Estate of Christina Tait, Estate of William Tait and Walter Tait v. Minister of National Revenue, [1989] 2 CTC 2073, 89 DTC 309

Brulé, T.C.J.: —These are appeals heard together and arose as a result of the Minister reassessing Walter Tait to include in his income value of grain on hand said to belong to his father's estate upon the death of his mother.

Facts

The appeals proceeded on the basis of an agreed statement of facts. In summary the facts are as follows:

On January 28, 1972, William Tait died and by his will created a spousal trust for his widow Christina Tait in which she was entitled to the net income from the residue of her husband's estate. Upon the death of Christina Tait the residue then remaining was to pass to Walter Tait as sole beneficiary.

On December 2, 1983, Christina Tait died intestate. During the period of the spousal trust farming income and expense was reported on the individual tax return of Christina Tait on a cash basis. The Minister of National Revenue accepted this method of reporting, although the Minister later made a determination that this was not correct. No tax consequences arose from this method of reporting.

At her death Christina Tait had as one of her assets grain on hand with a reported value of $22,752. An election was made pursuant to subsection 70(2) of the Income Tax Act on behalf of Christina Tait to include the grain on hand in a separate rights and things return.

The Minister reassessed the Estate of Christina Tait to delete from income the value of the grain on hand and disallowed the rights and things return. The value of the grain was included in the Estate of William Tait.

As a result, Walter Tait was reassessed to include in his income the income from the Estate of William Tait in the amounts of $30,390.47 in the 1984 taxation year and $3,954.60 in the 1985 taxation year.

The three appellants then filed notices of appeal.

Appellant's Position

Counsel for the appellant maintained that Christina Tait as a life tenant of her husband's estate had the right to the income and this included the grain on hand even though such was not as yet converted into cash. He pointed out to the Court the case of Re Lauer and Stekl (1974), 47 D.L.R. (3d) 286, in which the British Columbia Court of Appeal held that a life tenant, in computing annual income, is entitled to a fair equivalent for what would have been received had the assets been converted. Here the grain was not converted but had it been, then Mrs. Tait would have considered such as income. This decision was subsequently confirmed by the Supreme Court of Canada in Re Lauer and Stekl (1975), 54 D.L.R. (3d) 159.

Respondent's Position

Counsel for the Minister referred to a written argument submitted to the Court. It was suggested that Christina Tait was not entitled to file a rights and things return as she did not own rights or things. The Court was asked to consider that the spousal trust created by William Tait was the owner of the assets and the income earned in the trust, with a direction to pay the net income to Christina Tait. In support of this position the following cases were referred to.

Estate of Terrill Lewis v. M.N.R. (1952), 7 Tax A.B.C. 183; 52 D.T.C. 371;

No. 338 v. M.N.R (1956), 15 Tax A.B.C. 55; 56 D.T.C. 217;

Crown Trust Company (McArdle Estate) [No.1] v. M.N.R., [1965] C.T.C. 295; 65 D.T.C. 5176;

Woon v. M.N.R., [1951] Ex. C.R. 18; [1950] C.T.C. 263; 50 D.T.C. 871;

Ann D. Harris v. M.N.R. (1955), 13 Tax A.B.C. 293; 55 D.T.C. 446.

If the rights and things were the property of the spousal trust there was no right for any trust to avail itself of the provisions of subsection 70(2).

The grain in question it was said, must belong to Walter Tait and he was reassessed accordingly.

Analysis

While there is no question that the late William Tait's property was farmed, the important factor is who did the farming? Was it the estate or the life tenant personally? Following this determination how does such affect the taxability of the grain on hand at the death of Christina Tait?

The agreed statement of facts recognized that Christina Tait reported farming income and expense on a cash basis in her individual income tax return. There was no evidence presented as to whether or not she did the farming. Certainly Walter Tait did not farm the property himself as evident from his income tax returns, and there was no evidence that Christina Tait in her tax returns paid to have the property farmed.

There would be no prohibition to Christina Tait carrying on the farming operation as she reported annually. While as a life tenant she was entitled to the net income produced by the estate she was also entitled to have the use of the property. Suppose Mrs. Tait used the kitchen and oven to bake bread for sale, could it be said that this was an operation of the spousal trust? I think not. Similarly, if she personally farmed the property, then she would be entitled to the profits therefrom and in this case her administrator could file a separate rights and things return to include the grain on hand. Interpretation Bulletin IT-212R2 clearly sets out in paragraph 10:

The inventory of harvested grain of a deceased taxpayer who computed income using the cash basis is a right or thing.

Unfortunately, neither counsel dealt with the question of who actually farmed the property.

If the spousal trust through the executor was responsible for the farming then I agree that a rights and things return could not be filed respecting the grain according to the provisions of subsection 70(2) of the Income Tax Act as was pointed out by counsel for the Minister.

The determination of the ownership of the grain, if the estate farmed the property, is to be made based on the rights of a life tenant as opposed to a remainderman.

In estate administration practice there is a duty for the trustee to deal even-handedly between the life tenant and the remainderman. Assets which do not produce income should be converted to produce income. This of course is where assets are of a capital nature and follows the rule in Howe v. Lord Dartmouth (1802), 7 Ves. 137, 32 E.R. 56 which was expressed as follows by Kerwin C.J.C. in Royal Trust Co. v. Crawford, [1955] S.C.R. 184 at 185:

Where residuary personality is settled on death for the benefit of persons who are to enjoy it in succession, the duty of the trustee is to convert all such parts of it as are of a wasting or future or reversionary nature, or consist of unauthorized securities, into property of a permanent and income bearing character.

Presumably the trustee here, either used the farms for the benefit of the life tenant, or allowed her to use the property to farm. In either case the grain on hand was produced. If it had been sold then Christina Tait would have received the proceeds, but it was not. I cannot conceive that this makes any difference. If I may hypothesize, suppose a bond case comes due on say a Monday and the life tenant dies on the Tuesday before the trustee converts the coupon to cash, the life tenant's estate is still entitled to the proceeds. In each estate the trustee prepares on the death of a life tenant a statement of "net paid and accrued income”, representing what has been paid and what was owing at the date of death.

In this case, the grain is no different from the bond coupon. The trustee must follow the equitable maxim of "treat as done that which ought to have been done". In no way can an asset on hand which is normally considered as income become a capital asset of a spousal trust nor can it remain as an income asset and not be the property of the life tenant.

If Christina Tait had farmed the property her estate could have filed a rights and things return. If the estate had farmed the property the grain unconverted to cash represented income from the capital asset of the farm and so belonged to the life tenant on a net paid and accrued basis. In either event the grain did not belong to Walter Tait as a result of a distribution from the estate of William Tait.

The result is that the grain on hand at the death of Christina Tait, even though in its unconverted form, belonged to her and not to Walter Tait and this appeal is therefore allowed with costs with respect to Walter Tait and the matter is to be referred back to the Minister for reconsideration and reassessment. As Christina Tait and Walter Tait were not assessed in the years in question in their appeals they have no valid appeals before the Court and their appeals are hereby dismissed.

Appeal allowed with respect to Walter Tait.