Winnifred M Hillis and Irvin Hillis, as Administrators of the Estate of William Edward Hillis v. Her Majesty the Queen, [1982] CTC 293, 82 DTC 6249

Smith, DJ:—The plaintiffs in this action are claiming that the reassessment of the estate of William Edward Hillis to income tax for the taxation year 1977 dated May 20, 1980 be vacated. The income tax return for the deceased’s estate for the year 1977 showed tax payable and claimed a refund of $240.80, which amount had been deducted at source during the year. The reassessment of May 20, 1980 showed taxable income for 1977 of $118,258.80, on which the federal and provincial tax totalled $53,632.40, which with interest added amounted to $59,013.40.

The relevant facts may be stated as follows:

The plaintiff Winnifred M Hillis and her late husband William Edward Hillis resided at Macklin, Saskatchewan for many years prior to his death on February 21, 1977. They have two sons, Irvin Hillis and Gerald M Hillis. Irvin Hillis is the other plaintiff. He lives in Saskatchewan and is a farmer. Gerald M Hillis is an engineer, residing in Calgary, Alberta.

Letters of administration of the estate of William Edward Hillis were granted to the plaintiffs by the Surrogate Court of the Judicial District of Saskatoon, on August 4, 1977.

On June 15, 1979 Irvin Hillis disclaimed any interest in the estate of his father. On July 4, 1979, Gerald M Hillis disclaimed any interest in the estate. The result of these disclaimers was that Winnifred M Hillis became entitled under the law of intestacy of Saskatchewan to the entire estate.

On November 29, 1979, Winnifred M Hillis applied to the Court of Queen’s Bench under the Dependants’ Relief Act of the Province of Saskatchewan for an order granting the entire estate to her, and on December 14, 1979 the Court of Queen’s Bench granted the entire estate to her pursuant to her application.

As William Edward Hillis had died intestate and the disclaimers of the two sons had resulted in Winnifred M Hillis becoming the sole beneficiary of his estate, it was not necessary for an application to be made under the Dependants’ Relief Act. Assuming that all debts, funeral and administration expenses had been paid, the administrators could have transferred all the real and personal property of the estate to her. However, the fact that the order granting her the entire estate under the Dependants’ Relief Act had been obtained had an important bearing on the plaintiff’s claim in this action that no tax was payable for the year 1977. The first notice of reassessment of income tax for that year was sent on August 17, 1979 by the Department of National Revenue, Taxation, addressed to William E Hillis, c/o Irvin Hillis. Irvin Hillis, as administrator of the estate, sent in a notice of objection to the reassessment on October 1, 1979, and as has been stated supra, the application under the Dependants’ Relief Act was made on November 29, 1979.

The determination of the issues in this action depends on certain statutory provisions. It will be helpful to quote them at this point. First a section of the federal Interpretation Act and one of the Saskatchewan Interpretation Act. Section 16 of the federal Act reads:

16. No enactment is binding on Her Majesty or affects Her Majesty or Her Majesty’s rights or prerogatives in any manner, except only as therein mentioned or referred to.

Section 7 of the Saskatchewan Act is as short but is even more emphatic.

7. No provision in an Act shall affect the rights of Her Majesty unless it is expressly stated therein that Her Majesty is bound thereby.

The words “Her Majesty” include, inter alia, the Ministers of the Crown and a number of other persons who are authorized to perform certain func- tions of Her Majesty’s government, whether it is the government of Canada or of a province.

Next I quote subsection 14(1) and section 15 of the Dependants’ Relief Act of Saskatchewan.

14. (1) Where an order is made under this Act, then for all purposes, including the purposes of enactments relating to succession duties, the will shall have effect, and shall be deemed to have had effect from the testator’s death, as if it had been executed, with such variations as are specified in the order, for the purpose of giving effect to the provision for maintenance made by the order.

15. No order shall be made unless on an application made within six months from the grant of probate of the will or of administration, but the court may, if it deems it just, allow an application to be made at any time as to any portion of the estate remaining undistributed at the date of the application.

Subsections 70(5) and (6) of the Income Tax Act also are important. Subsection (5) need not be quoted. It lays down the general rule that where in a taxation year a taxpayer has died he shall be deemed to have disposed of all his capital property (other than depreciable property of a prescribed class) immediately before his death and to have received proceeds of disposition therefor equal to its fair market value at that time. It further prescribes that any person who has acquired any particular such capital property by virtue of the death of the taxpayer shall be deemed to have acquired it at a cost equal to the fair market value immediately before the taxpayer’s death. For depreciable property of a prescribed class these rules are modified, but a deeming feature is retained.

The effect of this subsection is that any increase over the cost to the taxpayer of each item of capital property that is shown by its fair market value at the time of his death is a capital gain, half of which is subject to capital gains tax.

