Frank L. Burnet, Executor of the Estate of Jeannette Bell Kelley, Deceased,* v. Minister of National Revenue, [1987] 1 CTC 2238, 87 DTC 160

Rip, T.C.J.:—This is an appeal from a notice of assessment for the 1980 taxation year in which the Minister of National Revenue, Taxation, the respondent, assessed The Estate of Jeannette Bell Kelley, referred to in the pleadings as the appellant, income taxes on the basis that the appellant had realized a capital gain upon the sale of certain Lands in Alberta. The appellant takes the position that it did not dispose of any real estate in Alberta in 1980 since the only persons having a vested interest in the property prior to sale were residents of the United States; accordingly, pursuant to the provisions of Article VIII of the Canada-U.S. Income Tax Convention, applicable to 1980, residents of the United States are exempt from tax on disposition of Capital property in Canada.

The appeal proceeded by way of an agreed statement of facts which is set out as follows:

*Paragraph 150(1)(c) of the Income Tax Act (“Act”) provides that a tax return be prepared for a trust or estate. The income tax return was prepared in the name of the “Estate of Jeannette Bell Kelley, Deceased”, and signed by Frank L. Burnet, executor. The notice of assessment was addressed to “The Estate of Jeannette Bell Kelley”; in the notices of appeal and reply to the notice of appeal The Estate of Jeannette Bell Kelley is referred to as the appellant. Subsection 104(1) of the Act states that reference in the Act to a trust or estate shall be read as a reference to the trustee, executor or other legal representative having ownership or control of the trust property. An estate is not a person. It would appear therefore that a notice of assessment be addressed to the legal representative, and a notice of objection against an assessment be filed by the legal representative. A notice of appeal ought to be filed by the legal representative, as appellant. The style of cause is amended accordingly.

For the sole purpose of the issues on this appeal and not as an admission to be used against the parties hereto on any other occasion, for any other purpose in connection with the reassessment appealed from, or in favour of any person other than the parties hereto, it is agreed that:

1. Jeannette Bell Kelley (the “Deceased”), died on May 15, 1970 leaving a last Will and Testament dated December 15, 1952 as amended by a codicil dated the 16th day of December, 1954 (the “Will”) copies of which are attached as Exhibit “A” hereto.

2. Probate in the Estate of the Deceased was granted in the Surrogate Court of Alberta on July 17, 1970 to Frank L. Burnet.

3. The residue of the Estate consisted of certain lands in the Province of Alberta, namely Section 26 and 35 in Township 18, Range 26, W4M containing an aggregate of 1,283 acres (the “Lands”).

4. Pursuant to the terms of the Will, there were a number of minor monetary bequests with the residue of the Estate being placed in trust, in accordance with the terms of the Will, to pay the free annual income of the residue to the Deceased's son, Jesse Alexander Kelley (the “Life Tenant”) during his lifetime.

5. The Life Tenant was 41 years of age at the date of the Deceased’s death and resided in Coquitlam in the Province of British Columbia.

6. In accordance with the terms of the Will, upon the death of the Life Tenant the corpus of the residue was to be “for such of the children of the [the Life Tenant] and if more than one in equal shares as tenants-in-common as shall attain the age of twenty one years”.

7. On May 15, 1970, the date of the Deceased’s death, the Life Tenant had two children: Kevin Kelley, 17 years and Diane Kelley, 16 years.

8. The Lands were acquired by the Deceased prior to December 31, 1971.

9. On or about September 30, 1980, at which time the children of the Life Tenant had all attained the age of twenty one years, the executor of the Deceased’s Estate sold the Lands, with the written consent of the remaindermen.

10. There was a capital gain upon the sale of the Lands.

11. At all material times the children of the Life Tenant were residents of the United States of America.

For reasons of brevity the whole of the will is not reproduced in these reasons. The provisions cited by counsel and other relevant provisions of the will are as follows:

I NOMINATE CONSTITUTE and APPOINT FRANK L. BURNET, of the City of Calgary in the Province of Alberta, Solicitor to be the sole Executor of this my Will and Trustee of my Estate . . .

All the rest residue and remainder of my estate and effects both real and personal I GIVE DEVISE and BEQUEATH unto my Trustee upon trust to sell call in and convert into money such parts thereof as shall not consist of money and to pay out of the moneys arising from such sale calling in and conversion and out of my ready moneys all my just debts and funeral and testamentary expenses including all estate succession duties inheritance and death taxes payable upon or in respect of my estate including moneys payable under any policy or policies of insurance on my life and any gift or benefit given by me to any person either in my lifetime or by survivorship or by this my Will or any codicil or codicils hereto and to pay the said legacy of TWO THOUSAND ($2,000.00) DOLLARS to the said WILLIAM SHARMAN and EUGENIA SHARMAN as hereinbefore provided and the said legacy of FIVE THOUSAND ($5,000.00) DOLLARS to the said EUGENIA SHARMAN and to invest the remainder of the moneys arising from such sale calling in and conversion and of my ready money in securities of the nature hereinafter authorized which together with securities of the nature hereinafter authorized and held by me at the date of my death are hereinafter referred to as my said trust investments and to stand possessed of the said trust investments upon the trusts hereinafter declared, that is to say: upon trust to pay the free annual income of such investments to my said son JESSE ALEXANDER KELLEY during his lifetime, and as to the corpus of the said trust investments upon the death of my said son JESSE ALEXANDER KELLEY for such of the children of my said son JESSE ALEXANDER KELLEY and if more than one in equal shares as tenants-in-common as shall attain the age of twenty one years.

