Clarence L. Leonhardt Estate v. Minister of National Revenue, [1990] 1 CTC 2198, 90 DTC 1034

Bonner, T.C.J.:—Julius Leonhardt, a farmer, died on April 18, 1974. His widow, Agnes Leonhardt, survived him. At the time of his death Julius Leonhardt owned a farm. Under his will, Agnes Leonhardt was entitled during her lifetime to the income from the residue of the estate. The farm formed part of that residue. The will of Julius Leonhardt further provided that upon the death of his widow the residue be divided equally among the survivors of the five children of the marriage. Agnes Leonhardt died in 1977 survived by her five children. In 1984 the farm was sold. The appellants, being the personal representatives of her son, Clarence Leonhardt, appeal from assessments of income tax made on the basis that the conditions laid down in the opening words of subsection 70(9.1) of the Income Tax Act ("Act") have been met with the consequence that the rules in paragraph (a) and (b) of that subsection are applicable to the computation of the adjusted cost base of the property sold. It was the position of the appellants that there was no tax free rollover on the death of Agnes Leonhardt.

The opening words of subsection 70(9.1) read:

Where any land in Canada or depreciable property in Canada of a prescribed class of a taxpayer has been transferred or distributed to a trust described in subsection

(6) or subsection 73(1), and the property was, immediately before the death of the taxpayer's spouse who was a beneficiary under the trust, used in the business of farming and has on the death of the spouse and as a consequence thereof, been transferred or distributed to and become vested indefeasibly in a child of the taxpayer who was resident in Canada immediately before the death of the spouse, the following rules apply: . . .

The issue between the parties is whether, on the death of Agnes Leonhardt and as a consequence of her death, the farm was transferred or distributed to and became vested indefeasibly in the children of Julius Leonhardt.

At the hearing of the appeals an agreed statement of facts was filed which reads in part as follows:

1. Julius Leonhardt died on April 18, 1974.

2. The will of Julius Leonhardt of May 25, 1967 as amended by codicil of May 26, 1971 and attached as Exhibit "A" (collectively, the “Will”) appointed Carl Alexander Leonhardt as Executor and Trustee.

3. Letters Probate were granted on June 7, 1974.

4. Paragraph 3 of the Will gave the property of Julius Leonhardt to his trustees upon trusts and directions including:

(d) TO KEEP INVESTED the residue of my estate, provided my said wife survives me for a period of thirty days, and to pay the net income therefrom to my said wife, during her lifetime;

(e) PROVIDED my wife predeceases me or fails to survive me for a period of thirty days or upon her death should she survive me, to divide the said residue of my estate equally amongst the survivors of: Clifford Julius Leonhardt; Carl Alexander Leonhardt, Clarence Lester Leonhardt; Lawrence Robert Leonhardt and Helen Delaine Klimek.

5. Paragraph 5 of the Will gave the trustees the right and power:

(a) To sell, call in and convert all of the residue of my estate, real and personal, at such time or times as my Trustees consider it expedient; with power to postpone such conversion for so long as they, in their sole discretion may determine;

(b) To invest moneys and assets of the residue of my estate in any investments which they shall deem reasonably secure and likely to return a fair annual income, not being limited to investments expressly authorized by law and with power to retain investments made by me in my lifetime, as long as they shall think proper and to re-invest the proceeds thereof or any part thereof in similar securities.

6. The residue of the estate of Julius Leonhardt (the "Estate") included a farm located near Drumheller, Alberta and described as the NE 1/4 5.22 and S 1/2 s.26 tsp. 29 range 19 W 4th (the "Property"), other rental property, a surface lease and bonds.

7. The trust created by paragraph 3 of the Will was, until the death of Agnes Leonhardt, a trust described in section 70(6) of the Income Tax Act.

8. As Executor and Trustee of the Will Carl Alexander Leonhardt was registered as owner of the Property on September 26, 1975.

9. The wife of Julius Leonhardt, Agnes Leonhardt, died on October 21, 1977.

10. The Estate did not report a disposition of the Property in 1977.

11. No election was made to dispose of the Property at its fair market value at the time of death of Agnes Leonhardt in 1977.

