . .
[Emphasis added.]
Again at page 57, paragraph 82, Professor Cantin Cumyn writes:
[translation]
82 - The institute is considered by law to be the owner of the substituted property. As a result, the institute is holder of a real right that permits him to personally benefit from the property and any usefulness that is likely to arise from it, subject to the limitations included, in principle, in the acts of settlement.
[Emphasis added.]
She completes this analysis at page 90, paragraph 131:
[translation]
131 - By its nature, real right confers on its holder immediate access to the property in question, to allow the holder to personally benefit directly from all or part of its use. Real right does not permit the intervention of a third party to benefit from the real right held by the holder. The usufructuary and the institute have a real right to the property given or bequeathed them. This necessarily means that both must be able to take possession of the property and administer it.
. . .
Although Quebec authors do not always expressly say that the method of institute enjoyment and usufructuary results in them having possession and administration of the object to which they are entitled, their analysis of the legal situation leads to this result. Marler [particularly observes that the] enjoyment of the usufructuary is similar to that of the institute, which at least partially explains the often-improper use of the word "usufructuary". In effect, according to the expressions used in the Civil Code, a usufructuary exercises his right as owner, while the institute is the owner. Thus, the owner cannot be denied possession and administration of the property.
[Emphasis added.]
[43] This analysis coincides with that of Mignault in his work, supra, at page 68:
[translation]
The institute is owner until the substitution is opened and, during that time, has all rights related to the quality of the property, except that those rights, for the institute, are subject to the same condition that governs ownership. The institute thus enjoys the substituted property, benefiting from it and administering it as owner, but as an owner responsible for handing it over when the condition is met.
[Emphasis added.]
[44] This analysis of the institute's right is comparable to that of the beneficiary of a trust's income. Professor Cantin Cumyn makes the following comments at paragraphs 132 and 133 of her work, supra:
[translation]
132 - Contrary to usufruct and substitution, a key characteristic of a trust lies in the fact that organization of the management of property is independent of the people to whom enjoyment is granted. Possession and administration are not associated with enjoyment and are granted to the trustee. The beneficiary of the income, who holds a personal right to the trust, is not legally authorized to claim possession of the property. The beneficiary of the capital is not either during the trust, as his or her right to own the property is only acquired when the trust ends.
133 - The distinction that exists between the exercise of the rights of the usufruct and institute, on the one hand, and that of the beneficiary of a trust, on the other, is a useful, material, means of interpretation. Two Supreme Court rulings illustrate this. In Guaranty Trust Company of New York v. The King, ([1948] S.C.R. 183), the Court was asked to determine whether a legacy of income could be interpreted as creating a usufruct in favour of the legatee. The testator conveyed all his property and, in particular, the amount to be used for payment of the income legacy, to trustees responsible for administering it and giving the revenues to the designated beneficiaries. Taschereau J. analyzed the right of the usufructuary as always having to give him or her possession and administration of the property. He found that the absence of the right of possession and administration requires of the legatee's right to the benefits to be seen otherwise, in this case as beneficiary of trust income.
In Masson v. Masson (1912) 47 S.C.R. 42), the Court was asked to determine whether the right of a first group of legatees was that of institutes of a substitution or beneficiaries of trust income. Noting that the testator had demonstrated a desire to keep his property in the family for as long as the law allowed, Fitzpatrick, CJ noted that there are, in Quebec law, two ways of attaining this objective: substitution and trust. The testator chooses the first when he conveys ownership of the property to his children, who are the first to benefit from the settlement. The second means is used when he indicates that possession and administration of the property shall be by someone other than the beneficiaries. It was therefore ruled that the testator, in that case, had created a trust by conveying all his property to trustees for them to administer and hold for as long as the law allows.[15]
[Emphasis added.]
[45] In my opinion, it cannot be claimed that the children of the late Cléophas Saint Aubin were institutes, as they never took possession of the property as owners. They did not have possession when the 1994 trust tax return was filed (as Mr. Saint Aubin filed it as an executor) or at the time of the hearing regarding the estate's appeal. Rather, it was the four executors who had possession of the property and administered it, up until the distribution set forth on the death of the last grandchild of the third[16] generation. (See clauses 5 and 12 of the will).