I DECLARE that my Trustee shall have a discretionary power to postpone for such period as to him shall seem expedient the sale calling in or conversion of any parts of my real or personal estate but the unsold real estate and the outstanding personal estate shall be subject to the trusts hereinbefore contained concerning the said trust investments and the rents and yearly produce thereof shall be deemed annual income for the purposes of such trusts AND I EMPOWER my Trustee during such postponement to make out of my general estate any outlay that he may think proper either for payment of calls on shares or otherwise for the benefit of my said estate.

I DECLARE that during the minority of any child or children of my said son JESSE ALEXANDER KELLEY entitled to a share or shares of the corpus of my said trust investments contingently upon his her or their attaining the age of twenty one years my Trustee shall apply the income or such portion thereof as he may deem fit of the share or shares of such child or children to or towards his her or their maintenance and education with liberty to pay the same to the guardian or guardians of such minor child or children and the receipt or receipts of such guardian or guardians therefor shall be a sufficient discharge and release to my said Trustee who shall not be liable to see to the application thereof. [Emphasis added.]

Arguments by counsel for both parties centred upon whether, prior to the sale of the Lands, the only persons having a vested interest in the Lands were the children of the life tenant, that is, the beneficiaries of the residue under the terms of the will ("beneficiaries"). Counsel for the appellant submitted that if I decide the beneficiaries were the only persons to have a vested interest in the Lands at the time, Article VIII of the Canada-United States of America Income Tax Convention of 1943 ("Tax Treaty") exempts the beneficiaries from paying tax to Canada with respect to the gain on the sale of the Lands. Counsel for the respondent submitted that the beneficiaries' interest in the Lands was not indefeasibly vested and therefore the Tax Treaty is not a factor in this appeal.

Article VIII of the Tax Treaty read as follows:

VIII Gains derived in one of the contracting States from the sale or exchange of capital assets by a resident or a corporation or other entity of the other contracting State shall be exempt from taxation in the former State, provided such resident or corporation or other entity has no permanent establishment in the former State.

It is settled law that a Tax Treaty is to be interpreted liberally.

Article VIII provides for "the sale or exchange ... by a resident or a corporation or an entity . . .". The resident, corporation or entity selling or exchanging a capital asset must be the person or entity having the legal capacity to sell or exchange the asset.

One must refer to the Will to determine to whom did the testatrix give the power to sell the assets of the estate. The Will empowers the Trustee:

.. to sell call in and convert into money such parts (of my estate) as shall not consist of money . . .

and provides that the Trustee

. . . Shall have a discretionary power to postpone for such period as to him shall seem expedient the sale calling in or conversion of any parts of my real . . . estate. . . .

It is clear, therefore, that the only person having the capacity to dispose of the Lands in 1980 was the trustee, Mr. Frank L. Burnet. There was no requirement for Mr. Burnet, in his capacity as personal representative to obtain the written consent of anyone, let alone the remaindermen, for the sale of the Lands, notwithstanding the beneficiaries had attained the age of 21 years by 1980.

Mr. Burnet postponed the sale of the Lands for a period of ten years pursuant to the power to do so contained in the will. He sold the Lands pursuant to the terms of the will. Presumably the proceeds of the sale were converted to money in accordance with his obligation to do so under the will.

Under the provisions of the current Act reference to a trust or estate is read as a reference to the trustee or the executor having ownership or control of the trust property.* [1] Mr. Burnet had ownership and control of the Lands. The trust or estate is, for the purposes of the Act, deemed to be in respect of the trust property an individual^ [2] the estate of Mrs. Kelley is deemed to be an individual and, as any individual, is liable for income tax on the capital gain from the disposition of the Lands. For purposes other than the Income Tax Act, including the Tax Treaty, the trustee, and not the trust, is the individual.

In the facts of the case at bar the sale of the Lands was made by the trustee. Mr. Brussa, counsel for the appellant, submits that notwithstanding who made the sale, the intent of the draftsman of Article VII of the Tax Treaty is that where residents of the United States have the economic benefit of a gain, and where they have no permanent establishment in Canada, the gain derived in Canada is exempt from tax in Canada. Counsel says he takes comfort in the wording of Article VIII which speaks of “gains derived” in Canada; the word "derived", he argues, "denotes an indirect relationship rather than the direct holding of property, the direct receipt of proceeds of disposition and the direct realization of a gain by a taxpayer".

