Estate of the Late Gordon Clark Terrill v. Minister of National Revenue, [1987] 2 CTC 2216, 87 DTC 504

Tremblay, T.C.J. [Translation]:—This appeal was heard on April 9, 1986 in the city of Sherbrooke, Quebec and on May 14, 1986 in the city of Montreal, Quebec.

1. Issue

The issue is whether, in substance, the late Gordon Clark Terrill, who died on August 14, 1980, bequeathed all his property in trust for the exclusive benefit of his wife during her lifetime in his will. If so, the provisions of 70(6) and 70(6.1) of the Income Tax Act must apply in favour of the estate and the shares in Eastern Rebuilders Limited must be transferred at their adjusted cost base.

The respondent maintained that the deceased's son was also a beneficiary under clause 6(c) of the will. The wife was therefore not an exclusive beneficiary and the shares must thus be transferred to the trust at their fair market value under paragraphs 70(5)(a) and 70(5)(c). The taxable capital gain from this deemed disposition must accordingly be taxed.

2. Burden of Proof

2.01 The burden is on the appellant to show that the respondent's assessment is incorrect. This burden of proof derives from a number of judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486; [1948] C.T.C. 195; 3 D.T.C. 1182.

2.02 In the same judgment the Court held that the facts assumed by the respondent in support of the notice of reassessment are also presumed to be true until proven otherwise. In the present case the facts presumed by the respondent are set out in subparagraphs (a) to (i) of paragraph 7 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

7. In reassessing the appellant for its 1980 taxation year, the respondent relied on the following facts, inter alia:

(a) When he died the deceased owned shares in Eastern Rebuilders Ltd;

(b) The appellant contested the amount of the capital gain of $129,979.00 realized on the deemed disposition of the said shares in a notice of objection, but this issue no longer exists since the notice of appeal is silent on the point;

(c) The deceased's will provided for a trust for the benefit of his wife, who was to receive the annual income from the estate;

(d) The trust created by the deceased's will is not a trust created for the exclusive benefit of his wife owing to article 6(c) of the said will, which reads as follows:

“While they are paying revenues to or for my wife, son or other beneficiaries under the foregoing provisions, my Executors and Trustees shall always have the right to draw and encroach upon the capital of my Estate for the benefit of my wife and son and other beneficiaries, to provide for emergencies such as illness or accident, or for maintenance, or education including higher education, as and when my Executors and Trustees in their sole discretion deem it necessary or advisable. Neither my Executors and Trustees, nor any beneficiary concerned shall be responsible or required to account further for any capital so used or paid over."

(e) Thus a person other than the deceased's wife might, before the latter's

death, receive or otherwise obtain the use of part of the capital of the trust;

(f) On December 15, 1983 Gordon E Terrill, the late Gordon Clark Terrill’s only son, waived the benefit conferred on him by article 6(c) of the will before the notary Jean Sylvestre

(g) On February 21, 1984 Mrs Helen Cook Terrill, in her capacity as tutor for her minor children Stéphanie, Valérie and Natalie, waived the benefit conferred on them by article 6(c) of the will before the notary Jean Sylvestre;

(h) The waivers dated December 15, 1983 and February 21, 1984 were not made within 15 months of the late Gordon Clark Terrill’s death;

(i) The property therefore did not become vested indefeasibly in the trust not later than 15 months after the death of the taxpayer.

3. Facts

3.01 Gordon C. Terrill died on August 14, 1980.

3.02 Victoria Margaret Patton survived him as did his son Edward Terrill (37 years old) and three grandchildren, Stéphanie (10 years old), Valérie (8 years old) and Natalie (4 years old).

3.03 At the time of his death Gordon C. Terrill owned 25 per cent of the shares in Eastern Rebuilders Ltd.

3.04 On his death Gordon C. Terrill left a will (Exhibit A-1) which had been written in the form derived from the laws of England on August 23, 1962. The said will was probated by the Superior Court of the province of Quebec, district of Bedford, on September 15, 1980.

3.05 Article 6 of the said will is central to the dispute. Article 5 is also important. They read as follows:

ARTICLE FIVE l bequeath to my wife, DAME VICTORIA MARGARET PATTON, in absolute ownership, all my wearing apparel, personal effects, jewellery, books, pictures, ornaments, silver, plate, linen, glass, china, provisions and consumable stores, including any automobile or automobiles which I may own, as well as all my interest in the household furniture and equipment wherever situate insofar as these may not be hers already.

Should my said wife, DAME VICTORIA MARGARET PATTON, predecease me, then 1 direct that all of my above-mentioned personal effects be made over in absolute ownership to my son, GORDON EDWARD TERRILL.

ARTICLE SIX 1 give and bequeath the residue of my Estate, moveable and immo- beable (sic), including any property over which I may have any power of appointment or disposal, to my Executors and Trustees, In Trust, for the execution of the following Trusts:

(A) To pay the net annual revenue derived therefrom to my wife, DAME VICTORIA MARGARET PATTON, until her death.