[46] First, Cléophas Saint-Aubin did not want his oldest son, Georges, to have possession of the property as owner, as he suffered from schizophrenia. This is why Georges was not designated as an executor of the estate. Cléophas Saint-Aubin instead wanted his estate's property to be administered by four executors (and their successors or replacements, as is set forth in clauses 6, 7, 12, and 17 of the will), among whom were two non-family members who were not beneficiaries of the will. It is also clear that Cléophas Saint-Aubin wanted to convey his estate to his descendants for as long as possible.[17] As seen earlier, there were two means of attaining this objective: substitution and trust. In my opinion, he chose the second: the executors were actually trustees to whom Cléophas entrusted the administration of the property for the benefit of his three children and their descendants.
[47] Counsel for the estate claims that no trust was created, as the testator did not state in his will that his property was to be transferred to his executors. In my opinion, this argument is also ill-founded. Although transfer was not expressly set forth in the will, it must be found that it was implicitly set forth, as revealed by a reading of the many clauses of the will, particularly clause 6, which deals with the property left by the testator on his death and those "acquired" by his executors and their successors. Clause 9 deals with maintenance of [translation] "building in my estate and those that shall be acquired". According to the terms of clause 7, it was the executors (and their replacements) who were to collect [translation] "all income from the property in my estate" in order to capitalize a portion and give the other portion to his children and grandchildren. The testator takes for granted that the executors will possess the property. Furthermore, how could the executors have collected all income and give it in part not only to his children, but also to his grandchildren if they did not have control over the estate's property? It must be remembered that the testator named executors [translation] "to ensure the audit[18] of income from [his] property to [his] children and descendants according to [his] wishes" and that the powers that he gives them are to last and be exercised by them [translation] "for as long as such substitution lasts." Finally, I would add that, according to the terms of the will, the final distribution [translation] "of [the] estate" was not to occur until the death of the last of his grandchildren to the third generation. What distribution could there have been at that time had the executors not always had control of the estate's property? They were to have control of the estate's property at the time of the final distribution, because the testator wanted his property to be transferred to them on his death.
[48] It was also the executors who could dispose of the estate's property pursuant to clause 13: [translation] "If they get good prices for my properties, they may be sold, but in such a case, consent is required from two thirds of my adult male children and descendants".[19] It is clear that, if the institutes had owned the property, it would not have been necessary to obtain anyone's consent. However, the executors were required to obtain the consent of two thirds of the male children and descendants. All descendants or even one third of the male children could not prevent disposition of the properties.
[49] Is it necessary to add that private bills passed by the Quebec legislature gave to the executors the authority to sell and mortgage the estate's properties? Furthermore, it is the executors who are listed as the purchasers of two properties in 1968. It is they and not the alleged institutes who were still exercising control over the estate's properties in 2003, 72 years after the death of the testator.
[50] Another indication that the institution created by Cléophas Saint-Aubin's will was not a substitution is the fact that the alleged institutes were not allowed to receive more than 50% of income from the estate during the first thirty years after the death of Cléophas Saint-Aubin and that, after that time, they were only entitled to two thirds of that income, with the balance to be capitalized. In addition, [translation] "If any of my children or descendants enter religious life", they would not [translation] "be entitled to income from their share during the time in which they are in religious life. Their income shall be accumulated as capital in the estate" (clause 15 of the will). Their right to income is therefore a personal not real right. These provisions, in my opinion, are contrary to a key element of a substitution, that of wanting an institute to possess the testator's property as owner. If a person holds property as an owner, that person can benefit from all income without any restrictions without interposition of an administrator.
