Doreen Isabelle Parkes, Executrix of the Estate of the Late William R. Parkes, Deceased v. Minister of National Revenue, [1986] 1 CTC 2262, 86 DTC 1214

Goetz, T.C.J.:—The issue in this appeal is whether the appellant taxpayer acquired an indefeasible title to certain shares in a private family corporation which shares were formerly owned by her deceased husband.

Facts

William R. Parkes was the owner of 7,499 common shares of Elgin Parkes Wholesale Limited (“the Company”). His brother, George Ernest Parkes, owned a like amount. These were all the issued common shares of the Company.

William R. Parkes died on or about the 13th day of June, 1978, leaving a last Will and Testament dated September 30, 1976. Letters probate issued January 1, 1979, appointing Doreen Isabelle Parkes, widow of the deceased, as sole executrix. The said Will contained the following provision:

3. If my wife survives me for thirty (30) clear days I GIVE, DEVISE AND BEQUEATH all the assets of my estate, both real and personal, of whatsoever kind and wheresoever situate, including any property over which I may have a general power of appointment, to my Trustees to pay or transfer such assets to my wife as her absolute property.

William R. Parkes and George Ernest Parkes had entered into a “buy-sell” agreement on December 18, 1973, which provided inter alia:

1. Upon the death of a shareholder each surviving shareholder shall purchase, and the executor or administrator (hereinafter called the legal representative) of the deceased shareholder shall sell, the shares of the Company owned by the deceased shareholder immediately prior to his death, for the price and upon the terms and conditions hereinafter stipulated, each surviving shareholder to purchase the number of shares owned by the deceased shareholder at the time of his death that bears the same proportion to all the shares owned by the deceased shareholder as the number of shares owned by such surviving shareholder bears to the number of shares owned by all of the survivors;

2. The purchase price for the shares of a deceased shareholder shall be the value of his shares as established by the professional accountants of the Company appointed for the year in which the death of the shareholder occurs. In the event that the professional accountants refuse to act and failing agreement between the legal representative of the deceased shareholder and the surviving shareholders, the purchase price shall be established in accordance with the provisions of The Arbitration Act Revised Statutes of Ontario;

3. The time and method of payment of the purchase price upon death of one of the shareholders shall be as follows: the sum of $100,000.00 shall be payable immediately by the proceeds of the life insurance policy held by the surviving shareholder on the life of the deceased shareholder and the balance of the purchase price shall be paid in fifteen (15) equal annual instalments, the unpaid balance bearing interest at the rate of three (3%) per cent per annum.

On January 8, 1979, Doreen Isabelle Parkes, as executrix of her husband’s estate, transferred 7,499 common shares of the Company to herself in her personal capacity. On February 27, 1979, she entered into an agreement with George Ernest Parkes, Raymond Paul Parkes, G. Ernest Parkes and Robert Alexander Hagen. Robert Alexander Hagen was the son-in-law of George Ernest Parkes. This agreement, among other things, provided for the sale, transfer and assignment of the appellant's 7,500 common shares to the other parties to the agreement. The purchase price was $400,000 as determined by the Company auditors, with a $100,000 down payment, plus interest at three per cent from July 1, 1978, and the balance to be paid in instalments of $20,000 annually and bearing interest at the rate of three per cent. George Ernest Parkes guaranteed all the payments.

The appellant was not conversant with the Company's business or affairs but she was aware of the “buy-sell” agreement and considered that she was obliged to sell her shares to George Ernest Parkes on demand. Relying on the advice of her lawyers and the Company's accountants, she agreed to the terms and conditions of the agreement of February 27, 1979 and to all legal steps taken by her subsequent to the death of her husband.

The respondent by reassessment included in income for 1978 the $400,000 proceeds from the sale of the said shares by Doreen Isabelle Parkes, pursuant to the 1979 agreement in the 1978 income of the deceased, William Robert Parkes, pursuant to the provisions of subsection 70(5) of the Income Tax Act, S.C. 1970-71-72, c. 63 as amended, whereas the appellant contends that the estate is entitled to the benefits of the provisions of subsection 70(6). To obtain the benefit of the “roll over” provision in subsection 70(6), the appellant must establish that the title to the shares vested indefeasibly in the spouse of the deceased William Robert Parkes.

“Indefeasible” and “indefeasibly vested” are defined as follows in Words and Phrases, Permanent Edition 20A, at pages 531-32:

“Indefeasible” in statute exempting from estate taxation property transferred to and “indefeasibly vested” in lineal descendant means not subjected to being defeated or avoided.

“Indefeasibly vested” — statute providing for exemptions from estate tax with respect to net estate, not exceeding specified amounts, transferred to and “indefeasibly vested” in surviving spouse or children of decedent, used quoted phrase as meaning an absolute vesting or a vesting with no strings attached as of date of decedent's death.

In Black’s Law Dictionary, 5th Edition, “indefeasible” is defined as follows:

That which cannot be defeated, revoked, or made void. This term is usually applied to an estate or right which cannot be defeated.

