The Late Nick G Penner v. Minister of National Revenue, [1984] CTC 2502, 84 DTC 1444

Tremblay, TCJ:—This case was heard on December 7, 1983, at the city of Winnipeg, Manitoba.

1. The Point at Issue

The point at issue is whether the purchase of the appellant’s farm by his son for $31,344 in 1981 may be considered as transferred or distributed to his son “after the death of the Appellant”, and as a consequence thereof within the wording of provision 70(9) of the Income Tax Act. If it were so, there is no taxable capital gain.

The respondent contends rather that the purchase of the farm must be considered as being “acquired” by the son within the meaning of provision 70(5) of the Act. Therefore, there is a taxable capital gain of $44,000 to be included in the computation of the appellant’s 1980 taxation year.

2. The Burden of Proof

2.01 The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the reply to notice of appeal as follows:

5. In reassessing the Appellant as described in paragraph 4, the Respondent assumed, among others, the following facts:

(a) Nick G Penner (“Mr Penner’’) was the owner of a farm property in Manitoba (S% 24-16-3E) of approximately 313.44 acres (“the farm”).

(b) By his will dated 8 November 1971, a copy of which is attached to the Notice of Appeal, Mr Penner devised the farm to his trustees in trust for four of his children, with the proviso that his son Helmut Penner had the option of purchasing it within one year of his death, for $100 an acre, or at market value should the market value be less.

(c) On 31 December 1971, the fair market value of the farm was not more than $32,000.

(d) Mr Penner died on 7 June 1980. The farm was a capital property at that time and its fair market value was at least $120,000.

(e) Immediately before Mr Penner’s death, the farm was used in the business of farming by Helmut Penner who was resident in Canada.

(f) Helmut Penner purchased the farm from the trustees for $31,344 on 11 March 1981.

(g) The farm was not on or after the death of Mr Penner, and as a consequence thereof, transferred or distributed to Helmut Penner within the meaning of subsection 70(9) of the Income Tax Act.

3. The Facts

3.01 At the beginning of the hearing, it was settled between counsel that the only point in dispute was the interpretation of the Act, whether provision 70(5) or 70(9) applies. If the appeal is dismissed on this point, then they will come back before the Court to decide the fair market value of the farm, unless they are able to settle the matter between themselves.

3.02 The facts are not in dispute. Counsel for the appellant admitted subparagraphs (a) to (f) of the assumptions of fact quoted above.

3.03 The appellant also admitted paragraphs (3) and (4) of the reply to notice of appeal. They read as follows:

3. In computing its income for the 1980 taxation year, the Appellant treated the disposition of a farm property on the basis that subsection 70(9) of the Income Tax Act was applicable, with the result that it reported no capital gain from this disposition.

4. The Respondent treated the disposition of the farm property on the basis that paragraph 70(5)(a) of the Income Tax Act was applicable, with the result that it reassessed the Appellant for a capital gain in the amount of $88,000 for the 1980 taxation year.

3.04 Moreover, counsel for the respondent admitted the two first paragraphs of the notice of appeal. They read as follows:

1. The land referred to is farm land in Canada.

2. Immediately before the death of Nicholas Gerhard Penner, who died on the 7th day of June, 1980, the land was used in the business of farming by his son, Helmut Alvin Penner, a resident throughout his lifetime of Manitoba, Canada.

3.05 The appellant’s will dated November 8, 1971 was filed as Exhibit A-1. The most relevant provision is subparagraph (d) of paragraph III. It reads as follows:

(d) TO GIVE, subject to the following proviso, all my farm land including buildings thereon in equal shares to the following four children of mine:

My said son, Nicholas Penner,

My daughter, Helen Kroeker,

My daughter, Selma Concordia Irwin, and

My said son, Helmut Alvin Penner;

provided that my said son, Helmut Alvin Penner shall have an option up to one year after the date of my death to purchase my farm land for the sum of $100.00 an acre or at the market value should such market value be less. The purchase price shall be at least one-half cash or more. If my said son, Helmut Alvin can arrange a mortgage for a larger amount, such amount shall be first of all divided equally among the said Nicholas Penner, Helen Kroeker and Selma Concordia Irwin. Should there be any further amount owing to the aforementioned three children, then such remainder shall be paid to them in equal annual instalments payable on the 1st day of December in each and every year, commencing in the year the said farm land has been purchased, such instalments to be equal to one-third of the value of all crops grown on the said lands. In the event that my said son Helmut Alvin does not exercise the said option to purchase, then my said farm shall be sold by my said Trustees.

3.06 The document entitled “Transfer of land” from the Appellant’s estate to his son Helmut Alvin Penner was filed as Exhibit A-2. It is dated January 29, 1981 and registered February 13, 1981.