Subsection (6) lays down the specific rules that apply where the person who acquires any such capital property by virtue of the death of the taxpayer is the taxpayer’s spouse or a trust for the spouse for life. Part of the subsection deals with depreciable property of a prescribed class, with which this case is not concerned. The relevant portions of it read as follows:

(6) Where any property of a taxpayer who was resident in Canada immediately before his death that is a property to which paragraphs (5)(a) and (c) or paragraphs (5)(b) and (d), as the case may be, would otherwise apply has, on or after his death and as a consequence thereof, been transferred or distributed to

(a) his spouse who was resident in Canada immediately before the taxpayer’s death, or

(b) a trust, created by the taxpayer’s will, that was resident in Canada immediately after the time the property vested indefeasibly in the trust and under which

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

if 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 in the spouse or trust, as the case may be, not later than 15 months after the death of the taxpayer, the following rules apply:

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

(d) 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) (note: This lengthy subparagraph deals with depreciable property and is not relevant to this action.)

(ii) in any other case, the adjusted cost base to the taxpayer of the property immediately before his death,

and the spouse or trust, as the case may be, shall be deemed to have acquired the property for an amount equal to those proceeds.

Where the conditions described in the last few lines of paragraphs 6(a) and (b), following subparagraph (b)(ii), are complied with, the value of the property at the time of the testator’s death and as acquired by the spouse, or trust, is deemed to be, not its fair market value at that time, but the cost to the testator. Thus no increase in value during the time the property was owned by the taxpayer is taken into account. Thus there is no capital gain and no liability to capital gains tax at that time. If subsequently the spouse or trust disposes of the property at a higher price than that at which the spouse or trust is deemed to have acquired it, the difference would have to be dealt with in accordance with the rules governing capital gains tax.

We are not concerned with cases in which a trust is set up for the spouse, because no trust was set up in this case. I have quoted paragraph 6(b) because counsel for the plaintiff, both in his written memorandum of the law and in his argument before me, gave a good deal of emphasis to his view that the conditions described in the few lines which follow subparagraph (6)(b)(ii) apply only to a case in which a trust for the spouse is set up and not to a case where the property is vested in the spouse directly.

In my view counsel has misunderstood the application of what is contained in those lines. In the first place the lines do not follow directly on at the end of subparagraph (6)(b)(ii). There is a space between them and the said lines are not placed directly below paragraph (6)(b), but are set right out to the margin directly below the introductory words of subsection (6). To my mind this fact indicates that these lines refer to all the preceding part of subsection (6). The decisive fact is contained in the words of the conditions contained in those lines. Those words speak of the property being established “to have become vested indefeasibly in the spouse or trust, as the case may be.” Paragraph (a) speaks only of property that has been transferred to the spouse, and paragraph (b) speaks only of property that has been transferred to a trust. Quite clearly the conditions expressed in those lines must be held to apply to both of paragraphs (a) and (b), in other words to cases in which property has been transferred to the spouse as well as to cases in which it has been transferred to a trust.

At this point I feel constrained to make a comment that is purely obiter. I would have expected that some question would be raised about the appropriateness, in the circumstances of this case, of the order made by the Court of Queen’s Bench of Saskatchewan on December 14, 1979. By virtue of the disclaimers of any interest in the estate of William Edward Hillis executed on June 15, 1979 and July 4, 1979 respectively by Irvin Hillis and Gerald M. Hillis, the only children of the deceased, Winnifrid M. Hillis, his spouse, became his only next of kin entitled to share in his estate. As such, under the Saskatchewan law of intestacy, she was entitled to the whole estate. The purpose of the Dependants’ Relief Act of Saskatchewan is to enable the Court, on application, to order that financial relief be given, out of the estate of the deceased, to a dependant of the deceased who, in view of that dependant’s situation and other relevant circumstances, has not been adequately, reasonably or properly provided for by the last will of the deceased or under the law of intestacy, as the case may be. I have very great difficulty in understanding how an order granting the whole of the deceased’s estate to his spouse can be described as giving financial relief to her out of the estate, when she is already entitled to the whole estate. In other words, is it possible to grant financial relief to a person out of something to the whole of which she is already solely entitled and if it is possible, is the order made by the Court of Queen’s Bench a proper exercise of the Court’s power under the Dependants’ Relief Act?

It does not seem that this question was raised at the hearing of the Application before the Court of Queen’s Bench. Nor has the Order made by that Court been challenged in any way in the pleadings or in argument at the trial before me. The question is therefore not an issue in this case, but in my view it is one that warrants being put in issue in cases of this kind.

The only real gain resulting in this case from seeking and obtaining the order of the Court of Queen’s Bench was that the order provided some foundation for saying that the vesting of this intestate’s estate in his widow had been antedated to the date of his death. It thus could make it easier to prove that no income tax was payable for the year 1977 since it would remove any problem about whether the conditions in the lines following the end of subparagraph (ii) of paragraph 70(6)(b) of the Income Tax Act had been complied with. The order having been made the question whether the claim is valid must still be resolved.

