The Estate of the Late John N Gladden v. Minister of National Revenue, [1984] CTC 2243, 84 DTC 1242

St-Onge, TCJ [ORALLY]:—The appeal of the Estate of the late John N Gladden was heard on February 1, 2 and 3, 1984, in the City of Vancouver, British Columbia, and it is with respect to the 1977 taxation year.

There are two issues:

1. Whether the deemed disposition of shares owned in Canada by a nonresident is taxable in this country, pursuant to the Canada-US Tax Convention in general, and Article VIII in particular;

2. Whether the quantum of the taxable capital gain if taxable in Canada should be split due to the community property regime of the State in which the deceased person was domiciled (California) at the time of his death.

The facts of this appeal are well spelled out at paragraphs 2 to 8 inclusive of the reply to the notice of appeal which read as follows:

A. STATEMENT OF FACTS

2. He admits that John N Gladden, the deceased, was a non-resident of Canada, resident and domiciled in the State of California, USA in the 1977 taxation year.

3. John N. Gladden died on August 3, 1977.

4. At the time of his death, the deceased owned 127 shares in the capital stock of Harrysons Limited, and I share in the capital stock of Kalahanie Holdings Ltd., both privately controlled corporations resident in Canada.

5. The representative of the estate of John N Gladden filed an amended Date of Death personal income tax return dated November 10, 1978 and reported a taxable capital gain on the basis of the deemed disposition of all the said shares in the amount of $75,387.50, but showed no tax payable on the said gain.

6. By Notice dated July 24, 1980 the Respondent reassessed the 1977 taxation year of the Appellant to include income tax payable on the taxable capital gain arising from the said deemed disposition on the following basis:

Deemed Proceeds of Disposition	$251,890.00
Less Adjusted Cost Base	101,115.00
Capital Gain	150,775.00
TAXABLE CAPITAL GAIN	75,387.50
AMOUNT UPON WHICH TAX IS TO BE PAID	$ 75,387.50

7. By Notice of Objection dated September 4, 1980 the Appellant objected to the said reassessment and by Notice dated March 16, 1981 the Respondent confirmed the said reassessment in respect of the Appellant’s 1977 taxation year.

8. In so reassessing the Appellant, the Minister of National Revenue, the Respondent, relied, inter alia, on the following assumptions of fact:

(a) the fair market value of the aforesaid shares on December 31, 1971 was not more than $101,115.00;

(b) the fair market value of the said shares on August 3, 1977 was not less than $251,890.00;

(c) the deceased was a non-resident of Canada during the 1977 taxation year; and

(d) the said shares were shares in the capital stock of private controlled corporations resident in Canada.

At the hearing, counsel for the appellant had admitted all the above- mentioned paragraphs.

On the first issue

He has also given to the Court a summary of arguments which reads as follows:

Summary of arguments on behalf of the Appellant taxpayer respecting the applicability of subsection 70(5) and Article VIII of the Canada-US Tax Treaty

A. Subsection 70(5) of the Act does not apply to Mr Gladden, a non-resident of Canada

— If subsection 70(5) did not apply to Mr Gladden in the first place, he would not have been deemed to have disposed of his capital property immediately before death and consequently no tax liability would arise.

— Subsection 70(5) does not apply because:

1. Tax on non-resident persons is imposed by subsection 2(3), which requires that where a non-resident person disposed of a taxable Canadian property” . . .that tax shall be paid “upon his taxable income as determined in accordance with division D”.

2. The revlevant sections of Division D provide that

115( l)(a)(iii) “A non-resident person’s taxable income earned in Canada for a taxation year is the amount of his income for the year that would be determined under Section 3 if . . . he had no other income other than . . . taxable capital gains from dispositions described in paragraph (b),”

115( 1 )(b)(iii) “The only taxable capital gains referred to in paragraph 3(b) were taxable capital gains and allowable capital losses from dispositions of property each of which was . . . a taxable Canadian property that was . . . a share of the capital stock of a corporation resident in Canada (other than a public corporation).”