(B) On the death of my said wife, DAME VICTORIA MARGARET PATTON, or on my death should she predecease me, then I direct my Executors and Trustees: To hold In Trust the residue of my Estate for my son, GORDON EDWARD TERRILL, with representation in favour of his lawful issue, in equal shares by roots, to be administered as follows:

Upon my son, GORDON EDWARD TERRILL, attaining the age of twenty-one years, the revenue of my Estate shall be paid to him until he attains the age of twenty-five years at which time my Executors and Trustees shall continue to pay the said revenue to my son, and shall make over to him one-third ( A) of the capital of the residue of my Estate. Upon my son attaining the age of thirty years, one-half

(1/2) of the balance of the capital of the residue of my Estate shall be made over to him in outright ownership. Upon my son attaining the age of thirty-five years, the balance of the capital of the residue of my Estate shall be made over to him in outright ownership.

Should my said son, GORDON EDWARD TERRILL, have predeceased the survivor of my wife and myself or survived both of us but died before receiving the entire residue of my Estate, leaving lawful issue, then my Estate shall pass by representation to said issue in equal shares by roots. The share of any such issue to be made over as each respectively attains the age of twenty-one years.

When a share is payable to issue representing my son, my Executors and Turstees (sic) may if they think it desirable pay over such share to the surviving parent, tutor or guardian of the beneficiary while such beneficiary is a minor, and the receipt of any parent, tutor or guardian shall be a sufficient discharge. Until all the capital of such issue's share is made over, my Executors and Trustees shall pay to or use for each beneficiary the net revenues or so much of them as they may deem necessary for the support and education of such beneficiary through such person or persons as they may consider just.

(C) While they are paying revenues to or for my wife, son, or other beneficiaries under the foregoing provisions, my Executors and Trustees shall always have the right to draw and encroach upon the capital of my Estate for the benefit of my wife and son and other beneficiaries, to provide for emergencies such as illness or accident, or for maintenance, or education, including higher education, as and when my Executors and Trustees in their sole discretion deem it necessary or advisable. Neither my Executors and Trustees, nor any beneficiary concerned shall be responsible or required to account for any capital so used or paid over.

3.06 The deceased appointed as executors and trustees his wife Victoria Margaret Patton, his son Gordon Edward Terrill and National Trust Company Limited.

3.07 On April 1, 1981 the executors and trustees of the late Gordon Clark Terrill sent the respondent the tax return for the deceased's taxation year.

3.08 On or about June 5, 1981 the respondent sent his notice of assessment upholding the income return prepared by the executors.

3.09 On or about April 29, 1983 the respondent sent the appellant a notice of reassessment.

3.10 On or about July 13, 1983 the appellant sent the respondent a notice of objection within the time prescribed.

3.11 On or about May 8, 1984 the respondent sent the appellant the Minister's notice confirming his notice of reassessment and rejecting the arguments put forward by the appellant in the notice of objection.

3.12 In his notice of reassessment the respondent refused to apply subsections 70(6) and 70(6.1) of the Income Tax Act as they existed for the 1980 taxation year.

3.13 On December 15, 1983 Gordon Edward Terrill, notwithstanding his opinion about the interpretation of article 6 of the will, waived (Exhibit A-2) the benefit conferred on him by article 6(c) of the will before the notary Jean Sylvestre.

3.14 On February 21, 1984 Helen Cook Terrill, wife of Gordon Edward Terrill, in her capacity as tutor of her minor children Stéphanie, Valérie and Natalie, also waived (Exhibit A-3) the benefit conferred on the three children by article 6(c) of the will before the notary Jean Sylvestre.

3.15 Mr. Terrill, Junior testified that he had heard mention of the problem raised by article 6(c) of the will only after the respondent had issued the notice of reassessment. The same applied to Chantal Jacques, senior trust administrator for National Trust, who was handling the Terrill trust.

According to her testimony, she had never believed that Mr. Terrill, Junior and his children were entitled to the income from the trust so long as the deceased's wife was alive. There had never been any discussion to this effect. Moreover, the Quebec Department of Revenue had never issued a notice of reassessment. There was only one assessment issued by the respondent, dated February 8, 1982 (Exhibit A-4). A succession duty release was issued by the Quebec Department of Revenue six to eight months after Mr. Terrill, Senior died. It was after this release had been issued that the shares in Eastern Rebuilders Ltd. were transferred to the trust.

3.16 At that point in the hearing in Sherbrooke, counsel for the appellant brought a motion to have the Court decide whether the will was clear, either to the effect that Victoria Terrill is the only beneficiary and that during her lifetime no other person can encroach on the capital, or to the effect that someone else can encroach on the capital during her lifetime, she being the only heir.

Whether the Court's decision is to the effect that the will is not clear or whether it is in favour of the respondent's position, according to counsel for the appellant this gives his client an opportunity to adduce indirect evidence concerning the testator's intention through extrinsic facts or documents.

In civil law proof of facts extrinsic to the will is possible only if a clause is ambiguous and the will itself is unclear.

Following the brief arguments by the two counsel, the Court decided, in order to permit complete production of evidence, to assume that article 6(c) of the will was ambiguous and that the will was unclear. This decision had the effect of permitting the testimony of Mr. Terrill, Junior and Arith Gor- donsmith and the production of an important document by the latter, inter alia. At the hearing in Montréal, counsel for the respondent again objected to the testimony and the production of documents, and substantial argument was presented by each side. Reserving its decision, the Court allowed the witnesses to be heard and the documents to be produced. The decision is rendered in paragraph 4.03.5 of this judgment.