If counsel for the appellant is correct one must determine the beneficiary of the gain. This person must be the absolute owner of the Lands, that is, his right of ownership in the Lands is unrestricted; his right of ownership is unfettered and he can enjoy and dispose of the Lands in the most absolute manner. Article VIII cannot contemplate a situation where a person's ownership of an asset may be taken away on the happening of a future event, for example. If the beneficiaries’ interests in the Lands were vested, were their interests in the Lands vested indefeasibly or were the interests subject to divestment? The gift by the testatrix to the beneficiaries was a gift to a class of persons, that is, the children of the life tenant, and the interests of all members of the class will vest at the same time: Kingsbury v. Walter, [1901] A.C. 187 at 194 per Lord Davy. Where there is doubt as to the time of vesting the presumption is in favour of the early vesting: Bickersteth v. Shanu, [1936] A.C. 290; [1936] 1 All E.R. 227. Counsel for the appellant, rely- ing on Brown v. Moody, [1936] 2 All E.R. 1695 (P.C.),£ [3] submits that the beneficiaries' interests in the Lands vested at the earliest on the death of the testator and at the latest on their attaining the age of 21 years. I accept the counsel's submission that prior to the sale of the Lands the beneficiaries had vested interests in the Lands.

Was this vesting absolute? Was the vesting of the interests of the beneficiaries indefeasible? Counsel for the respondent referred the Court to chapter 5 of Professor Feeney's work, The Canadian Law of Wills, entitled “Class Gifts and the Rule of Convenience". Professor Feeney, on page 162, discusses the rule in Andrews v. Partington (1791), 3 Bro. C.C. 401; [1775- 1802] All E.R. 209, that a class closes as soon as the condition in the will which postponed the class gift is so far performed that some member of the class is entitled to the enjoyment of his share. However, Professor Feeney adds on page 163.

In the case where gifts to members of a class on attaining a specified age (or satisfying some other personal condition) are also subject to a prior life estate, the class closes on the death of the life tenant or when the eldest class member attains the specified age, whichever happens last.

Professor Feeney's footnote refers to Re Emmet's Estate (1880), 13 Ch.D. 484 (C.A.) and Re Chartres, [1927] 1 Ch. 466. Professor Feeney adds:

Of course, if the gift is to the children of the life tenant who attain a certain age, the class closes on the death of the life tenant because the class is then incapable of increasing in size.

For the beneficiaries’ interests in the Lands to be indefeasibly vested there must be no other person who has a right, contingent or otherwise, to the Lands. In the case at bar this is not so. Children of the life tenant born after the death of the testatrix would diminish the interests of the beneficiaries in the Lands. In the event the beneficiaries predecease the life tenant, their interests in the Lands would lapse and the Lands and the rest of the residue of the estate would fall into an intestacy. The will provides for no gift over in the event of the death of the beneficiaries. Under the terms of the will a beneficiary must survive his father in order to receive his gift; if only one child of the life tenant survives, that child has the right to all the residue; if no child survives the life tenant the will is silent as to the distribution of the residue. The beneficiaries’ interests in the lands are subject to divestment.

To accept the appellant’s submission that the intent of Article VIII of the Tax Treaty was to exempt from Canadian tax the economic benefit of a gain in Canada received by a resident of the United States would compel a court to pierce the corporate veil when a United States controlled corporation, resident in Canada, disposes of a capital asset in Canada; as a result of such sale the gain would be reflected in the increase in the value of the shares of the corporation and the corporation would not be liable for tax in Canada since the economic benefit of the gain belongs to the shareholders who are resident in the United States. I cannot agree with this submission. The purpose of the Tax Treaty is for the avoidance of double taxation of a taxpayer. I have difficulty in satisfying myself that Article VIII contemplates the beneficiaries to be the residents or entities of the United States who are exempt from taxation in Canada on gains derived from the sale of the Lands. Article VIII does not, in my view, refer to indirect economic gains, and in particular it does not refer to economic gains of persons whose right to the gains is contingent.

The estate is liable for tax on the disposition of the Lands. Accordingly the appeal will be dismissed.

At trial appellant's counsel advised the Court that notwithstanding the notice of appeal, the appellant disputes the adjusted cost base of the Lands as determined by the respondent; however this issue was to be determined only in the event the estate was held to be liable for tax. At both counsel's request interim reasons for judgment, dated September 15, 1986, were issued pending advice from counsel whether the parties have settled the matter of the adjusted cost base of the Lands or whether the Court would continue the trial to hear evidence and arguments as to value. An extension for time to January 12, 1987, was granted to so advise the Court. The Court has not been so advised and therefore these reasons and a formal judgment are now being issued.

Appeal dismissed.