3. Thus in the case of taxable capital gains, unless and until the non-resident taxpayer has an actual disposition of a taxable Canadian property, he need not refer back to Section 3 (and thereby the whole of Division B), and thus subsection 70(5) (in Division B) does not apply to him. In other words, having a disposition of a taxable Canadian property under Section 115 is a condition precedent to returning to Section 3, and thereby Division B and subsection 70(5).

4. Majority judgement in Vincent Hurd v the Queen (81 DTC 5140) distinguished

— The Hurd case turned on its own facts and dealt with income from employment which is normally determined under Division B, via Section 3. Section 3 is incorporated by reference (in the case of employment income) by Section 115.

— However in the case of capital gains, the wording of Section 115 is much more specific. Subparagraph 115( 1 )(a)(iii) refers the reader directly to paragraph 115(l)(b), and not back to Section 3. The net effect of the specific provisions regarding capital gains in Section 115 is that Section 3 is incorporated by reference if, and only if the non-resident taxpayer disposed of capital property. If Section 3 is not incorporated by reference, neither is Division B, nor is subsection 70(5).

5. Reference to dissenting judgment of Ryan, J in Hurd.

6. If non-residents were to be taxed on deemed dispositions of capital property, surely clear unambiguous language would be necessary, as in the following sections of the Act:

— 115(l)(b)(ix) ‘‘any other property deemed by any provision of this Act to be taxable Canadian property”

— The preamble of Section 212 (which imposes a withholding tax on amounts paid by a Canadian resident to a non-resident):

“Every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to him as, on account or in lieu of payment of, or in satisfaction of. ..”.

B. If subsection 70(5) of the Act does apply to Mr Gladden, he would nonetheless not be taxable in Canada on the resultant capital gain since he would be protected by Article VIII of the Canada-US Tax Treaty

1. A proper interpretation of the words “sale or exchange’’ in the Canada-US Tax Treaty would protect Mr Gladden from Canadian taxation on the capital gain resulting from the “deemed disposition” and “receipt of proceeds” provisions of subsection 70(5) of the Act.

a) A primary purpose of tax treaties in general and the Canada-US Treaty in particular, is to avoid double taxation

— Title of Treaty and Preamble to Treaty

— Numerous references in Canadian case law

b) Double taxation exists in this case

— The agreed statement of facts and copy of US Federal Estate tax return illustrates that one-half of the aggregate value of the Harry- sons and Klahanie were subject to US estate tax of $34,238 (US) and no credit for Canadian taxes was claimed (line 16, page 1 of the US Estate tax return).

— The US allows no credit for Canadian taxes paid, but only a deduction from the aggregate value of the Estate for US tax purposes (IRS Revenue Ruling 82-82, IRB 1982-18, 8).

— The Canadian tax levied on Mr Gladden’s shares was $34,840.

c) The Treaty should be interpreted “in the light of its object and purposes”

— The Vienna Convention on the law of Treaties (of which Canada is a party)

— Melford Developments v the Queen, Federal Court Trial Division, per Grant, DJ. 80 DTC 6074 at page 6077.

d) In interpreting tax treaties regard should be had to the intentions of the parties.

— “Principles to be Applied in Interpreting Tax Treaties”, David A Ward, Canadian Tax Journal, Volume XXX, No 3 May/June 1977 at page 265.

— The intention of the parties at the time of the signing of the Convention could not have been to tax American residents on capital gains realized in Canada, as at the time of the signing of the Convention capital gains were not taxable in Canada.

— In re Ross, 140 US 453 (1981 — US Supreme Court, as quoted in The Great-West Life Assurance Co v United States, US Court of Claims, No 114-79T, May 5, 1982.

e) Under Canadian law, Tax Treaties have been and should be liberally interpreted.