3.17 According to the testimony of Mr. Terrill, Junior, his father told him in about 1975 that “if anything happens to me, everything goes to your mother, after that, you are looked after" (transcript Vol. 1, April 9, 1986, p. 60).

When cross-examined by his counsel, the witness stated: "Well he said everything, everything goes to your mother, then when your mother dies, you are looked after (transcript Vol. 1, p. 62). "He answered in general that it’s going to your mother, then after that, you are looked after" (transcript Vol. 1, p. 62).

3.18 When the witness, not knowing anything about the will at the time, spoke to his father in 1975 when the latter was ill, he told him "perhaps this would be the time to revise your will” . . . "He said no, it’s clear, it’s all looked after”. "And exactly as I told you, finally he was so ill that I said well, why push a man who is ill, so I left it like that” (transcript Vol. 1, p. 62).

3.19 His father had finished school after Grade 11. Around 1955, with three other people, he had formed the company Eastern Rebuilders Ltd., whose primary purpose was to rebuild motors. He had 30 employees at the time. He was a conservative man who was more interested in working than in making money and was very close to his employees.

3.20 Mr. Terrill, Junior, after four years of study at the University of Vermont, began working for Eastern Rebuilders Ltd. — in 1968. During his years of study he had worked part-time for Chrysler Canada.

3.21 Arith Gordonsmith is a former employee of National Trust, for which he worked for 55 years, primarily as a business consultant.

3.22 The witness met Mr. Terrill, Senior in 1962. After examining the financial statements supplied by Mr. Terrill, he sent him, on May 22, 1962, a memorandum concerning preparation of the will to be signed by Mr. Terrill (Exhibit A-5), taking into account the succession duties and estate taxes imposed by the Quebec and Canadian governments.

Assuming an estate of $250,000 upon Mr. Terrill’s death, he gave the following two examples:

EXAMPLE NO. 1

Estate bequeathed in outright ownership to Wife.

Province of Quebec Duties )

) approximately $48,200.00 Estate Taxes )

Widow dies later leaving an Estate

of say $200,000. to son.

Province of Quebec Duties )

) approximately $38,100.00 Estate Taxes )

TOTAL TAXES ON TWO (2) ESTATES $86,300.00 EXAMPLE NO. 2 (As per Will Memorandum)

Estate bequeathed in trust for the benefit

of wife and upon her death, capital to son.

Province of Quebec Duties )

) approximately $48,200.00 Estate Taxes )

Widow dies later, no further taxes payable

on capital remaining in trust

$48^0000

Example of Savings

No. 1 approximately $86,300.00

No. 2 approximately $48,200.00

Saving of approximately $38,100.00

Thus, by leaving his property to his wife in trust and, upon her death, the capital to his son, he avoids paying succession duties of some $38,000.

3.23 According to Mr. Gordonsmith, in using a trust Mr. Terrill, Senior was no doubt trying to protect his wife. The witness said that he himself had probably made this suggestion, in light of his considerable experience in the area. He had been working for National Trust for approximately 30 years at the time (transcript Vol. 2, May 14, 1986, pp. 28, 29, 30).

Mr. Terrill opted for the trust will (transcript Vol. 2, p. 33). After his death and during his wife's lifetime, the executors were to encroach on the capital for the latter's benefit (transcript Vol. 2, p. 34) and for her benefit alone (transcript Vol. 2, p. 35). In cross-examination, the witness said that Mr. Terrill, Senior wanted his son to continue his university education, but that after his own death, he did not want his son to be living off his mother (transcript Vol. 2, p. 38). He had confidence in his son and whatever he undertook, he would set goals for himself (transcript Vol. 2, p. 39).

Still on cross-examination, Mr. Gordonsmith said that paragraph 6(c) of the will applied to the son only if the mother was dead (transcript Vol. 2, p. 41).

3.24 Mr. Terrill, Junior, general manager of Eastern Rebuilders Ltd., filed as Exhibit A-6 a photocopy of an extract from the company's general ledger to the effect that Gordon C. Terrill’s estate, through the National Trust Co., held common shares in the said company. On April 30, 1981 certificate No. 14 covering 124 common shares having a book value of $100 each was transferred to the estate. To explain this transfer two letters were also filed. One, dated April 6, 1981 (Exhibit A-7) was sent by National Trust to Ed Terrill of Eastern Rebuilders Limited. The first two paragraphs read as follows:

We are now pleased to enclose the Quebec Succession Duty Release for the 188 shares of Eastern Rebuilders Limited preferred bearing Certificate No. 2, a Quebec Succession Duty Release for 124 shares of Eastern Rebuilders Limited common Certificate No. 1, for 99 shares and Certificate No. 7, for 25 shares together with the Quebec Succession Duty Release for the balance of note are $87,071.00 at 10% per annum.

We would be very much obliged if you would reissue a new certificate in the name of the Estate of Gordon C. Terrill and mail same to us at your earliest convenience.