4. Law — Cases at Law — Analysis

4.01 Law

The provisions of the Income Tax Act involved in the present case are 70(5)(c) and 70(9). They read as follows:

70(5) Depreciable and other capital property of deceased taxpayer. Where in a taxation year a taxpayer has died, the following rules apply:

(c) any person who, by virtue of the death of the taxpayer, has acquired any particular capital property of the taxpayer (other than depreciable property of a prescribed class) that is deemed by paragraph (a) to have been disposed of by him at any time shall be deemed to have acquired it immediately after that time at a cost equal to its fair market value immediately before the death of the taxpayer;

(9) Transfer of farm property by farmer to his child. Where any land in Canada or depreciable property in Canada of a prescribed class of a taxpayer to which paragraphs (5)(a) and (c) or paragraphs (5)(b) and (d), as the case may be, would otherwise apply was, immediately before his death, used by him, his spouse or any of his children in the business of farming and the property has, on or after the death of the taxpayer and as a consequence thereof, been transferred or distributed to a child of the taxpayer who was resident in Canada immediately before the death of the taxpayer and 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 child not later than 15 months after the death of the taxpayer, the following rules apply:

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

(b) 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 of the depreciable property of the taxpayer of that class that the fair market value at that time of all of the depreciable property of the taxpayer of that class, and

(ii) where the property was land, its adjusted cost base to the taxpayer immediately before his death,

and the child shall be deemed to have acquired the property for an amount equal to those proceeds; and

(c) 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 (9)(b)”.

4.02 Cases at law

The cases at law to which the Court was referred are:

1. Walter G Lumbers v MNR, [1943] Ex. CR 202, aff'd [1944] SCR 167;

2. Montreal Trust Company, Executor of the Will of J S D Tory v MNR, [1973] CTC 434; 73 DTC 5354 (FCA), Aff'd [1976] CTC 415; 76 DTC 6312 (SCC);

3. Montreal Trust Company, Executor of the Will of J S D Tory v MNR, [1971] CTC 488; 71 DTC 5271 (FCTD);

4. Executors of the Estate of Hugh Hawk v MNR (1957), 17 Tax ABC 71; 57 DTC 207 (TAB);

5. In re Wilson, [1908], 1 Ch 839:

6. In re Eve, [1956], 1 Ch 479.

4.03 Analysis

4.03.1 The crux of the matter is whether or not the sale of the farm property by the appellant’s estate to the appellant’s son, Helmut Alvin Penner, pursuant to the option prescribed by the appellant’s will, is a transfer of property as a consequence of the appellant’s death within the meaning of provision 70(9) of the Act. If not, then provision 70(5) must apply. The words of the provision 70(9) are

. . on or after the death of the taxpayer and as a consequence thereof, been transferred or distributed to a child . . .” [Emphasis added]

In French, it says: 66 . . au moment du décès du contribuable ou postérieurement, et par suite de ce décrès, été transféré ou transmis lors d’un partage à un enfant . . .”.

4.03.2 Appellant's argument

Because the word “consequence” is not defined in the Act, counsel for the appellant referred to Black’s Law Dictionary:

CONSEQUENCE. The result following in natural sequence from an event which is adapted to produce, or to aid in producing, such result;—the correlative of “cause”. Board of Trustees of Firemen’s Relief and Pension Fund for City of Tulsa v Miller, 186 Okl. 586, 99 P 2d 146, 147.

In Consequence of

This phrase has been used as equivalent to the words, “in the event of.” In re Spalding's Estate 84 Cal App 371, 258 P 154, 155.

The proviso included in the appellant’s will and the decision of his son to use it meets the wording of the definition and therefore, the wording of the Act.

Indeed the option is in the will and the latter may apply only after the appellant’s death. Hence, it is “. . . after the death of the taxpayer and as a consequence thereof . . .”.

Concerning the word “transfer”, counsel for the appellant referred to Exhibit A-2 “Transfer of Land”. The fact that the sum of $31,344 was paid does not change the fact that there was a transfer.

4.03.3 Respondent's argument

Counsel for the respondent gave a written summary of his argument. The Court quotes the entire argument:

1. The issue on this appeal is whether or not the sale of farm property by an estate to a child of the taxpayer, pursuant to an option to purchase prescribed by the taxpay- er’s will, is a transfer of property as a consequence of the taxpayer’s death within the meaning of subsection 70(9) of the Income Tax Act.

2. Subsection 70(9) of the Income Tax Act exempts certain property from capital gains tax which is otherwise payable upon death, and such a provision must be strictly construed against the taxpayer.

In the Lumbers case, Mr Justice Thorson said:

He must show that every constituent element necessary to the exemption is present in his case and that every condition required by the exempting section has been complied with.

3. Among other things, subsection 70(9) requires that the property must “on or after the death of the taxpayer, and as a consequence thereof, (be) transferred or distributed to a child of the taxpayer.’’ It is respectfully submitted that when property has been sold by an estate to a beneficiary the property has not been “transferred or distributed’’ within the meaning of subsection 70(9).

4. It is respectfully submitted that the word “transferred’’ in subsection 70(9) cannot be given a broad interpretation. In Tory Estate v MNR the Federal Court of Appeal held that the word “transferred” in subsection 64(3) (now subsection 70(3) of the Act) was restricted in meaning by its association with the word “distributed”, and that subsection 64(3) did not embrace acquisitions by a beneficiary when the beneficiary took as a purchaser for valuable consideration:

“‘The deceased, a lawyer, left a legacy of $100,000 for his daughter. At the time of his death, fees amounting to $483,350 were still owing to him. The executor paid the daughter a part of the legacy amounting to $10,000 and subsequently entered into an agreement with her whereby the right to collect the outstanding fees was transferred to her in return for which she released the estate from its liability to pay her the balance of the legacy and, in addition, paid the estate the sum of $380,000.’”