— Saunders v the Minister of National Revenue, Tax Review Board, 54 DTC 524, per Fordham at page 526

— Appleby v the Minister of National Review, Tax Review Board, 79 DTC 173

— Canadian Pacific Limited v Her Majesty the Queen, 76 DTC 6120, Federal Court Trial Division, at page 6134

— The Queen v John M Cruickshank, 77 DTC 5226, Federal Court Trial Division

— Shahmoon v the Minister of National Revenue, 75 DTC 275, Tax Review Board

f) The word “exchange” in Article VIII of the Canada-US Treaty should be given a wider meaning than its lexicon meaning.

— The Queen v Cruickshank, 77 DTC 5226, per Gibson, J at page 5227

2. The laws of contract are applicable to Tax Treaties and as such neither of the contracting parties can unilaterally enlarge, restrict or otherwise vary the terms of the Treaty as they existed at the time of negotiation and execution of the Convention.

— The terms of the Treaty at the time of negotiation and execution were such that capital gains of non-residents were exempted from tax by both countries. The “sale or exchange” provisions of Article VIII reflect the fact that the US taxes capital gains on the basis of sales or exchanges. Capital gains were not taxed in Canada when the Treaty was executed.

— If Article VIII of the Treaty does not apply, then subsection 70(5) has unilaterally enlarged the terms of the Treaty by purporting to tax US residents on capital gains arising on death.

— In the absence of express, unequivocal language, Canada cannot amend its domestic law so as to create an artificial economic transaction in order to collect tax contrary to the terms of the Treaty; especially where the ability to collect tax in the event of a real economic transaction does not exist.

— Melford Developments v Her Majesty the Queen, Federal Court of Appeal, 81 DTC 5020 at page 5024.

— Melford Developments v Her Majesty the Queen, Supreme Court of Canada, 82 DTC 6281, at pages 6285 and 6286.

— Her Majesty the Queen v Associates Corporation of North America, Federal Court of Appeal, 80 DTC 6140.

— Doris Lillian Gadsden v The Minister of National Revenue, Tax Review Board, 83 DTC 127 at page 136.

3. On a literal interpretation, subsection 70(5) creates an exchange of capital property within the meaning of the Treaty

— Under subsection 70(5), the taxpayer is deemed both to have disposed of capital property and to have received proceeds of disposition therefor; hence an “exchnage” has taken place.

— Under Sections 39 and 40, only gains from the “disposition" of capital properties result in tax, hence if there is no “disposition" there is no tax.

— There is no separate provision in the Act which triggers tax on a “deemed disposition".

— Therefore, once a disposition has been deemed to have occurred, the resultant disposition is indistinguishable from an actiual disposition.

— Similarly, once a receipt of proceeds has been deemed to have occurred, the resultant receipt is indistinguishable from an actual receipt.

— Whether disposition and receipts of proceeds are “deemed” or actual merely reflects two separate routes of arriving at the same result. In the end, all that remains is that the taxpayer has disposed of his capital property and received proceeds of disposition in return.

— An “exchange” therefore occurs via either route.

— See Melford Developments v The Queen (Supreme Court) at page 6283 where Estey, J rejects the reasoning of Urie, J that a guarantee fee which is “deemed” to be a payment of interest is not in fact “interest”.

4, Davis v Her Majesty the Queen, 78 DTC 6374, Federal Court Trial Division and 80 DTC 6056, Federal Court of Appeal

— Obiter dictum of Decary, J at the Trial Division distinguished

— Decary, J seems to be creating two separate classes of disposition; “deemed to be dispositions” versus actual “dispositions”

— It cannot be siad that a gain is derived from a “deemed to be disposition" (at page 6375). This is correct, for only dispositions produce gains. “Deemed to be dispositions” only produce dispositions.

— No reference was made to the obiter dictum of Decary, J in the Court of Appeal.,

5. The Minister’s interpretation of the applicability of Article VIII of the Treaty as expressed in paragraph 4 of IT 173R is inconsistent

— Paragraph 4

The words “sale of exchange of capital assets” in Article VIII do not include the transfer of property as a gift, the passing of property by the death of the owner, or any deemed disposition other than a deemed sale under the Income Tax Act.