The second letter, dated August 14, 1981 (Exhibit A-8), is the reply sent to National Trust Ltd. The main paragraph reads as follows:

In reply to the letter of Miss C. Jacques, Trust Officer, dated 6 April, 1981, we are enclosing Société de reconstruction Eastern Itée common share certificate No. 14 for 124 (one hundred and twenty-four) shares to replace certificates Nos. 1 and 7 for 99 (ninety-nine) and 25 (twenty-five) respectively, which are now cancelled.

A photocopy of share certificate No. 14, covering 124 common shares issued by the company, was filed as Exhibit A-9.

The statement of assets and debts of the estate of the late Gordon C. Terrill prepared by National Trust Co. Ltd. and filed as Exhibit A-10 shows that 124 common shares of Eastern Rebuilders Ltd. valued at $162,316 form part of the estate, as well as 188 preferred shares of the same company valued at $18,800.

3.25 Ms. Chantal Jacques, senior trust administrator at National Trust, filed as Exhibit A-11 a letter dated November 18, 1980 addressed to the Quebec Department of Revenue with which she sent various documents pertaining to the Gordon C. Terrill estate, including the statement of assets and debts of the estate (Exhibit A-10). A succession duty release was also requested. The latter release was in fact issued on May 21, 1981 (transcript Vol. 2, p. 68), other releases having been issued on December 12 and 24, 1980 and March 30, 1981.

3.26 According to Ms. Jacques, the estate generated income and paid amounts to Mrs. Victoria Terrill as follows, from August 14 of one year to August 13 of the following year:

No one other than Mrs. Victoria Terrill received any money. There remained $9,000 in the income account. The capital of the estate in 1980 was $307,709, according to Exhibit A-8. All the assets were transferred to the trust (transcript Vol. 2, pp. 61 to 65).

Mrs. Helen Terrill, wife of Mr. Terrill, Junior, testified that in 1975, when Mr. Terrill, Senior became ill, she and her husband, during a visit, asked him if he had made a will. "He said he had a will.” When he said that his will had been made in 1962, the witness said to him: "Why would you update your will and go again.” He replied: "Everything is fine, Vicky gets everything and after Vicky dies, then Ed gets everything." Vicky is the nickname of Victoria, his wife, the witness's mother-in-law (transcript Vol. 2, p. 75).

Another time, on another occasion, he said: “It’s very clear, everything goes to Vicky in trust, and when she dies, then everything goes to my husband, and if he should die before that, then, it goes to my three (3) kids" (transcript Vol. 2, p. 76).

4. Act, Case Law, Analysis

4.01 Act

The principal provisions involved in this case are paragraph 70(5)(a) and subsections 70(6) and 70(6.1) of the Income Tax Act. These provisions read as follows:

70. (5) Where in a taxation year a taxpayer has died, the following rules apply:

(a) the taxpayer shall be deemed to have disposed, immediately before his death, of each property owned by him at that time that was a capital property of the taxpayer (other than depreciable property of a prescribed class) and to have received proceeds of disposition therefor equal to the fair market value of the property at that time;

70. (6) Where any property of a taxpayer who was resident in Canada immediately before his death that is a property to which paragraphs (5)(a) and (c) or paragraphs (5)(b) and (d), as the case may be, would otherwise apply has, on or after his death and as a consequence thereof, been transferred or distributed to

(a) his spouse who was resident in Canada immediately before the taxpayer's death, or

(b) a trust, created by the taxpayer's will, that was resident in Canada immediately after the time the property vested indefeasibly in the trust and under which

(i) his spouse is entitled to receive all of the income of the trust that arises before the spouse's death, and

(ii) no person except the spouse may, before the spouse's death, receive or

otherwise obtain the use of any of the income or capital of the trust,

if the property can, within 15 months after the death of the taxpayer or such longer period as is reasonable in the circumstances, be established to have become vested indefeasibly in the spouse or trust, as the case may be, not later than 15 months after the death of the taxpayer, the following rules apply:

(c) paragraphs (5)(a) to (d) are not applicable to the property;

(d) the taxpayer shall be deemed to have disposed of the property immediately before his death and to have received proceeds of disposition therefor equal to,

(i) where the property was depreciable property of the taxpayer of a prescribed class, that proportion of the undepreciated capital cost to him immediately before his death of all the depreciable property of the taxpayer of that class that the fair market value at that time of the property is of the fair market value at that time of all of the depreciable property of the taxpayer of that class, and

(ii) in any other case, the adjusted cost base to the taxpayer of the property immediately before his death,

and the spouse or trust, as the case may be, shall be deemed to have acquired the property for an amount equal to those proceeds; and

(e) where the property was depreciable property of the taxpayer of a prescribed class, paragraph (5)(e) is applicable as if the reference therein to "paragraph (b)" and to "paragraph (d)" were read as references to "paragraph (6)(d)".

70. (6.1) For the purposes of subsection (6) and paragraph 104(4)(a), a trust shall be considered to be created by a taxpayer's will if the trust is created

(a) under the terms of the taxpayer's will;

(b) by a disclaimer by a beneficiary under the taxpayer's will; or

(c) by an order of a court in relation to the testator's estate made pursuant to any law of a province providing for the relief or support of a testator's dependants.