[51] Furthermore, the individuals charged with giving the testator's property to the alleged substitute (i.e., the beneficiaries of the capital) are the executors, not the institutes. It must be remembered that, of the initial executors, there were only two alleged institutes, the other two being non-family members. In his written statements on July 10, 2003, Counsel for the estate stated the following:
[translation]
26. At the time this is written, Mr. Louis Saint-Aubin and his brother Michel list themselves as executors with their two cousins, Yoland and Anne-Marie Sabetta, daughters of Consuello Saint-Aubin. These four great-grandchildren of St-Aubin, Sr. are first and foremost institutes of the substitution and are, as such, individual owners of the bequeathed property. It is therefore superfluous to call them executors as they have full ownership of the property.[20]
It would have been easier to make this claim had the four executors been the only alleged institutes of their generation. However, the evidence does not show that they were. To the contrary, it is highly likely that there were others, as the evidence shows that Mr. Saint-Aubin had five brothers and sisters. In any case, even if these four executors had been the only alleged institutes, it would have changed nothing in the issue for Counsel for the estate. These alleged institutes cannot be qualified as individuals [translation] "hold[ing] the property as proprietor", as they could not receive more than two thirds of the estate's income. The rest was to be capitalized for the beneficiaries of the capital. Even if the four executors of the estate had been beneficiaries of income in 1993, that does not mean that they could not have, to some degree, worn two different hats: that of executor and that of income beneficiary.
[52] In my opinion, all of the above-mentioned provisions of the will are incompatible with the existence of a substitution, but are fully reconcilable with the existence of a trust. And even if it were not a trust within the meaning of Article 981a C.C. as such, it would at the very least be an unsettled estate,[21] clearly subject to subsection 104(1) of the Act. According to the very terms of the will, the final distribution [translation] "of [the] estate" was only to occur on the death of the last grandchild of the third generation. The testator also expressly stated his desire that [translation] "the powers that [he gave] to [his] executors last and be exercised by them for as long as such substitution lasts." It was they who were to control the property of the estate for as long as the alleged substitution lasted. The estate is still not resolved in 2003, as no distribution has occurred: children of the second generation are still alive. The above statements also correspond to the view of the executors regarding these provisions of the will, as they refer to themselves as executors in both property acquisition contracts entered into in 1968[22] and in their pleadings filed with this Court. Nowhere are they described as simply agents of institutes!
[53] In my opinion, the argument put forth by Counsel for the estate, that the executors act only as administrators or agents for the institutes and that the latter could end their administration at any time is unfounded. If such were the case, it would not have been necessary to have private bills passed by the Quebec legislature to confirm the validity of the sale of certain properties and to obtain the power to mortgage the properties. Furthermore, it is the alleged institutes who would then have reported the estate's capitalized income.
[54] As I am convinced that Cléophas Saint-Aubin's will created a trust-or that, at the very least, we are looking at an unresolved estate over the property of which the executors still have control-it is in fact a trust as defined in subsection 104(1) of the Act. It is thus not necessary to consider the related argument by Counsel for the estate based on subsection 248(3) of the Act.
Prescription of the Tax Debt
[55] The last argument put forth to contest the merits of the Minister's assessment is the prescription to recover the tax debt by the Minister. This argument is based on the recent decision by the Supreme Court in Markevich (supra). In that decision, the Supreme Court of Canada ruled that section 32 of the CLPA applied to recovery of a tax debt. This section reads as follows:
32. Except as otherwise provided in this Act or in any other Act of Parliament, the laws relating to prescription and the limitation of actions in force in a province between subject and subject apply to any proceedings by or against the Crown in respect of any cause of action arising in that province, and proceedings by or against the Crown in respect of a cause of action arising otherwise than in a province shall be taken within six years after the cause of action arose.
[56] Counsel for the estate claims that the time at which the debt was incurred, or the time at which the taxable income was earned, i.e., 1993, and as more than ten years have passed since that time, there is no interest in affirming the merit of the Minister's assessment. In my opinion, this argument too must be rejected for the two reasons indicated by Counsel for the Respondent in her written statements dated May 29, 2003.
[57] First, the matter does not fall within the jurisdiction of this Court. When the estate appeals the Minister's assessment to this Court, the only matter that can be appealed is the merits of the assessment. This Court cannot determine if the Minister can collect the tax debt from the estate. (See, inter alia, Perley v. Canada, [1999] F.C.J. No. 461 (CFA) (Q.L.), [1999] 3 C.T.C. 180, 99 DTC 5176, Mazo v. Canada, [1997] T.C.J. No. 63 (Q.L.), [1997] 2 C.T.C 2433 and Guillemette v. Canada, [1997] T.C.J. No. 589 (Q.L.), [1997] 3 C.T.C 2797, 97 DTC 1347.) The Act provides a detailed prescription system regarding the Minister's power to make a reassessment outside the normal reassessment period. In particular, subsection 152(4) of the Act states that the Minister has the power to make a new assessment outside the normal reassessment period when the taxpayer made a misrepresentation attributable to neglect, carelessness or wilful default. As indicated by Counsel for the Respondent, prescription of assessment must not be confused with prescription of collection procedures related to the assessment.