12. The Executor of the Estate was advised by his accountant that there was no disposition of the Property in 1977.

13. The Appellant and Clifford Julius Leonhardt, Carl Alexander Leonhardt, Lawrence Robert Leonhardt and Helen Delaine Klimek were children of Agnes and Julius Leonhardt (the "Children").

14. The Property was rented to Lawrence Robert Leonhardt, one of the children, from 1953 until 1984.

15. After the death of Agnes Leonhardt, the Children agreed with the Executor to continue to rent the Property to Lawrence Robert Leonhardt.

16. In 1984 the Property was sold to Lawrence Robert Leonhardt for $215,000 pursuant to the Offer to Purchase dated February 16, 1984, a copy of which is attached as Exhibit "B".

17. Costs of disposition of the Property to Lawrence Robert Leonhardt were $4,604.62.

18. By arrangement among the Children, the purchase price of the Property was divided among them as set out in the Offer to Purchase.

19. At all material times the Property was used in the business of farming, the improvements on the Property were depreciable property of a prescribed class and all the Children were resident in Canada.

20. The adjusted cost base of the Property to the Estate was equal to the adjusted cost base of the Property to Julius Leonhardt.

21. The adjusted cost base of the Property to Julius Leonhardt was the fair market value of the Property on December 31, 1971.

22. The fair market value of the Property on December 31, 1971 was $54,000, being $48,700 for the land plus $5,300 for the buildings.

23. The fair market value of the Property at the date of death of Agnes Leonhardt was $225,600.

24. The Estate filed a return for the taxation year ended December 31, 1984 reporting the disposition of the Property. It reported that the adjusted cost base of the land was $220,300, the adjusted cost base of the building was $5,300, claimed outlays and expenses of disposition of $4,604.62 and claimed a net loss on the Property of $15,204.62 (calculated as the aggregate of a loss on the land of $17,504.62 plus a gain on the buildings of $2,300), for an allowable capital loss of $7,602.31.

25. The Respondent took the position that there had been a capital gain on the sale of the Property calculated as follows:

Proceeds of sale of the Property	$207,400.00
Less: Appraised V-day Value
(Land only)	$48,700.00
Outlays and Expenses	4,604.62
	$53,304.62
Revised Net Capital Gain for Land	$154,095.38

26. The Estate was wound up on December 31, 1986.

27. On October 19, 1987 the Respondent reassessed the Appellant for the 1984 taxation year, inter alia, adding to his income the sum of $30,819.08, being one-fifth of the capital gain calculated by the Respondent.

28. The Respondent also offset an allowable capital loss of $6,838.13 claimed by the Appellant of which $2,000 was applied by the Appellant to his 1984 tax year, $2,654 to his 1983 tax year, and $183.91 to his 1985 tax year against the capital gain assessed.

29. The Appellant filed Notices of Objection dated January 8, 1988 to the Reassessments for 1983, 1984 and 1985.

30. The Respondent confirmed the Reassessments for the 1983-1985 taxation years by Notice of Confirmation dated June 1, 1988.

Counsel for the appellants argued that subsection 70(9.1) speaks of the transfer of the property "on" the death of the spouse. This language stands in contrast, he said, to subsection 70(9) which speaks of a transfer "on or after" the death of the spouse. There was no transfer of the property between the time of the death of Agnes Leonhardt in October of 1977 and the sale in 1984. The word "on" is used in a strict temporal sense and in that sense nothing happened "on" the death of Agnes Leonhardt. The children, he submitted, received their property, that is, their respective interests under the will of Julius Leonhardt and the will speaks from the date of death.