4.02 Case Law and Scholarly Opinion

The parties referred the court to the following case law and scholarly opinion:

1. MacNeill Estate v. M.N.R., [1973] C.T.C. 2248; 73 D.T.C. 189 (T.R.B.);

2. Kamichik Estate v. M.N.R., [1973] C.T.C. 2208; 73 D.T.C. 177 (T.R.B.); 3. Laberge v. Laberge, Rapport judiciaire de Québec, [1927] B.R. 101 at 101-104;

4. Latour v. Grenier, Rapport judiciaire de Québec, [1945] B.R. 225 at 229-30;

5. Métivier v. Parent, [1933] S.C.R. 495;

6. Caseault v. Parent, [1983] C.S.Q. 200-05-002643-836;

7. Bériault v. Les Héritiers de feu Phi lias Bériault, [1980] C.S.Q. 760-05-000123-80;

8. Hillis v. The Queen, [1983] C.T.C. 348; 83 D.T.C. 5365 (F.C.A.);

9. Mignault, Le Droit Civil Canadien, Montréal, Théoret, 1899 Vol. 4, pp. 268 to 272;

10. Laurent, Principes du Droit Civil Français (Donations et Testaments), Vol. 14;

11. Baudry-Lacantinerie and Collin, Traité Théorique et pratique de Droit Civil (Des Donations entre vifs et des Testaments), Vol. 11-2, 1905 edition;

12. Chambre des notaires du Québec, Répertoire de droit (Fiscalité), F. 22. 7855 — October 1985;

13. Jolin, Les impôts sur le revenu et le décès, Ass. Québécoise de Planification Successorale, 1-13-2-12.

4.03 Analysis

A. Arguments of Counsel for the Appellant

4.03.1 After citing article 5 of the will (para. 3.05), which creates a particular legacy for the deceased's wife, counsel for the appellant referred to the beginning of the article 6, including paragraph (A).

ARTICLE SIX I give and bequeath the residue of my Estate, moveable and immo- beable (sic), including any property over which I may have any power of appointment or disposal, to my Executors and Trustees, In Trust, for the execution of the following Trusts:

(A) To pay the net annual revenue derived therefrom to my wife, DAME VICTORIA MARGARET PATTON, until her death.

He submitted that right there the requirements of subsection 70(6) of the Act had been met since, according to him, "no one other than the deceased's spouse can be entitled to the income and capital during her lifetime”.

4.03.2 Paragraph B of article 6 of the will is the provision that applies after the deceased's wife dies. Mr. Terrill, Junior becomes the sole heir and certain provisions apply if he has not yet reached the age of 35 or if he himself has predeceased. In the latter case his children become the heirs.

4.03.3 Paragraph C of article 6 of the will is the one which has given rise to the legal problem at the root of the reassessment and of this appeal. It reads as follows:

(C) While they are paying revenues to or for my wife, son, or other beneficiaries under the foregoing provisions, my Executors and Trustees shall always have the right to draw and encroach upon the capital of my Estate for the benefit of my wife and son and other beneficiaries, to provide for emergencies such as illness or accident, or for maintenance, or education, including higher education, as and when my Executors and Trustees in their sole discretion deem it necessary or advisable. Neither my Executors and Trustees, nor any beneficiary concerned shall be responsible or required to account further for any capital so used or paid over.

According to counsel for the appellant, this paragraph concerning an encroachment on capital is written logically. The encroachment on capital can be made only for the benefit of the wife, the son or the grandchildren but only while they are beneficiaries. Paragraphs A and B of article 6 of the will describe who are the beneficiaries and how they cannot be beneficiaries simultaneously: first the wife (paragraph A), then, on her death, the son (paragraph B) and, in the event the son dies, the grandchildren (paragraph B).

While they (the Executors) are paying revenues to or for my wife, son or other beneficiaries (grandchildren) under the foregoing provisions (paragraphs A and B).

Thus for the son to have any income, the mother must be dead. For the grandchildren to have any income, their father, Mr. Terrill, Junior, and their grandmother, Victoria Terrill, must be dead.

According to counsel for the appellant, the wording of article 6 of the will is clear and meets the requirements of subsection 70(6) of the Act.

4.03.4 This interpretation, according to counsel for the appellant, is also the interpretation of the executors who read the will (para. 3.15) and who administered the estate accordingly (para. 3.26). The estates section of the Quebec Department of Revenue, in issuing the succession duty releases within the normal time, also interpreted article 6 of the will in the same way as the executors and also in the same way as the income tax section of the Quebec Department of Revenue, which accepted the appellant's position (paras. 3.15, 3.24 and 3.25).

4.03.5 Counsel for the appellant maintained that if the Court reached the conclusion that there was doubt about the clarity of the will in general and clause 6(c) in particular, extrinsic evidence of the testator's intention should then be considered (paras. 3.17 to 3.27).

4.03.5.1 The main argument of counsel for the respondent in opposing the presentation of such evidence is the following passage from Judge P. B. Mignault (para. 4.02(9)).