[58] The second reason is that Counsel for the estate misinterprets the scope of the Markevich decision. Having ruled that the cause of a action of a tax debt arises "otherwise than in a province" (paragraph 39 of the decision), Major J. concludes in paragraph 41 of his reasons:
41 I conclude that the collection proceedings under the ITA are subject to prescription six years after the cause of action arose. As noted above, the cause of action in this case comprised the respondent's tax debt and the expiry of the 90-day delay period after the mailing of the Notice of Assessment dated June 17, 1986.
[59] To properly understand the scope of this conclusion, we must cite subsection 225.1(1) of the Act:
225.1: Collection restrictions
(1) Where a taxpayer is liable for the payment of an amount assessed under this Act, other than an amount assessed under subsection 152(4.2), 169(3) or 220(3.1), the Minister shall not, for the purpose of collecting the amount,
(a) commence legal proceedings in a court,
(b) certify the amount under section 223,
(c) require a person to make a payment under subsection 224(1),
(d) require an institution or a person to make a payment under subsection 224(1.1),
(e) require the retention of the amount by way of deduction or set-off under section 224.1,
(f) require a person to turn over moneys under subsection 224.3(1), or
(g) give a notice, issue a certificate or make a direction under subsection 225(1)
until the day that is 90 days after the day of the mailing of the notice of assessment.
[Emphasis added.]
[60] The six-year delay must not be calculated from the time at which the tax debt is incurred, but rather from the date of the cause of action, which here is the date of the mailing, to the estate, of a copy of the decision by this Court in the matter, as required pursuant to subsection 225.1(3) of the Act, which reads as follows:
225.1(3) Idem. Where the taxpayer has appealed from an assessment of an amount payable under this Act to the Tax Court of Canada, the Minister shall not, for the purpose of collecting the amount in controversy, take any of the actions described in paragraphs 225.1(1)(a) to 225.1(1)(g) before the day of mailing of a copy of the decision of the Court to the taxpayer or the day on which the taxpayer discontinues the appeal, whichever is the earlier.
[Emphasis added.]
[61] Finally, the recent decision by the Federal Court of Appeal in MacKinnon v. the Queen, 2003 FCA 158, 2003 DTC 5271, the reasons for which were written by Noël J., expressly rejecting the merits of a position such as that of the counsel for the estate:
[3] In particular, it can no longer be argued that the applicable limitation period for the collection of taxes and related interests and penalties begins to run when income is earned. As was found by the Motions Judge and confirmed by the Supreme Court in Markevich (paragraphs 27 and 28), that period begins to run as of the time when a tax debt comes into existence and the delay prescribed by section 225.1 of the Income Tax Act (ITA) expires (i.e. 90 days after the mailing of the notice of assessment).
[Emphasis added.]
Conclusion
[62] In light of my conclusion that the Minister could make a reassessment outside the normal reassessment period and that the estate was a trust, it remains to be determined if the Minister could include a taxable capital gain in the estate's income as the result of the deemed disposition of the estate's capital property. As the parties have agreed to the fair market value of those properties on the evaluation day and on January 1, 1993, the amount of the total gain realized by the estate is no longer contested. That amount is $753,500. Furthermore, nothing more has been presented that could allow me to conclude that the deemed disposition of those properties did not occur on January 1, 1993. The evidence clearly reveals that the estate was created in 1931. Whether it be a simple estate or a trust within the meaning of the Civil Code, the estate in this case is a trust subject to the 21-year rule. As a result, the Minister could include a taxable capital gain in the estate's income as a result of the deemed disposition of the capital property.
[63] For all these reasons, the estate's appeal regarding the 1993 taxation year is allowed, with costs to the Respondent, and the assessment is referred back to the Minister for reconsideration and reassessment taking into account that the estate realized a capital gain of $753,500.
Signed at Montreal, Quebec, this 4th day of September 2003.
Archambault, J.
Translation certified true
on this 15th day of March 2004
Gerald Woodard, Translator
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