Mr Justice Bastin, in the last part of the Tory Estate decision, said:

In the case at bar, the assignment to Mrs Denton of $90,000 of the accounts receivable was a distribution pursuant to the terms of the will but the assignment of the balance of the accounts receivable was, in fact, a sale to Mrs Denton for valuable consideration. To the extent of $90,000, the assignment was made in satisfaction of the balance of her request. The word “distributed” is used to cover cases where the conveyance is to several beneficiaries. The word “transferred” is inserted to provide for a case where the conveyance is to only one person.

The meaning of “transferred” in this clause is limited by its association with the word distributed. The rule is expressed in the phrase “noscuntur a sociis”. To quote from Maxwell on Interpretation of Statutes, Twelfth Edition, at page 289:

Where two or more words which are susceptible to analogous meaning are coupled together, noscunter a sociis. They are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.

The meaning of both the words “transferred” and “distributed” is also coloured by their conjunction with the words “beneficiaries interested in the estate or trust”.

The value of the rights or things is therefore restricted to the amount of the inheritance of the beneficiary. If he acquires more than that he takes as a purchaser for value and the estate is taxable on the amount so transferred.

This interpretation contradicts the interpretation given by the Tax Appeal Board in Hawk Estate v MNR, (1957), 17 Tax ABC 71; 57 DTC 207.

5. The reasoning of the Federal Court of Appeal is equally applicable to subsection 70(9), and to the facts of this appeal. The farm property in this appeal was not transferred to a beneficiary gua beneficiary, but to a purchaser for valuable consideration.

The fact that the taxpayer’s son was a favoured purchaser does not affect his status as purchaser.

In the Wilson case, (supra), Mr Justice Warrington, on page 842, referred to the masters of the Rolls in Given v Massey:

On the language of this will, it is clear that the testator meant that Loughrey was to be a purchaser, and nothing else — a favoured purchaser no doubt, but still a purchaser.

It is further respectfully submitted that a testamentary option to purchase differs from a testamentary gift of property. The exercise of the option to purchase gives rise to a contract between the executors and the purchaser.

It is necessary to recall the words of the will:

In the event that my said option to purchase then my said farm shall be sold by my said trustees.

In the Eve case, (supra), Mr Justice Roxborough said at 482:

The question is where the benefit of the option stands in the hierarchy of assets for the payment of debts in a solvent estate. The option is a right to purchase 1,000 shares at par value, it involves a contract between the trustees as vendors to sell and the purchaser to buy the shares at the stated price, free from encumbrances, and this is so, notwithstanding that there is a strong element of bounty in the transaction. The shares are not bequeathed subject to a charge or condition. An option to purchase cannot be a specific bequest of shares. If there is a specific bequest at all, it must be of the difference between the price stated in the will and the market value of the shares.

In the Wilson case, at 843, Mr Justice Warrington says:

If he desires to have it and if he exercises his option, in my opinion he elects to become a purchaser . . .

4.03.4 In his rebuttal, counsel for the appellant contended that the Federal Court of Appeal, in the Tory Estate case, had not overruled the Hawk Estate decision given by the Commissioner, W S Fisher, even if the legal section involved is the same: 64(3) of the former Act.

In my opinion, however, the facts are different in the sense that the deceased and the three sons were named as the principal beneficiaries of the four farms of Mr Hawk. The evidence indicated that the three sons, in accordance with an agreement with their mother, had taken absolute possession of the cattle and grain. The sons, thereafter, had dealt with these rights and things as their own and the estate had not received any part of the proceeds of the sale of these assets.

In the Tory Estate case, as in the instant case, the estates have received proceeds of the sale: $31,344 in the latter from the appellant to purchase the farm and $380,000 in the former case, from Mr Tory’s daughter to purchase receivable accounts due to Mr Tory and that she had not inherited. Therefore, the instant case and the Tory Estate case are distinguishable on a very important point from the Hawk Estate case.

4.03.5 In the instant case, if the appellant had not chosen the option, he would have received one quarter of the proceeds of the sale, however, he chose the option of purchasing the farm and paid $31,344 to the estate.

4.03.6 The Court is bound by the interpretation of the Federal Court of Appeal in the Tory Estate case. Hence, the property fails to come within subsection 70(9) of the Act because a sale for consideration is not a “transfer” within the meaning of the said section. Moreover, the sale did not occur as an immediate or direct consequence of the choice of the option to purchase the farm. Even if the sale is a mediate or an indirect consequence of the taxpayer’s death, it is not a transfer within the said section.

Therefore, the transfer of the property falls within the general rule provided in subsection 70(5).

To apply this section, however, one must know the fair market value of the property on December 1971, and on June 1980. The parties shall try to arrive at a settlement and if not, shall come back before the Court. Until then, the reassessment must be maintained.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.