In my view, the appellants' analysis is incorrect. It was agreed that when Julius Leonhardt died his farm was, pursuant to his will, transferred to a trust described in subsection 70(6). The farm was the "property" which ", . . was, immediately before the death of . . . (Agnes Leonhardt) . . . used in the business of farming . . .”. Paragraph 3(e) of the will provided that in the circumstances which in fact transpired, that is to say, upon the death of Agnes Leonhardt on a day more than 30 days after the death of Julius Leonhardt, the residue of the estate was to be divided equally among the survivors of the five named children. I have been referred to no authority which would support a conclusion that paragraph 3(e) is to be deprived of its plain meaning. The executors were required to determine on the death of Agnes Leonhardt which of the five children was alive and to divide the residue among them. Nothing in the will called for the children to disgorge their bequests under any circumstances occurring after receipt.

Next, counsel for the appellants argued that all the children had, following their mother's death, was a right to compel the executor to administer the will in accordance with its terms. They did not have a right to any specific property forming part of the residue. Counsel submitted that although the residue was then vested in interest, specific items of property forming part of it were not so vested. In this regard he referred to Hanbury and Maudsley, Modern Equity, eleventh edition, pages 163 to 165 and in particular to the following passages:

A legatee or devisee does not, on the testator's death, become equitable owner of any part of the estate. The executor takes full title to the testator's property, not merely a bare legal estate . . . and these duties are inconsistent with his holding the property on trust for the legatee or devisee.

A devisee or legatee may be said to become the equitable owner of specific property once property has been allocated by the executor for the purpose. In the case of a residuary gift or a claim on intestacy, the allocation cannot occur until the residuary accounts are prepared. That is the time at which the executors are turning into trustees. The interest of the person entitled then becomes that of a beneficiary under a trust.

Counsel relied as well on the decision of the Alberta Supreme Court in Olgivie-Five Roses Sales Ltd. v. Hawkins et a/., [1] and in particular to the reference at page 167 to the decision of the Privy Council in Commissioner of Stamp Duties v. Livingston, [1965] A.C. 694, [1964] 3 All E.R. 692 (P.C.):

Viscount Radcliffe defined the interest of a residuary legatee in the testator's unadministered estate as a right to enforce the proper carrying out of the functions and duties of administration by the executor after describing the duties and trusts imposed on an executor. The learned Peer said:

What equity did not do was to recognize or create for residuary legatees a beneficial interest in the assets in the executor's hands during the course of administration.

The principles to which counsel referred raise the question whether, on the death of Agnes Leonhardt, the farm was an asset held by the executors in the course of the administration of the estate of Julius Leonhardt. In answer to that question counsel pointed to paragraph 26 of the agreed statement of facts. That paragraph, in my view, falls far short of a clear statement that allocation of the farm to the children did not take place before 1986 because residuary accounts were not prepared before that time. Nothing in the agreed statement of facts suggests that debts of Julius Leonhardt remained to be paid at the time of the death of Agnes Leonhardt or that there was anything else to be done by the executor save to convey legal title to the children. It is of course clear that legal title remained in the executor's hands at all times prior to the sale of the farm in 1984. On the other hand, the agreement for sale named the executor as vendor but provided for the division of the purchase price among the beneficiaries of the estate of Julius Leonhardt. As I see it the appellants have failed to establish the factual basis for the assertion that the only property which passed on the death of Agnes Leonhardt was a right to require due administration of the estate.

Counsel for the appellants turned next to the statutory requirement that on the death of the spouse the property be transferred or distributed to and become vested indefeasibly in the children. He referred to authorities including executors of the Estate of David Faskin v. M.N.R., [2] and J.S.D. Tory Estate v. M.N.R., [3] as to the meaning of the word "transfer" and he submitted that a change of ownership and conveyance is required. Nothing in the cases referred to is authority for the proposition that subsection 70(9.1) will operate to effect a rollover only if, on the death of the spouse, there is a prompt conveyance to the children of legal title to the property. I can find no basis in the language of the subsection for such a construction. If it were so read, a capricious and illogical limitation on its operation would be imposed.

I turn finally to the question whether the farm property became vested "indefeasibly" in the children on the death of Agnes Leonhardt. Nothing in the will called on any child to disgorge the share of the residue received by him as a result of the division directed to be made "upon the death" of Agnes Leonhardt. Consequently the vesting was indefeasible. [4] The appeals will therefore be dismissed.

Appeals dismissed.