[Translation]

I can also cite the decision of Judge Mathieu in DeSalaberry v Faribault (11 RL 621). He held that since all testamentary dispositions must be in writing and since oral evidence against the contents of a writing is prohibited, the testamentary witnesses and even the notaries before whom the will was executed cannot be examined to create, change or substitute testamentary dispositions, on the pretext of obscurity or an unexpressed intention or to explain the contents of the will or to establish what was agreed at the time of its making, but that the judge must look for the testator's intention in the actual instrument; that in order to discover the testator's intention, however, it is permissible to determine through witnesses his personal situation, the degree of relationship between the testator and the legatees and their relationship between the testator and the legatees and their relations among themselves, the size of his estate compared to that of the legacy and the customs in the place where the testator was living (a).

4.03.5.2 Counsel for the appellant distinguished between interpretation of the will concerning the creation or existence of a legacy and interpretation of the will concerning its execution.

He referred to the decision of the Quebec Court of Appeal in Laberge v. Laberge (para. 4.02(3)) at page 104.

[Translation]

And with regard to the sufficiency of the statement in the will itself, this is a question of fact and a question of law: in fact, the intention on which we must first rely (Articles 840 and 872 CC) must be sufficient; in law, the use of extrinsic evidence must pertain to the execution of the disposition rather than to its very existence.

Colin & Capitant (3rd ed., Vol. 3, p. 846) state:

And there is nothing to prevent judges from seeking clues to enlighten them about the true meaning of the expressions used by the testator to designate either the legatees or the subject-matter of the legacies in documents other than the will or in the circumstances of the case, in short, in elements of extrinsic evidence that may be made available to them.

In a note I find in Dalloz (1902-2-302), the author states the following:

If the very existence of the legacy was at issue, the factors could only be sought in the will itself, since no legacy is valid unless it is contained in a regular will, and it is only in cases where the existence of the legacy is not disputed or where it is a question of determining the details or determining the deponent's intention that judges can rely on extrinsic considerations.

Taking into consideration as well the fact that Mr. Terrill's will was in English form, he referred to a decision of the Quebec Court of Appeal in Latour v. Grenier.

[Translation]

In order to resolve the issue, since this is a will in English form, we may take into account the circumstances in which this writing was made.

On this point — I say this with the greatest respect — the Superior Court seems to me to have erred in refusing to admit the oral evidence. This is contrary to all the English authorities concerning the interpretation of a will made in this form. The Privy Council decided this formally in 1872 in Mignault v Malo. A complete review is made of the history of the introduction of this law into our country and of the practice followed by our courts concerning the probating of such a will and the judgment then considers the objection made to the admissibility of the oral evidence:

1 (1872) 16 LCJ 288, at 296.

(P. 296) It remains only to consider the objections that the evidence by which these instructions are proved to contain the testamentary intentions of the deceased is inadmissible according to the /ex fori — that is, the Canadian French law; and for this position art. 1233, para. 7, was relied upon, which requires that there must be “a commencement of proof in writing” (commencement de preuve par écrit) in order to admit the oral testimony of witnesses. If it were necessary to consider whether in this case this condition as to the commencement in writing had been fulfilled their Lordships would be strongly inclined to hold that it had been fulfilled; but in truth the case is not one to which the doctrine of the lex fori prevailing as to the admission of evidence is applicable at all. The law which introduced into the Colony the English law as to wills must be considered as having introduced it with all its incidents, and therefore with the admissibility of oral evidence, without which, indeed, the new law would be nugatory and of no effect.

4.03.5.3 He also referred to a decision of the Superior Court in Caseault (para. 4.02(6)), where Pierre Côté, J. cited Professor Germain Brière.

[Translation]

Professor Germain Brière, in "Les libéralités’, expressed clearly and concisely the rules governing the interpretation of wills:

314. Article 872 provides first of all that the meaning normally ascribed to certain terms gives way to the expression of the testator's intention in the opposite sense (Meincke v Royal Trust Co, [1960] BR 384; Lafond v Frechette, [1960] CS 273; Lauzon v Duplessis (1940), 46 RL 331 (SC); Bissonnette v Bisson- nette, [1944] CS 159). The essential rule in matters of interpretation of wills is therefore to seek the testator's intention.

However, the cases have specified that the testator's real intention must be determined by giving the terms used their literal meaning, and it is only when the intention is really in doubt that one may go beyond the literal meaning (Metivier v Parent, [1933] SCR 495; opinion of Rinfret J, dissenting, in Bernard v Amyot-Forget, [1953] 1 SCR 82; Larose v Valiquette, [1943] 3 DLR 716; Prevost v Fraser, [1957] CS 35; Société d'administration et de fiducie v Bédard, [1968] CS 107; Drouin-Dalpé v Langlois, [1979] 1 SCR 621). The provisions concerning the interpretation of contracts, in particular Article 1013, are applicable by analogy, taking into account, however, the difference between a contract and a will (see the opinion of Rinfret J in Bernard v Amyot-Forget, cited at note 611; Gauthier v Lambert, [1968] CS 242; Gauthier req, [1968] RP 103 (SC).

