Laura May Lyons v. Minister of National Revenue, [1983] CTC 2117, 83 DTC 113

M J Bonner:—The appellant’s daughter was, under the terms of a will which created a trust, entitled to receive certain income. Part of that income found its way into the appellant’s hands as a result of a contract made between the appellant and her daughter. The issue herein is whether the respondent was correct in including the moneys received by the appellant in the computation of her income.

Robina Lyons died in February of 1960. Her will, so far as is relevant, provided that the residue of her estate was to be held in trust and the income therefrom was to be divided equally among her three sons until death of the last surviving son. Further, the will provided that if Calder Lyons, one of those sons, died before the last surviving son he share of income was, until the death of such last son, to be paid to his children. The appellant and her husband, Calder Lyons, had only one child, Patricia Young.

In December of 1964 Patricia Young, her father and the appellant entered into a written agreement calling for payment to the appellant of seventy-five percent of any income which might flow to Patricia Young pursuant to the trust created by the will of Robina Lyons. Paragraphs 1 and 2 of the agreement read as follows:

1. The Party of the First Part (Patricia Young) does hereby transfer, assign and set over unto the Party of the Third Part (the Appellant) such portion of the expectant right of the Party of the First Part to the receipt of the one-third income from the assets of the Estate of Robina A Lyons commencing on the death of the Party of the Second Part (Calder Lyons) to the intent that hereafter Seventy-five (75%) per cent of the said income shall be paid to the Party of the Third Part during her lifetime and Twenty-five (25%) per cent of the said income shall be paid to the Party of the First Part.

2. This Agreement shall be conclusively deemed to vest in the Party of the Third Part an unconditional right to receive Seventy-five (75%) per cent of the said income during the term of her natural life.

In February of 1972, following the death of her father, Patricia Young directed the trustees to . . pay the income hitherto paid to AVERY CALDER LYONS from the date of his death in the proportion of 75% to LAURA MAY LYONS and 25% to ..herself.

Thereafter, until December of 1975 payments were made in accordance with the agreement and direction. Patricia Young then purported to revoke the direction and requested the trustees to pay all of the income to her. The dispute was resolved, at least temporarily, and later in December of 1975 the solicitors for the appellant wrote to the solicitors for the estate and advised that:

. . . for the present time that the said income should be paid in the percentages of fifty per cent (50%) thereof to Mrs Lyons and fifth per cent (50%) thereof to Mrs Young.

Payments of fifty percent of Mrs Young’s one-third share of the estate income were made to the appellant thereafter until October of 1977 when the solicitor for the appellant directed the estate to revert to the original 1964 agreement. Litigation followed which resulted in a finding by the Supreme Court of Ontario that the 1964 agreement was not vitiated by duress, undue influence or fraud as had been claimed by Mrs Young and, further, that the 1975 agreement varying the proportions in which the income was to be divided between the appellant and her daughter was also valid and not made without prejudice to the appellant’s rights under the original 1964 agreement.

By the assessments of income tax under appeal the respondent included in the computation of the appellant’s income the following amounts

Those amounts were described in at least some of the notices of reassessment as “interest income received from the Estate of Robina A Lyons”. The notification of confirmation given in response to objections to the assessments for the first four of the years under appeal asserted that:

. . . the amounts . . . have been properly included in computing the taxpayer’s income in accordance with the provisions of paragraph 12(1 )(m) and subsection 105(1) of the (Income Tax) Act.

The first submission made on behalf of the appellant was that the 1964 agreement . . should be construed as no more than repayment of moneys owing or lent to Mrs Young” and that . . being repayment only of moneys borrowed, it does not attract tax”. The agreement recites:

WHEREAS the Parties of the Second Part (Calder Lyons) and the Third Part (the Appellant) have advanced certain moneys to the Party of the First Part (Patricia Young).

AND WHEREAS the Parties hereto have agreed that the aforesaid advances to the Party of the First Part should be repaid by providing an income for the said Party of the Third Part, during her lifetime.

It will be observed that the agreement referred to in the recitals is one which calls for repayment . . by providing an income for. ..” the appellant. That recital is consistent with paragraphs 1 and 2 of the agreement. The manner selected by the parties to the agreement to discharge the indebtedness was not repayment of any moneys loaned but, rather, was an assignment of a right to income. Thus, the suggestion made by counsel for the appellant that the moneys received pursuant to the assignment are to be regarded, in effect, as instalments made in repayment of a debt as opposed to “.. . benefits . . . from or under a trust. ..” within the meaning of subsection 105(1) of the Income Tax Act is wrong.

The second submission made by counsel for the appellant was that, by virtue of subsection 56(2) of the Act, . . the income is taxable in Mrs Young’s hands to start with and that whether or not she subsequently transfers the benefits of this income to some other person, she cannot escape the liability for tax which is hers to start with”. Counsel did not suggest that the assignment of the right to receive income which was made by the 1964 agreement was legally ineffective and that in some way Mrs Young had, following the 1964 agreement, a continuing right to receive the payments in question. Thus, it was not shown that the payments by the trustees to the appellant were “made pursuant to the direction of” Mrs Young within the meaning of subsection 56(2) of the Act.

Finally, I observe that it was not suggested that the posiition prior to the resolution of the 1975 dispute and the position subsequent to it were different in any way. In summary, it was not shown that the assessments were wrong. The appeals will therefore be dismissed.

Appeal dismissed.