— If a deemed “sale” qualifies for Treaty exemption as a “sale” (under “sale or exchange”) why doesn’t a deemed “disposition” and deemed “receipt of proceeds” also qualify for the exemption as an “exchange”?

6. The result of the Minister’s interpretation is anomolous, and should not be supported

in the absence of clear and unequivocal language by Parliament.

— If Mr Gladden had actually disposed of his capital property immediately before death for actual proceeds, he would have received funds with which to pay Canadian tax. However, no Canadian tax would be exigible, since the Minister would recognize Article VIII protection.

C. In the event of any inconsistency between the provisions of this Act or the said Convention and Protocol and the operation of any other law, the provisions of this Act and the Convention and Protocol shall, to the extent of such inconsistency, prevail.

— Paragraph 3 of the Canada-United States of America Tax Convention Act, 1943,

Counsel for the respondent rested on the Davis case, [1978] CTC 536; [1980] CTC 88, to say that:

1. The Estate Tax Act is not comparable to the Capital Gains Tax Act.

2. There is no double taxation in the present appeal. He also argued that the Court should look at Article XVI of the Canada-US Tax Convention which reads:

Art XVI. (Avoidance of double taxation.) Where a taxpayer shows proof that the action of the revenue authorities of the contracting States has resulted in double taxation in his case in respect of any of the taxes to which the present Convention relates, he shall be entitled to lodge a claim with the State of which he is a citizen or resident or, if the taxpayer is a corporation or other entity, with the State in which it was created or organized. If the claim should be deemed worthy of consideration, the competent authority of such State may consult with the competent authority of the other State to determine whether the double taxation in question may be avoided in accordance with the terms of this Convention.

According to this Article XVI, if there is double taxation the US authorities have to look at it. The evidence reveals that the US did not choose to allow a credit, consequently there is no double taxation within the meaning of Article XVI.

At the hearing, counsel for the appellant argued that subsection 70(5) of the Income Tax Act, SC 1970-71-72, c 63, as amended, which deals with deemed disposition of property and proceeds thereof at the death of a taxpayer does not apply to a non-resident, because subsections 2(3), section 3, subparagraph 115(l)(a)(iii) and subparagraph 115(l)(b)(iii) of Division D just mentioned dis- position, and as long as the non-resident has no actual disposition, he does not need to refer back to these sections because actual disposition and deemed disposition are two separate things.

As to the second argument, he is saying that is subsection 70(5) of the Act applies, the appellant is not taxable in Canada because Article VIII of the Treaty protects the non-resident from the deemed disposition of property and proceeds therefrom of subsection 70(5) of the Act for the simple reason that the primary purpose of the Treaty was to avoid double taxation. According to him, there is a double taxation in the case at Bar because:

1. The US has levied under the federal Estate Tax Act a tax of $34,238 on the aggregate value of the appellant’s assets;

2. Canada has levied a tax of $34,800 on deemed disposition of property.

In that respect, he argued that the Canada-US Tax Treaty should be interpreted:

1. in the light of his object and purposes;

2. according to the intention of the parties;

3. liberally in accordance with the Canadian law;

4, that the word “exchange” should be given a wider meaning than its lexicon meaning.

The appellant’s third argument is that the contracting parties cannot unilaterally enlarge, restrict, or otherwise vary the terms of the Treaty.

On this issue, counsel for the appellant argued that the capital gains of nonresidents were exempted from tax by both countries. Consequently, subsection 70(5) of the Act cannot unilaterally enlarge the terms of the Treaty by taxing US residents on capital gains on death, nor can it amend its domestic law so as to create an artificial economy transaction in order to collect tax.

Counsel for the appellant’s fourth argument is that subsection 70(5) of the Act creates an exchange of capital property within the meaning of the Treaty because the taxpayer is deemed both to have disposed of property and to have received proceeds of disposition thereof. Hence, an exchange has taken place where as under sections 39 and 40 of the Act only gains from disposition from property result in tax. Hence, if there is no disposition, there is no tax.