Counsel for the plaintiffs submits that the answer is yes. His argument may be stated briefly as follows: The order having been made it must be assumed that the Court, as required by section 15 of the Dependants’ Relief Act, considered it to be just to allow the application to be made, notwithstanding that the six-month period from the grant of Letters of Administration for doing so had ended some 21 months prior to the application being made. The effect of the order, under section 14 of that Act, was to vest all the property of the deceased in the female plaintiff at the date of her husband’s death. This eliminates any question of the condition (in subparagraphs (6)(b)(i) and (ii) of the Income Tax Act) that vesting must occur within 15 months after the death of the taxpayer not being complied with. The 18 months that had elapsed after those 15 months had expired was, in the circumstances, in his opinion, a reasonable extension of that period, for the purpose of establishing that vesting had occurred within the period.

The first point advanced by counsel for the defendant was that legislation does not bind Her Majesty except as provided in the Interpretation Act. Section 7 of the Interpretation Act of Saskatchewan is very clear: “No provision in an Act shall affect the rights of Her Majesty unless it is expressly stated therein that Her Majesty is bound thereby.” Nowhere in the Dependants’ Relief Act of Saskatchewan is there an express statement to this effect. Section 14 does state that an order made under the Act has effect “for all purposes, including the purposes of enactments relating to succession duties.” Even assuming that the quoted words mean that Her Majesty is bound thereby, counsel submitted that the words “for all purposes” mean “all provincial purposes” and that this case is not concerned with an Act relating to succession duties but with the right of Her Majesty to collect the taxes provided for by the Income Tax Act (a federal statute), including taxes imposed in respect of capital gains.

Section 16 of the Interpretation Act of Canada is equally clear and to the same effect, though expressed in somewhat different terms: “no enactment is binding on Her Majesty or affects Her Majesty or Her Majesty’s rights or prerogatives in any manner, except only as therein mentioned or referred to.”

Counsel for the defendant submitted that section 14 of the Dependants’ Relief Act of Saskatchewan is not intended to apply to purely federal purposes and in any event it cannot operate to preclude Her Majesty from collecting income tax, including capital gains tax that is owing and payable under the Income Tax Act. He referred to several judicial decisions in support of his argument.

1. North Pacific Lumber Co Ltd v MNR, [1928] Ex CR 68; [1917-27] CTC 336; 1 DTC 117. This is a decision of Audette, J in the Exchequer Court of Canada. The appellant company was in liquidation. Under the Income War Tax Act, 1917, the Crown claimed the right to tax interest earned on deferred payment for the sale of capital assets under a contract of sale made by the company before the liquidation. The company refused to pay interest after the date of the appointment of the liquidator, on the ground, inter alia, that under the Winding-Up Act there is a notional change in the character of the company which removed the distinction between capital, profits and interest, all of them becoming simply assets, so that the company is no longer a person carrying on business or a person under the Tax Act. Audette, J quoted the general rule of construction of statutes, as held in the case of The Queen v Nova Scotia Bank (1885), 11 SCR 1, that the Crown is not bound by a statute unless therein mentioned. At page 117 of the DTC report he said:

Nowhere in the Winding-Up Act is the Crown named and accordingly there is no pretence for saying that the Crown should be bound thereby; therefore the respondent’s rights are free from any restraint that might be invoked under the Winding-Up Act.

2. The King ex rel A-G Can v Sanford (1939), 1 DLR 374. This was a replevin action brought by the Soldiers’ Settlement Board, an agency of the Crown in right of Canada. It went, on appeal, to the Supreme Court of Nova Scotia. The judgment of the Court was delivered by Carroll, J. The case involved the sale of a horse by the Board to one of its soldier settlers under a conditional sale agreement which was not registered under the Conditional Sales Act of Nova Scotia. The buyer, who had not paid any part of the price, sold the horse to the defendant, from whom the Board brought this action to recover it. At page 380, Carroll, J said that the rule generally stated is that the Crown is not bound by a statute unless named in it. He then quoted, with obvious approval, the following statement from Maxwell on the Interpretation of Statutes, 7th ed pp 117 et seq:

At all events the Crown is not reached except by express words or by necessary implication in any case where it would be ousted of an existing prerogative or interest. It is presumed that the Legislature does not intend to deprive the Crown of any prerogative, right or property, unless it expresses its intention to do so in explicit terms, or makes the inference irresistible. Where, therefore, the language of the statute is general, and in its wide and natural sense would divest or take away any prerogative or right from the Crown, it is construed so as to exclude that effect.

