Minister of National Revenue v. F. David Malloch Memorial Foundation, [1971] SCR 141

Supreme Court of Canada

Minister of National Revenue v. F. David Malloch Memorial Foundation, [1971] S.C.R. 141

Date: 1970-06-29

The Minister of National Revenue Appellant;

and

F. David Malloch Memorial Foundation Respondent.

1969: June 17, 29.

Present: Martland, Ritchie, Hall, Spence and Pigeon JJ.

ON APPEAL FROM THE EXCHEQUER COURT OF CANADA

Taxation—Estate tax—Gift of residue to charitable organization—Aggregate taxable value—Computation of deduction—Payment of estate tax and succession duties—“Minus paragraph”—“Successive approximations”—Estate Tax Act, 1958 (Can.), c. 29, ss. 7(1)(d), 18(1)—Devolution of Estates Act, R.S.O. 1960, c. 106, s. 5.

In her will, the testatrix expressed the intention “that all… debts, expenses, duties and taxes shall be paid out of my general estate so that all benefits and dispositions given or made by me… shall be free and clear therefrom”. The will then directed the payment of a number of legacies and “to pay and transfer all the rest and residue of my estate” to the respondent, a charitable organization. In assessing the estate tax, the Minister proceeded on the assumption that the will gave the residue to the foundation, charged with the burden of payment of the estate tax, and, in computing the aggregate taxable value of the property passing, adopted the method of “successive approximations” as in his view the deduction was subject to the last paragraph, or “minus paragraph”, of s. 7(1)(d) of the Estate Tax Act. The Exchequer Court allowed the appeal from the assessment. The Minister appealed to this Court.

Held: The appeal should be allowed.

The gift to the foundation was a gift of the true residue. It was an absolute and indefeasible gift to a charitable organization and the provisions of the will, together with the applicable provisions of the Estate Tax Act and the Devolution of Estates Act, constituted a direction to pay the estate duty out of the residue which was given to the charitable foundation. The provisions of the “minus paragraph” of s. 7(1)(d) of the Act were therefore applicable for the purpose of computing the aggregate taxable value

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of the property passing, and the proper method of determining the amount of estate tax to be subtracted in accordance with those provisions was the method of “successive approximations”.

APPEAL from a judgment of Gibson J. of the Exchequer Court of Canada1, in an estate tax matter. Appeal allowed.

G.W. Ainslie, Q.C., and I. Pitfield, for the appellant.

Everett Bristol, Q.C., for the respondent.

The judgment of the Court was delivered by

RITCHIE J.—This is an appeal from a judgment of the Exchequer Court of Canada[1] which had allowed an appeal from an assessment made by the Minister of National Revenue under the Estate Tax Act, 1958 (Can.), c. 29, whereby estate tax in the sum of $59,592.04 was assessed in respect of the estate of Kate Daintry Malloch.

The question to be determined on this appeal is posed in the special case stated by consent of the parties in the following terms:

The question for the opinion of the Court is whether or not any part of any estate, legacy, succession or inheritance duties or any combination of such duties (including any tax payable under Part I of the Estate Tax Act) is, either by direction of or arrangement made or entered into by the deceased whether by her will or by contract or otherwise, or by any statute or law imposing such duties or relating to the administration of the estate of the deceased, payable out of the property comprised in the gift to the Appellant Foundation or payable by it as a condition of the making of such gift.

If this question is answered in the affirmative then, in my opinion, the last paragraph of s. 7(1)(d) of the Estate Tax Act (sometimes referred to as the “minus paragraph”) is applicable for the purpose of computing the aggregate taxable value of the property passing, and the

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proper method of determining the amount of estate tax to be subtracted in accordance with those provisions is the method of “successive approximations” which was explained in the reasons for judgment of Mr. Justice Judson in the Minister of National Revenue v. Bickle et al[2] and which was adopted by the Minister in the present case.

In allowing the present appeal Mr. Justice Gibson would have answered the question in the negative and the effect of that answer is to reduce the assessment of estate tax from $59,592.04 to $50,057.32. It is the difference between these two figures which forms the subject matter of this appeal.