The cases also frequently emphasize, pursuant to Article 1018, that the testator's intention must be determined by taking into consideration the whole will and not one particular expression in it (Boyer v Montreal Trust Co, [1953] CS 89; Rousseau v Duffy (1941), 47 RL 258 (SC); Glass v Glass, [1969] CS 484).

Even though it is in the will itself that the testator's intention must be sought, it happens that factors extrinsic to the will are relied on. As Taschereau J said, there are cases where reference can also be made to the particular circumstances to find what the testator truly intended. To use the classic expression, one may then sit in the testator's armchair and consider the circumstances that surrounded him when he made his will (Bégin v Bilodeau, [1951] SCR 699, at 709).

Côté, J., in the same decision, also cited Laurent (Vol. 14 of his Principes du Droit Civil Français (Donations et Testaments)) as well as Baudry-Lacantin- erie and Collin (Des donations entre vifs et des testaments, Vol. 11-2, 1905 edition).

Counsel for the appellant also referred to other decisions and authors.

4.03.5.4 In the event of ambiguity in the interpretation of clause 6(c) of Mr. Terrill's will, can extrinsic evidence be used to determine the testator's intention and allow his wishes to be carried out better?

The Court will have no hesitation in using such evidence if necessary, since clause 6(c) of the will pertains to the execution of the will and not to the existence of legacies provided for instead in clauses 6A and 6B of the Will.

B. Arguments of Counsel for the Respondent

4.03.6 In interpreting clause 6(c) of the will, counsel for the respondent emphasized the existence of the word "always" — ”. . .. my Executors and Trustees shall always have the right to draw and encroach upon the capital of my estate for the benefit of my wife and son . . .”. She maintained that if the executors always have the right to encroach on the capital for the benefit of the son, they therefore also have that right while the mother is still alive. This means that the trust becomes tainted.

4.03.7 Counsel for the respondent also emphasized the existence of clause 9(g) of the will. It reads as follows:

ARTICLE NINE In addition to all powers conferred by law, I give my Executors and Trustees the right and power, without the intervention or consent of the beneficiaries herein named:

(g) To determine and distinguish capital from revenue and to credit or charge receipts and disbursements to capital or revenue of my Estate in such proportions and amounts as they may think proper;

Referring to the Repertoire de droit of the Chambre des notaires du Québec (para. 4.02(12)), she cited paragraph 26 in part:

[Translation]

26. Other clauses may also taint an exclusive spousal trust. These are as follows;

— Clause giving the trustees the discretion to determine what constitutes capital or income of the trust. In order to avoid the danger such a clause might pose, it should be stated that it would be of no effect if it had the effect, directly or indirectly, of depriving the spouse in his or her lifetime of receiving all the income of the trust or allowing any other person to receive any part of the capital of the trust during his or her lifetime;

She also cited Marc Jolin (para. 4.02(13) ):

[Translation]

Any clause giving the trustees the authority to determine what constitutes capital and what constitutes income means that the trustees can determine that a sum which is normally “income” will be regarded as “capital” and will not be paid to the spouse, the latter being entitled only to the income. We then have the result that the spouse is not entitled to all the income of the trust during his or her lifetime, which is an essential requirement for any trust wishing to qualify for purposes of subsection 70(6) ITA (s 367 TA).

Ms. Bélanger therefore submitted that the only solution was to regard the trust as tainted.

4.03.8 C. Decision of the Court

With regard to the interpretation of clause 6(C) of the will, it seems clear to me that a reading of the whole of article 6 favours the appellant's thesis.

Clauses 6(A) and 6(B) establish legacies while clause 6(C) governs encroachment upon capital.

However, it is while the executors are paying income to the wife, the son or someone else (“while they are paying revenues to . . .") that the encroachment on the capital can take place but "for the benefit of" the beneficiary, the wife or the son. Knowing that Terrill, Junior cannot be a beneficiary until after his mother has died (clause B), it seems obvious to me that the testator's intention was to follow the logical order established by clauses 6(A) and 6(B), as argued by counsel for the appellant (para. 4.03.3).

The word "always" must be interpreted as meaning at any time, for the benefit of a beneficiary, during the period in which he is entitled to the income.

4.03.9 If any doubt remained, the extrinsic evidence strongly supports the appellant's thesis. The strongest evidence, in my view, is the testimony of Mr. Gordonsmith confirmed by Exhibit A-5 (paras. 3.21, 3.22, 3.23). The intention was to save $38,100 in succession duties and protect Mrs. Victoria Terrill by creating a trust for her benefit.

4.03.10 In the testator's mind, the will he had made in 1962 first for his wife’s benefit and then, after her death, for his son's benefit, did not have to be changed. The testimony of his son and of the latter's wife, whose credibility I do not doubt, also confirm the appellant's thesis (paras. 3.17, 3.18, 3.27).

4.03.11 The argument of counsel for the respondent respecting clause 9(g) of the will (para. 4.03.7) seems to me to be quite convincing at first glance.