On this issue, he argued that once the disposition and receipts of proceeds have been deemed to have occurred, the resultant disposition is indistinguishable from an actual disposition.

Counsel for the appellant then referred the Court to Davis, (supra), to say that Decary, J, seems to be creating two separate classes of disposition deemed to be disposition versus actual disposition. According to Decary, J: “it cannot be said that the gain is derived from a deemed to be disposition” (at 6375). This is correct for only dispositions produce gains. Deemed to be dispositions only produce dispositions.

As to his first argument, the Court is of the opinion that there are no two separate entities, in fact, two separate things can exist but in law there is only one thing which is disposition of property and the proceeds thereof because of the existence and presence of the presumptions Juris et De Jure.

This Court rests on the statement of Decary, J when he says:

... A deemed to be disposition is a fiction created by the statute for a specific purpose and herein only for what is known as the departure tax, whereas in my opinion, the reference to sale and exchange in Article VIII of the Convention means sale and ex- change as they take place in the course of events and not as a fiction created by statute. . .

The second argument is not valid because there is no evidence to indicate that there is double taxation. On one hand, the US government taxes the appellant under the Estate Tax Act, whereas Canada taxed the capital gain. For the year under appeal, there was no Estate Tax Act in this country. Consequently, there cannot be any double taxation since the appellant is taxed on two different levels.

In view of this finding, there is no need to distinguish jthe numerous cases referred to me by the appellant on the interpretation of the Canada-US Tax Treaty.

This third argument has no bearing since at the time of the agreement on Article VIII of the Canada-US Tax Treaty there was no tax on capital gain in Canada. The said Article reads as follows:

Art VIII. (Gains from sale of capital assets.) 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.

So the parties could not have negotiated to avoid double taxation on a tax which did not exist in Canada.

On the issue that subsection 70(5) of the Act cannot unilaterally enlarge the terms of the Treaty to tax US residents or to collect, the Court believes that a country is free and has the right and power to pass the necessary laws to govern in the best interests of its people. To decide this first issue the Court prefers to rely on the position taken by counsel for the respondent. Consequently, for these reasons, the answer to the first question, whether the deemed disposition of shares owned in Canada by a non-resident is taxable in this country, pursuant to the Canada-US Tax Treaty in general and Article VIII in particular, the answer is yes.

The Second Issue

The second issue is whether the quantum of the taxable capital gains should be split due to the community property regime of the State in which the deceased person was domiciled (California) at the time of the death. On this issue, Mr E Lloyd Saunders, an expert witness specializing in Family Law in the State of California, was called to testify on the community property regime of that State. A five-page document was prepared by him on the said community property regime as follows:

I

“The community property system in this state (California) was derived from the Spanish-Mexican law in force in California at the time of its acquisition by the United States.”

32 Cal Jur 442.

There are 8 states of the 50 states in the United States that have the community property system.

II

The wife has a present and vested one-half ownership in community property under California law. Her ownership interest in not contingent.

A. Property aquired in the state of California whether real estate, personal property or money during the marriage of the parties, with some exceptions, is community prop- erty. This is true whether title stands in one party’s sole name or in both parties’ names.

California Civil Code §5110.

B. Since the year 1927, the wife has a present, existing and equal ownership interest in community property.

California Civil Code §5105, provides as follows:

“The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests. This section shall be construed as defining the respective interests and rights of husband and wife in community property.

See also Summary of California Law, 8th Edition Witkin, Volume 7, pages 5144 and 5145.

and

Cooke v Cooke (1944), 65 Cal App 2d 260, 265.