The respondent corporation, which is the residuary legatee of the estate of Kate Daintry Malloch, is a non-profit corporation without share capital and is duly qualified and registered as a Canadian charitable organization, all the resources of which have since its inception been invested to produce income all or a substantial part of which has been devoted to the making of gifts to other organizations in Canada constituted exclusively for charitable purposes and similarly qualified and registered.

The matter to be determined on this appeal resolves itself into the question as to whether the gift made to the respondent corporation is a gift of the residue of the estate and whether the tax payable under Part I of the Estate Tax Act is payable out of that gift, either by reason of the terms of the will or the provisions of any statute relating to the administration of the estate. In this regard it is first necessary to consider the relevant provisions of the will, Clause III of which reads as follows:

III I GIVE AND BEQUEATH to my said daughter, MARY DAINTRY COLE, my jewelry, furs and all other personal effects, and all articles of household use and ornament belonging to me for her own use or disposal as she may see fit.

Clause IV of the will is summarized in the stated case as follows:

IV I GIVE DEVISE AND BEQUEATH the remainder of my property and estate of every nature

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and kind and wheresoever situate to my Trustees upon the following trusts, namely:

(1) To pay my just debts, funeral and testamentary expenses and all succession duties, estate and inheritance taxes that may be payable in connection with any gift or benefit given by me to any persons either in my lifetime or by survivorship or by this, my Will or any codicil thereto, it being my intention that all such debts, expenses, duties and taxes shall be paid out of my general estate so that all benefits and dispositions given or made by me in my lifetime or by my Will shall be free and clear therefrom.

(2) As soon as possible after my death to pay the following legacies:

* * *

(3) (a) to pay to my daughter, Mary Daintry Cole, the sum of Three Hundred Thousand Dollars ($300,000.) or, at her option, to transfer to her stocks and securities of equivalent value for the whole or part of same sum.

(4) To pay and transfer all the rest and residue of my estate to F. DAVID MALLOCH MEMORIAL FOUNDATION, a Corporation without share capital incorporated under the laws of Ontario, with the direction that the monies or property so given, or property substituted therefor, shall be held permanently by said Foundation and invested for the purpose of gaining or producing income to be used, applied or donated for such charitable and educational purposes as the Directors of the Foundation may from time to time determine.

The aggregate not value of the estate after debts was $837,836.85. After deducting Ontario succession duties, the value of the residue to the charitable foundation, without taking estate tax into account, was $418,416.11. The Minister of National Revenue, proceeding on the assumption that the will gave the residue to the foundation, charged with the burden of payment of the estate tax, assessed the tax at $59,592.04.

Counsel on behalf of the Minister pointed out that the amount payable as tax is deemed to be a debt due to Her Majesty and incurred by the deceased immediately prior to her death, and in this regard reference was made to s. 18(1) of the Estate Tax Act, 1958 (Can.), c. 29, which provides that:

18. (1) Where any amount is payable as tax under this Part pursuant to section 13 by the execu-

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tor of the estate of a deceased, that amount shall, for the purposes of any applicable statute or law relating to the administration of estates, be deemed to be a debt due to Her Majesty incurred by the deceased immediately prior to his death.

It was further contended on behalf of the Minister that the applicable statutory provision relating to the administration of this Ontario estate was s. 5 of the Devolution of Estates Act, R.S.O. 1960, c. 106, which provides:

5. Subject to section 37 of the Wills Act the real and personal property of a deceased person comprised in a residuary devise or bequest, except so far as a contrary intention appears from his will or any codicil thereto, is applicable rateably according to their respective values to the payment of his debts, funeral and testamentary expenses and the costs and expenses of administration.

The contention is that when the last two sections are read together, it becomes apparent that the amount payable under the Estate Tax Act is a debt of the estate which is payable out of residue, and with all respect for the views expressed by Mr. Justice Gibson, I am unable to reach any other conclusion from a consideration of the combined effect of the two statutory provisions.

