Executors of the Estate of the Late Wilbert Peardon v. Minister of National Revenue, [1986] 1 CTC 2083

Brulé, T.CJ.:—

Issue

This is an appeal by the executors of the estate of the late Wilbert Pear- don from an assessment of income tax for the 1980 taxation year.

The only issue is whether or not the trust of the residue created by the Will of the deceased comes within the meaning of paragraph 70(6)(b) of the Income Tax Act.

No evidence was offered by either party, both arguing the contents of the Will and its interpretation in relation to the qualifying section of the Income Tax Act, viz subsection 70(6), to create a spouse trust.

The relevant part of subsection 70(6) is found in paragraph (b) which reads:

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

(i) . . . his spouse is entitled to receive all of the income of that 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.

Counsel for the appellants referred to the operative part of the Will creating the trust which reads:

2. TO USE any part of my estate, either corpus or income, as may be required for the proper and sufficient maintenance of my wife, SADIE, during her lifetime, the amount of such payment is to be in the absolute discretion of my Executors.

This clause, he said, gives rights only to the spouse. The intention of the testator was solely for her during her lifetime.

The appellant’s counsel put forth that the meaning of the word "entitled" in subparagraph 70(6)(b)(i) is satisfied by this will in that the word, by its discretionary definition, means “a claim of right" and not an actual receipt.

Also it was suggested that because no one can come forward and enforce a right in the trust property, the clause constitutes a valid spousal trust.

Counsel also offered a defence to allegations by the Minister that certain benefits to the deceased’s grandson and the use of certain granaries defeated the spousal trust. I shall deal with these matters presently.

The Minister’s counsel pointed to three parts of the Will which he said tainted the spousal trust. These were:

(1) the fact that payments of income and capital to the spouse were in the absolute discretion of the executors;

(2) that the use of the granaries could be apportioned by the executors;

and

(3) the treatment of the deceased's grandson and the benefits he received.

Before dealing with the specific alleged offending parts of the Will I would like to make some general comments respecting the necessary ingredients to a valid spousal trust.

Apart from other qualifications such as residency and vesting requirements, which are not in dispute here, to qualify as a spousal trust, the spouse must be entitled to receive all the benefits of the trust arising before the spouse's death and no one but the spouse may receive or otherwise obtain the use of anything, capital or income, from the trust before the spouse's death. Her rights must be exclusive and no other person can have any intrusionary rights vis-a-vis the trust be they immediate or in the future while the spouse is living.

There does not have to be any benefit obtained by any person, other than the spouse, the mere possibility is enough to say that the trust does not comply fully with the provisions requisite in the Act. [This latter statement has as its authority the case of the Estate of Donald Murdoch Clous- ton v. M.N.R., [1974] C.T.C. 2163; 74 D.T.C. 1176, which dealt with a similar provision in the Estate Tax Act.]

In the case of the Estate of Albert N. Gilbert v. M.N.R., [1983] C.T.C. 2712 at 2713; 83 D.T.C. 645 at 647, the Court held that the word “may" in subparagraph 70(6)(b)(ii) should be construed as “permissive."

Turning now to the relevant portions of the deceased's Will I make the following observations.

(1) One paragraph reads:

I further provide that during the time which my grandson, DEAN, may be renting my farm lands, or any portion thereof, from the Executors of my Estate, that he shall have the right to use and occupation of the dwelling on the North West of Section Fourteen (14) in Township Twenty-Six (26), in Range Five (5), West of the Third Meridian, without payment of rent therefrom, PROVIDED THAT he keeps the said dwelling in good repair and condition during the term of his occupation.

I do not find this offensive to the spousal trust. The grandson if he is renting is providing income to the trust. Perhaps as an added inducement he is permitted to occupy a dwelling, but in so doing must keep it in good repair and condition. This is tantamount to rent, and if he were not there the executors would have to rent the property and pay for any upkeep. The testator obviously thought such an arrangement was a quid pro quo and Dean is not getting any benefit for nothing from the trust.

(2) As to the executors' authority to apportion the use of all the granaries without any stipulated requirement for payment this would seem to be permissive in allowing certain individuals to benefit from trust property. The testator gave one property to his son Murray Lyman and allowed that his grandson Dean may be renting another property. He excluded from the devise to his son the granaries and therefore they became a part of the residue of the estate. The deceased allowed the executors to apportion the use of these granaries as may be required for the efficient operation of his farm lands. This would mean that the son and grandson had the door open to them, if the executors so chose, to use the granaries, thereby infringing on the exclusive use of the trust property by the spouse.

(3) The provision that income and capital be paid to the spouse in the executors' absolute discretion presents another problem. Certainly there is no concern over capital because what is not used for her maintenance will pass on her death. However the treatment of income must be looked at carefully.

As mentioned above, counsel for the appellant offered that the meaning of “entitled” in subparagraph 70(6)(b)(i) means “a claim of right,” and I find no objection to this. However the Will does not say that the spouse be “entitled” to the income or capital, only that the executors may “use any part of my estate.” It does not say “all of the income.”

If the executors exercise their discretion and the wife is properly maintained the Courts presumably will not overrule their decision as to quantum and the spouse would not be in a position to require the executors to pay to her all the income if such was more than required for her proper maintenance.

This principle is to be found in the case of Re Sayers et al. and Philip, a decision of the Saskatchewan Court of Appeal found in 38 D.L.R. (3d) 602, the case being brought to the attention of the Court by counsel for the Minister.

In the event that the income of the trust was more than adequate for the spouse's maintenance I ask “What would happen to the excess?.” There is no provision for accumulation and in the absence of such a requirement it could well be that there would be an intestacy as to the surplus. If such were the case, perhaps the spouse would not be entitled to receive all the surplus. If not, then some other party or parties might benefit. If the testator wished his widow to receive all the income he should have said so.

I appreciate the comments of the appellant’s counsel as to the testator's intention to benefit only his spouse during her lifetime but “intentions” cannot alter the provisions of the Income Tax Act. Perhaps the testator's indicated intentions were not carried out because of the poor drafting of his Will.

The fact that the use of the granaries could permit certain parties to benefit from a residency asset, and also the possibility of others perhaps bene- fitting from any surplus income that might arise in the trust, is sufficient for either or both reasons to taint the trust.

The end result then is that this appeal is dismissed.

Appeal dismissed.