Article 9 in its entirety is purely concerned with administration of the estate. I shall cite it in full:

ARTICLE NINE In addition to all powers conferred by law, I give my Executors and Trustees the right and power, without the intervention or consent of the beneficiaries herein named:

(a) To retain investments and to invest and reinvest the monies of the Estate as they may think proper without being limited to investments permitted to Trustees by law, and from time to time in their discretion to sell, alter and vary such investments, and to participate in the amalgamation, reorganization or recapitalization of any corporation or firm in which my Estate may have any share or interest;

(b) To hold investments in their own name or that of a nominee, with or without the addition of words indicating that they hold them in a fiduciary Capacity;

(c) To sell, lease, hypothecate, pledge, release, alienate, exchange, abandon and otherwise dispose of all property of my Estate, both moveable and immoveable, in such manner as they may see fit, and also to borrow money for, or to advance money to, the Estate;

(d) To continue, or in their discretion to discontinue and wind up any business, undertaking, guarantee or obligation in which I may be concerned, and to appoint attorneys or representatives to act for them in connection with any such business or undertaking or any other matters concerning my Estate;

(e) To release any property affected by mortgage or hypothec, in whole or in part, and to compromise and waive any claims at any time due to or by my Estate for any consideration or without consideration and upon such terms and conditions as they may deem advisable;

(f) To make such capital and revenue expenditures as they may deem advisable

upon the repairing, improving or rebuilding of any property of my Estate;

(g) To determine and distinguish capital from revenue and to credit or charge receipts and disbursements to capital or revenue of my Estate in such proportions and amounts as they may think proper;

(h) To make any partitions of my Estate in such manner as they may deem best without any process of law even though some of the beneficiaries may be minors or otherwise incapable, and also to settle any shares in my Estate either by paying the same in cash or by conveying to the party entitled thereto such investments belonging to my Estate as they may deem fair and sufficient;

(i) To perform any act authorized by this my Will without having to obtain judicial authority, even though some of the necessary parties to such act are incapable persons, and without limiting the generality of the foregoing, to do all acts which a person of full capacity could do if owner of the assets comprising my Estate.

In light of this article as a whole, we must ask ourselves what is meant by "to determine and distinguish capital from revenue and to credit or charge receipts and disbursements to capital or revenue of my Estate in such proportions and amounts as they may think proper".

First of all, the decision to regard an amount as income or capital is not a purely arbitrary decision made at the whim of the executors. This is a purely objective question based on the general principles of accounting. ”. . . [A]s they may think proper", which are the final words in clause 9(g), refer to this objective basis, in my view.

The same is true of the capital and revenue expenditures upon the repairing of a property as provided in clause 9(f). Putting on a new roof is a capital expenditure whereas painting a kitchen and other rooms is an income expenditure.

When it is a question of determining whether an amount received is in the nature of capital or income, the source must be considered. If the source is interest or rent collected, this is obviously income. If the source, on the other hand, is the proceeds from the sale of a house, it is just as obvious that this is capital. There is no way, in my view, that the executors can regard the proceeds of the sale of a house as income and distribute them to the beneficiary as income. There is no way either that the executors can decide that rents or interest are capital and not distribute them to the beneficiary.

The testator's intention, in my view, in drafting clause 9(c) and in giving the executors all the powers is to allow National Trust Company Limited to administer the estate promptly without entering into lengthy discussions with beneficiaries who are not familiar with accounting concepts. National Trust, with its accountants and administrators, is, in effect, in a better position to decide upon the nature of an expenditure or income in accordance with accounting principles.

This does not mean, however, that the administrators could not temporarily regard a surplus of income, say $5,000, for year B as capital in order to invest it for a few months or more during year C. After all, an executor must be a wise administrator seeking to gain the most income possible from the estate.

The sum of $5,000, however, and the income therefrom cannot change their nature at the whim of the executors. According to the evidence, moreover, we see that in February 1986 National Trust had $9,000 in the so- called "income" account (para. 3.26). This does not mean that National Trust cannot invest it or that if it does so, that will change its nature forever.

As the Chambre des notaires du Québec suggests in paragraph 26 of the Répertoire de droit (para. 4.03.7), it would be a good idea, in order to avoid the potential danger of a clause such as 9(g), to state that it would be of no effect if, directly or indirectly, it had the effect of depriving the spouse of all the income of the trust during his or her lifetime.

4.03.12 Still with regard to clause 9(g) of the will, upon Mr. Terrill, Senior's death, the executors did not have to decide what was capital since after the debts had been paid, everything became capital to be administered.

4.03.13 In conclusion, clause 9(g) of the will cannot in substance be regarded as giving the executors the power to change an amount received as income into an amount received as capital or vice versa at their whim. They are only entitled to apply the appropriate accounting principles to determine the nature of an amount received and administer it accordingly. Such a clause, in my view, cannot taint a trust. The notice of reassessment must be amended.

4.03.14 In view of the above conclusions, the Court does not have to take into account the arguments of the parties respecting article 70(6)(b), namely whether as a result of the waivers by Mr. Terrill, Junior (para. 3.13) and Mrs. Helen Cook Terrill (para. 3.14), it was established, within 15 months after the death of the taxpayer or such longer period as is reasonable in the circumstances, that the property had become vested indefeasibly in the trust.

5. Conclusion

The appeal is allowed with costs and the matter referred back to the respondent for reconsideration and reassessment in accordance with the reasons given above.

Appeal allowed.