(1) The Estate of Kelley (1953), 122 Cal App 2d 42 at page 43 states the law in California very clearly:

Our Civil Code, section 161a, enacted in 1927, defines community property acquired during the marriage relation as a present, existing, and equal interest in the wife. This has been defined by our courts as a “vested’’ interest. Subject to administration (Estate of Kurt, 83 Cal App 2d 681 (189 P 2d 528)), it belongs to the surviving wife and never did belong to the husband. (Estate of King, 19 Cal 2d 354 (121 P 2d 716); Horton v Horton, 115 Cal App 2d 360 (252 P 2d 397); Cooke v Cooke, 65 Cal App 2d 260 (150 P 2d 514)).

(2) The wife’s one-half ownership in community property never belonged to the husband.

Estate of King, 19 Cal 2d 354 at 363.

C. In Cooke v Cooke (1944), 65 Cal App 2d 260, 269, held that for another state (Arkansas) to deprive the wife of her vested one-half interest in community property would have the effect of depriving her of property without due process of law and violates the 14th Amendment of the United States Constitution. Although the United States prohibits one state from taking property of a citizen of another state without due process of law, it would appear that under comity and reciprocity a foreign country should not take a vested property interest away from a spouse.

E. The State of California recognizes the surviving spouse’s vested interest in community property and hence the survivor’s one-half interest is not taxed under California Probate Code Section 201 which provides as follows:

“Upon the death of either husband or wife, one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent.. .”

III

A. The rents, issues, and profits of community property are community property and are subject to the control, management and administration by each spouse.

7 Witkin Summary of California Law, 8th Ed, pages 5096 and 5097.

B. Income from community property is subject to the control by either spouse pursuant to Civil Code §5125 which provides for the equal management by husband and wife. The husband is not the sole administrator of community property income in California.

California Civil Code §5125.

(There is an exception where one spouse is operating a business which is community personal property; such spouse has sole management of said business. CC 5125(b)).

C. The 1973 Legislature followed the most radical of suggested reform paths by giving the wife the same control as the husband.

7 Witkin Summary of California Law, 8th Ed page 5147.

5 Pac Law Journal 352.

IV

Cases are legion in California on the subject matter that a husband owes a fiduciary duty to the wife in the management of community property and that his actions are that of comparable to a trustee. (There are cases where the husband had sole management — prior to the 1973 amendment to CC 5125).

Vai v Bank of America (1961), 56 Cal 2d 329.

In re marriage of Warren (1972), 28 Cal App.

Fields v Michael (1949), 91 Cal App 2d 443.

Then, he explained that prior to 1927 the wife’s ownership was not contingent, but on that year the Legislature amended the Act to give the wife equal interest with her husband in the community property. In the Sura case, (supra), compared to the community property regime in California, the husband has the administration, whereas in California the wife has both equal ownership and equal management and control with her husband of the assets and proceeds therefrom of the community property.

In addition, there is a presumption that all property acquired after the marriage is community property subject to management by both spouses and if the husband denies this right, she has an action against him or a right of enforcement.

There is another presumption called “presumption of title’’ when the family home is taken in both names as joint owners. In that case it is deemed that this property is an asset of the community property. In the case of vacant land in joint ownership it is deemed to be in joint tenancy; but this presumption is rebuttable.

If the separate property increases in value during the marriage due to inflation, the increased value is not an asset of the community. But if the increase is due to personal efforts of the spouse it becomes an asset of the community and the one who wants to attack this asset has the onus to prove that it does not belong to the community property. The husband cannot sell the assets of the community without the wife’s consent. If each spouse has a business, each one has the sole control of the business but only on the day-to-day operation. If the wife wants to sell her share of the assets of the community, she is free to do so but in the case of the husband, he would have to take divorce proceedings.

Counsel for the appellant then filed an affidavit of John U Edwards, an attorney of the estate, licensed to practice in the State of California. This affidavit reads as follows:

John U Edwards, being duly sworn, deposes and says:

That I am an attorney duly licensed to practice law in the State of California and have been so licensed since 1946. That John Neville Gladden, also known as John N Gladden and Mary A Gladden, husband and wife, had been clients of mine since 1965. That in the course of representing said clients, I had occasion to draft their Last Wills and Testaments. That in preparing said Wills, I carefully reviewed the source and character of their real property, personal property and income to determine whether said community and income was community property or separate property.