In allowing this appeal, Mr. Justice Gibson appears to have adopted the view that the gift to the organization was not a gift of the residue of the estate, saying:

In my view, no part of the estate tax and succession duties were directed by the will of the deceased to be payable out of the property comprised in the gift to the Foundation but instead, it is only in the residue of the residue of this estate that the Foundation has any property interest.

This must mean that Mr. Justice Gibson considered that the testatrix had disposed of her main estate in Clause III by giving her “jewelry, furs and all other personal effects, and all articles of household use and ornament” to her daughter, and that the provisions of Clause IV, whereby she disposed of all her property, constituted a gift of the residue, and that when she directed her executors “To pay and transfer all the rest and residue” of her estate to the respondent founda-

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tion, she was disposing of the residue of the residue. I am unable to accept this reasoning and am of opinion that the gift to the foundation was a gift of the true residue.

Although Mr. Justice Gibson recognized the fact that estate taxes are deemed to be a debt of the estate under the provisions of the Estate Tax Act, he concluded that:

Nowhere in The Devolution of Estates Act, and particularly at section 2 or at section 5 is there a statutory imposition of such succession duties or estate tax, nor, further, any requirement that such duties and estate taxes be payable out of the property comprised in the gift to this Foundation.

This reasoning must be predicated on the learned judge’s finding that the gift to the foundation was not “a residuary devise or bequest” because the provisions of s. 5 clearly state that such a devise or bequest is applicable to the payment of debts. As I am unable to accept the learned judge’s premise, I cannot subscribe to his conclusion.

The question here raised must, accordingly, in my opinion, be resolved on the basis that the estate tax is payable out of residue, and the answer must therefore depend on the true construction to be placed on s. 7(1)(d) of the Estate Tax Act which is sometimes referred to as the “minus paragraph” and which reads as follows:

7. (1) For the purpose of computing the aggregate taxable value of the property passing on the death of a person, there may be deducted from the aggregate net value of that property computed in accordance with Division B such of the following amounts as are applicable:

(d) the value of any gift made by the deceased whether during his lifetime or by his will, where such gift can be established to have been absolute and indefeasible, to

(i) any organization in Canada that, at the time of the making of the gift and of the death of the deceased, was an organization constituted exclusively for charitable purposes, all or

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substantially all of the resources of which, if any, were devoted to charitable activities carried on by it or to the making of gifts to other such organizations in Canada, all or substantially all of the resources of which were so devoted, or to any donee described in subparagraph (ii), and no part of the resources of which was payable to or otherwise available for the benefit of any proprietor, member or shareholder thereof,

minus such part of any estate, legacy, succession or inheritance duties or any combination of such duties (including any tax payable under this Part) as is, either by direction of or arrangement made or entered into by the deceased whether by his will or by contract or otherwise, or by any statute or law imposing such duties or relating to the administration of the estate of the deceased, payable out of the property comprised in such gift or payable by the donee as a condition of the making of such gifts;…

It will be seen from what I have said, that I am of opinion that the residuary gift for which provision is made in Clause IV(4) of the will of Kate Daintry Malloch is an absolute and indefeasible gift to a charitable organization as defined in s. 7(1)(d) and that the provisions of the will, together with the applicable provisions of the Estate Tax Act and the Devolution of Estates Act, constitute a direction to pay the estate duty out of the residue which is given to the charitable foundation.

I am accordingly of opinion that the question posed by the case stated should be answered in the affirmative and that the provisions of the “minus paragraph” of s. 7(1)(d) of the Estate Tax Act are applicable for the purpose of computing the aggregate taxable value of the property passing, and the proper method of determining the amount of estate tax to be subtracted in accordance with those provisions is the method of “successive approximations” which was explained in the reasons for judgment of Mr. Justice Judson in the Minister of National Revenue v. Bickle et al[3] and which was adopted by the Minister in the present case.

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For all these reasons, I would allow this appeal with costs, set aside the judgment of the Exchequer Court and restore the assessment made by the Minister of National Revenue.

Appeal allowed with costs.

Solicitor for the appellant: D.S. Maxwell, Ottawa.

Solicitors for the respondent: White, Bristol, Beck & Phipps, Toronto.