In Stubart Investments Limited v. The Queen, [1984] C.T.C. 294; 84 D.T.C. 6305, Mr. Justice Estey stated at 302 (D.T.C. 6311-12):

In the field of taxation itself the traditional position was re-echoed in /.R.C. v. Duke of Westminster, [1936] A.C. 1 at 19 where it was stated:

Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

The series of transactions resulting in the transfer of the company shares from Doreen Isabelle Parkes to her transferees on the surface would appear to bring the appellant within the parameters of subsection 70(6) of the Act. The last Will and Testament of William R. Parkes provided that Doreen Isabelle Parkes receive all the estate assets, including the Company shares in question. These shares were subject to the provisions of the Articles of Incorporation of the Company restricting the transfer of shares in that such transfer could not be effected without the sanction of the holders of at least 70 per cent of the issued common shares of the Company. These shares were also subject to the terms of the “buy-sell” agreement of December 18, 1973, which forced Mrs. Parkes to sell and George Ernest Parkes et al. to buy the shares of the Company owned by the deceased, William R. Parkes, immediately prior to his death. In other words, the title and ownership of the shares was tainted by the existence of certain conditional limitations.

The transfer of the shares by the executrix to herself in her personal capacity on January 8, 1979 and subsequently to George Ernest Parkes et al. on February 27, 1979, would appear to circumvent the conditions attached to such shares. Counsel for the appellant argues that George Ernest Parkes gave up his rights under the 1973 agreement by approving the transfer of shares to Doreen Isabelle Parkes in her own right. The terms of the “buysell” agreement could only be varied by a written agreement. The 1979 agreement contained this clause:

6. This agreement represents the entire agreement between the parties hereto and replaces any prior agreement made between the parties hereto and their predecessors, and shall enure to the benefit of and be binding upon the respective parties hereto and their heirs, executors, administrators, successors and assigns.

Counsel for the appellant suggested that the courts could award damages for a breach of the 1973 agreement and that an order for specific performance most likely would not be granted under the circumstances.

With respect to contracts for the sale of shares, Robert J. Sharpe, author of Injunctions and Specific Performance, (1983 Canada Law Book Limited) said at pages 664-65:

Specific performance is often awarded to enforce contracts for the purchase and sale of shares in corporations. Here, the courts have been much more willing to grant the remedy than is the case with respect to contracts for the purchase and sale of other items, apart from real property. If consistency is to be maintained, specific relief should not be granted unless damages are inadequate. However, as has been noted, "inadequacy of damages'" is a most elastic concept, and in the case of contracts for the purchase and sale of shares, courts have been prepared to stretch it in favour of specific relief.

Where the shares are not publicly traded, obvious valuation problems arise. Presumably, reasonably accurate estimates of value could be made, but the cost might often be excessive, and is readily avoidable through a specific performance decree. Although alternate investments could be found, shares in one company are not the equivalent of shares in another, and even though the plaintiff’s interest is purely financial, the courts have consistently awarded specific performance in such cases. Indeed, specific performance has been awarded even with respect to very small companies, where personal co-operation between shareholders as investors is involved.

In this case the value of the shares is readily ascertainable as the means of evaluation have been clearly set out in the 1973 agreement, namely, by the Company accountants.

The 1979 agreement contains provisions for the same method of evaluation, particularly:

1. One per cent for goodwill;

2. Market value of the fixed assets;

3. $100,000 down payment;

4. Balance to be payable in 15 equal annual instalments;

5. Interest at three per cent.

In essence the 1979 agreement carries through the terms of the 1973 agreement. The only intervening event was the transfer of the shares from the estate directly to the widow of the deceased. The widow felt she was obliged by the terms of the 1973 agreement to sell the shares to the deceased's brother. She accepted without question the advice of her solicitors and of the Company accountants and signed whatever documents were placed be- fore her. In other words she knew that she could not sell the shares to anyone but the deceased's brother, George Parkes. She realized she had no firm title to the shares because of the 1973 agreement which was binding on her until she entered into the 1979 agreement. The transfer to her from the estate was only one step, although not necessary, to get the title to the shares in the name of George Parkes or his nominees. Had she refused to transfer the shares to George Parkes, he could have sued successfully for specific performance.

The estate seeks to have the benefit of the spousal rollover provisions of subsection 70(6) and to do so the object and spirit of the benefit provisions must be met. See Stubart Investments Limited v. The Queen, supra. At 316 (D.T.C. 6323) Mr. Justice W. Z. Estey stated:

While not directing his observations exclusively to taxing statutes, the learned author of Construction of Statutes 2nd ed., (1983), at 87, E.A. Dreidger, put the modern rule succinctly:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

One of the tests set forth by Mr. Justice Estey in Stubart (supra) is stated at 313-14 (D.T.C. 6324):

Nonetheless, some guidelines can be discerned for the guidance of a court faced with this interpretative issue.

3. Moreover, the formal validity of the transaction may also be insufficient where:

(c) “the object and spirit” of the allowance or benefit provision is defeated by the procedures blatantly adopted by the taxpayer to synthesize a loss, delay or other tax saving device, although these actions may not attain the heights of “artificiality” in ‘section 137. This may be illustrated where the taxpayer, in order to qualify for an “allowance” or a “benefit”, takes steps which the terms of the allowance provisions of the Act may, when taken in isolation and read narrowly, be stretched to support. However, when the allowance provision is read in the context of the whole statute, and with the “object and spirit” and purpose of the allowance provision in mind, the accounting result produced by the taxpayer’s actions would not, by itself, avail him of the benefit of the allowance.

Unfortunately, the widow's right to have the title to the shares vest in her indefeasibly was precluded by the 1973 agreement which made it compulsory for her to sell the shares and compulsory for the deceased's brother to buy them. The 1973 agreement was effective up to the signing of the 1979 agreement, hence the title to the shares did not vest indefeasibly with her upon the passage of 30 days from the date of her husband's death. The transfer from the estate to Mrs. Parkes directly was to no avail because the title to shares was coloured by the terms of the “buy-sell” agreement.

For these reasons the appeal is dismissed.

Appeal dismissed.