The facts disclosed to me were as follows:

That John N Gladden came to California in late 1935 or early 1936 in the middle of the depression. That he came to California, as did most people in the period, without assets. That he married Mary A Gladden on August 3, 1936 in Santa Barbara, California. That he had never acquired any assets of any type through inheritance or gifts from any source whatsoever. That he was a “self-made” man who developed a prosperous business which later flourished during World War II and that the income from said business and the proceeds from the sale of said business allowed him to retire early and invest his community property money which he had accumulated during his marriage to Mary A Gladden while in California. That over the years he reiterated the substance of these allegations on several occasions; that Mary A Gladden, now deceased, confirmed to me that fact that all their assets had been developed from the community property earnings in the State of California and that their investments were the result of his Califorrnia operation.

He also filed a copy of a certificate of incorporation of “Harrysons Limited” to show that it was incorporated in October 1945, some 10 years after the marriage of John N and Mary A Gladden. Then, he provided the Court with a summary of his submission to show that the taxable capital gain should be split due to the community property regime of the State of California. This summary reads as follows:

Summary of Arguments re the application of the California Community of Property Regime to subsection 70(5) of the Income Tax Act.

1. Subsection 70(5) provides that the taxpayer shall only be deemed to be disposed, immediately before his death, of each property “owned” by him at that time that was a capital property of the taxpayer. . ..

— Therefore as a condition precedent, the taxpayer must have owned the capital property which is the subject of the deemed disposition in order to trigger taxation under the Act.

2. Section 3 of the Income Tax Act imposes tax on the person, however again with reference to subsection 70(5) it is first necessary to establish that the person owned the property before subjecting that person to a tax on the capital gain arising as a result of the deemed disposition.

3. Under community of property regimes in general and under the California Community of Property Regime in particular, immediately before the death of a subject taxpayer he could own no more than one-half of the community property. As a result, immediately before John Gladden’s death he owned only one-half of the Harryson’s and Klahanie shares, since his spouse, Mrs Mary Gladden, owned the other one-half.

— Report and testimony of expert witness, E Lloyd Saunders, California Attorney

— Reese v MNR, 55 DTC 489 per Fisher WS at page 490

From a study of the California law other than that cited to the Board at the hearing it appears that, prior to an amendment which became effective on and after the 29th day of July 1927, the wife, under the decisions of the California Courts in connection with community property laws of the State was held to have only an “expectancy” and not a present, vested in equal interests with her husband in the community property. Accordingly, until the amendment took effect, the income from such community property was taxable to the husband as the administrative head and owner and enjoyment of the property. As a esult of the decision in the United States Supreme Court in UNITED STATES VS ROBERT K MALCOLM, 282 US 792, ...which held that the California amendment gives the wife in the State an equal, present and vested interest in community property with her husband . she may report and pay tax on one-half of the income from such property.

— Sura v MNR, Supreme Court of Canada) 62 DTC 1005 per Taschereau, J at page 1009:

I must say that I agree with Mr Fisher of the Income Tax Appeal Board when he states that there is co-ownership of community property ... I refuse to accept the theory of Mister Justice Fournier of the Exchequer Court who sees in the community only the personal estate of the husband. . .

— Irenee Garant v MNR, 83 DTC 501

— US Federal Estate Tax return wherein deductions from the aggregate value of Mr Gladden’s Estate were allowed for Mrs Gladden’s one-half community property ownership interest.

4. Income attribution cases distinguished.

— No Canadian cases have yet considered the deemed disposition provisions of subsection 70(5). The Canadian cases thus far have dealt with whether the in- come arising from community property is properly taxable in the hands of both or only one of the spouses.

— per Sura v the Minister of National Revenue, 62 DTC 1005, (Supreme Court of Canada)

a) There is co-ownership of community property.

b) Nevertheless there is a difference between who owns the community property (ie both spouses) and who has a right to its income. The husband only has a right to its income, base on his powers as sole administrator.