3. In the Goods of Hartley, [1899] P 40. In this case the Probate Division of the English High Court held that the Land Transfer Act of 1897 did not bind the Crown, and, therefore, the legal estate in escheated land did not, under section 1 of that Act, vest in the Solicitor to the Treasury as the Crown’s nominee.

4. George T Laflair v MNR, 15 Tax ABC 439; 56 DTC 451. The headnote of this case reads, in part:

Held, that the appeal is dismissed. Nothing appearing in a provincial statute can alter the incidence of taxation as provided for in the Income Tax Act. The $400 received yearly by the appellant was his annual remuneration as a member of a city council and was not paid to him for expenses incurred or to be incurred. No part of this amount came within the relieving provisions of section 10(3) of the Act.

Many other decisions could be cited, all to the same effect.

Counsel for the plaintiffs submitted that the cases cited by counsel for the defendant did not deal with the situation we have in the present case. He said he thought the last lines of subsection 70(6) were drafted with the retroactive effect of an order under the Dependants’ Relief Act in mind, and that, by these words Parliament has accepted the consequences for the Crown of the events dealt with in them, though there is no statement expressly binding the Crown. He did not, however, disclose any authority for his thinking, nor did he refer to any judicial decisions in support of it. I am unable to agree with counsel’s submission on this point. While the facts in the cited cases differ between themselves and also from those in the present case, the legal principle is the same in all of them and is applicable to the present case. In my opinion sections 14 and 15 of the Dependants’ Relief Act of Saskatchewan have no effect upon the right of Her Majesty to collect taxes to which she is entitled under the provisions of the Income Tax Act.

There remains the question whether the vesting of the estate in the deceased’s spouse occurred within the time limitation described in subsection 70(6) of the Income Tax Act. That limit is “within 15 months after the death of the taxpayer”, and this fact must be established within the same 15 months “or such longer period as is reasonable in the circumstances.” The deceased taxpayer died on February 21, 1977. Fifteen months from that date was May 21, 1978. As of the latter date the taxpayer’s two sons were entitled to share in the estate under the intestacy succession law of Saskatchewan, and apparently no steps had been taken either to distribute the estate among the beneficiaries or to have disclaimers of interest executed by the two sons. Not until November 29, 1979, 18 months after the 15-month period had ended, when the order of the Court of Queen’s Bench of Saskatchewan was obtained, could it be said that the estate had become vested in the spouse of the deceased. Under Section 14 of the Dependants’ Relief Act the vesting was deemed to have taken effect at the date of the death of the deceased. The question for determination is whether that period of 18 months was “such longer period as is reasonable in the circumstances.” To my mind those words mean that, at least in uncomplicated cases the vesting of the property in the spouse should occur during the specified 15-month period and that reasonable grounds for delay beyond that period are required to be shown.

The only ground of explanation for the delay in this case is that for a long time no lawyer was engaged to look after the legal steps of administering the estate. All such matters were left in the hands of an accountant, who it seems did practically nothing. The date at which a lawyer was engaged is not disclosed in the evidence. It may have been prior to the date on which Irvin Hillis executed his disclaimer of interest in the estate, or it may not have been till after the first notice of reassessment of the estate for income tax for the year 1977, which notice is dated August 17, 1979. This notice must have come as a shock to Irvin, in whose care it was addressed, and I think would almost certainly cause him (and his mother) to consult a lawyer, if they had not done so previously.

In my view the foregoing explanation for the long delay which occurred in this case cannot be considered to be reasonable justification for that delay. The estate was not inconsiderable, being valued by the Department of National Revenue at more than half a million dollars. So far as the evidence shows, there were no contingent liabilities, no conflicting or uncertain claims, and no other circumstances that complicated the business of administration. The administrators (plaintiffs in this action) probably were not aware of, or at least not well informed about the terms of subsection 70(6) of the Income Tax Act, particularly the conditions laid down in the last few lines thereof, but if so, ignorance of the law is not an excuse for the long delay that occurred. In view of the estate being relatively large and the nonexistence of any factors that might occasion difficulties or delay in administration, it is to be expected that the administrators would move with reasonable dispatch. From the evidence I can see no reason why the estate could not easily have been fully administered and wound up within six or seven months following the death of the deceased. The administrators were entitled to wait for a reasonable period of time to permit the accountant, on whom they relied, to get on with the administration, but to allow matters to drag on for well over two years without any progress being shown, requires, in my opinion, much better grounds of justification than have been expressed here.

The result is unfortunate for the spouse. The provisions of subsection 70(6) of the Income Tax Act are designed to exempt the spouse of a deceased taxpayer who acquires property by reason of that taxpayer’s death, from capital gains tax that otherwise would be payable under subsection 70(5) of that Act, but the exemption is only given if the conditions stated at the end of subparagraph 70(6)(b)(ii) are complied with. From my understanding of the facts I am unable to find that they have been complied with. Accordingly the action is dismissed. The defendant is entitled to costs.