— Under California Community of Property law Mrs Gladden had an interest which was superior to the community property interest of a spouse under the Community of Property Regime of Quebec, since under California law the husband is not the sole administrator of the community. Therefore there can be no doubt that she had an ownership interest.

— Cases distinguished:

a) Floyd E Skelton v the Minister of National Revenue, 56 DTC 147.

b) Sura v the Minister of National Revenue, 62 DTC 1005 (Supreme Court of Canada).

c) Pope v the Minister of National Revenue, 60 DTC 456.

d) 656 v the Minister of National Revenue, 60 DTC 42.

e) 738 v the Minister of National Revenue, 62 DTC 32.

f) Workman v the Minister of National Revenue, 60 DTC 462.

5. The Appellant does not seek to invoke the revenue law of the State of California, but rather relies on the California Community of Property Regime in order to determine the extent of the capital property owned by him for the purposes of the application of subsection 70(5) of the Canadian Income Tax Act

— Cases distinguished:

Pope v the Minister of National Revenue (Supra)

6. Support for appellant taxpayer in gift tax and succession duty cases.

— Unlike the income attribution cases, with gift tax and succession duty cases the ownership of the property is relevant in that only property owned by the taxpayer would render him competent to dispose of it by way of gift or bequest.

— Cases cited:

a) Edouard Leduc v the Minister of National Revenue, 67 DTC 501.

b) The Minister of National Revenue v the Estate of François Faure, 73 DTC 5236 (Federal Court Trial Division), 75 DTC 5076 (Federal Court of Appeal), 77 DTC 5228 (Supreme Court of Canada).

7. With respect to Mary Gladden’s one-half interest in community property, even if John Gladden had owned that property and were competent to dispose of it, its fair market value immediately before the date of his death would be nil (because of Mrs Gladden’s community property interest).

— Per Chief Justice Martland in the Minister of National Revenue v the Estate of Francois Faure, Federal Court of Appeal, 75 DTC 5076 at page 5081.

Counsel for the respondent argued that the law of California was not applicable in the present appeal and if it were, the Court must scrutinize the nature of the community property in order to determine the true nature of the rights of the wife before the death of her husband. This question of community property has been studied more than once by the judges of this country, but as mentioned by counsel for the appellant, the Canadian cases have dealt with whether the income arising from community property is properly taxable in the hands of both or only one of the spouses.

In the Sura case, [1962] CTC 1 it was decided that the spouses were co-owners of the assets of the community property even if there was a difference between who owns the assets and who has a right to its income. Only the husband has a right to its income based on his powers as sole administrator.

In the case at Bar, the issue is different. One must know who is the owner of the shares before the death of John N Gladden and because he was a resident of California at the time of his death, one must study the statutes in that State to know:

1. Under which matrimonial regime he was married;

2. The nature of the community property;

3. The rights of each spouse under such a regime.

The evidence has revealed that John N Gladden was married to Mary A Gladden on August 3, 1936; that they were under the community property regime; that when he came to California in 1935 he had no assets; that he had never acquired any assets of any type through inheritance or gifts from any source whatsoever, and that he had accumulated his assets during his marrige to Mary A Gladden while in California.

The evidence has also revealed that the company in which he had the shares (the subject matter of this appeal) was incorporated on October 10, 1945, some ten years after his marriage.

From this evidence adduced and following the explanation given by the expert witness on the nature of the community property regime in California and the rights of each spouse, it is obvious that the shares under review, held in the name of John N Gladden, were assets of the community property at the time of his death, and consequently he could own no more than one-half thereof.

For these reasons the appeal is allowed and the matter referred back to the Minister, in order to reassess the appellant on the basis that tax on the taxable capital gain arising from the deemed disposition immediately before his death by the deceased who was a non-resident of Canada of his shares in the capital stock of privately controlled corporation resident in Canada, held by him at the time of his death, should be paid on one-half of the shares only.

Appeal allowed in part.