Gordon S Cowan Et Al, Executors Under the Will of John Crerar Mackeen v. Minister of Finance of the Province of Nova Scotia, [1978] CTC 557

MacKeigan, CJ:—The primary issue on this appeal is whether a bequest by the late Colonel J C MacKeen, intended by him to be enjoyed by his wife, Dorothy, for her lifetime and then to be enjoyed equally by his four daughters, escaped Nova Scotia succession duty by reason of the corporate devices employed. Mrs lyiacKeen and three daughters, Sally Norwood, Catherine Burkart and Christina Shaw, were resident in Nova Scotia when Colonel MacKeen died in Nova Scotia on September 30, 1972. A fourth daughter, Jane Fagan, resided in Massachusetts; the will gave her her portion on her mother’s death without any corporate intervention, since she as a non-resident needed no. shield from Nova Scotia taxation in respect of her succession to personal property situate in Alberta.

The assets ’so bequeathed consisted of all the issued common shares of Rockingham Investments Ltd, an Alberta company, and a promissory note made by that company in favour of Colonel MacKeen for $1,715,211.21, all of which are referred to in the will as the “Rockingham Securities’’. The share certificates were physically situate in and transferable only in Alberta. The note was also physically situate in Alberta and payable in Alberta.

The testator bequeathed the above assets to his executors to hold in trust and to pay the net income derived therefrom during the life of his wife, Dorothy MacKeen, to another Alberta company, Point Pleasant Investments Ltd, a wholly-owned subsidiary of Francklyn Investments Ltd, an Alberta company, all of whose common shares are owned by Mrs MacKeen.

On Mrs MacKeen’s death, the executors are to divide the assets into four equal parts: one to be paid to Jane Fagan and the other three parts to Alberta companies, as follows:

(1) One quarter to Chester Investments Ltd, a wholly-owned subsidiary of Blue Water Investments Ltd, all of whose common shares are owned by Sally Norwood;

(3) One quarter to Sambro Investments Ltd, a wholly-owned subsidiary of Iberian Investments Ltd, all of whose common shares are owned by Catherine Burkart:

(3) One quarter of Sambro Investments Ltd, a wholly-owned subsidiary of Hollis Investments Ltd, all of whose common shares are owned by Christina Shaw.

The bequests to Chester, Citadel and Sambro provided that if the bequests were void or failed to take effect they should go to the respective daughters. In that event, if at the time of the division of the estate any daughter was not living, “her equal part shall be transferred to her issue then living in equal shares per stirpes”.

The nine Alberta companies referred to above have the same officers and directors, all lawyers resident in Alberta. The share certificates, share registers and head offices of all companies are situate in Alberta.

In each of the four parent companies, ten voting common shares are held by the Nova Scotia women (Francklyn—Dorothy MacKeen; Blue Water—Sally Norwood; Iberian—Catherine Burkart; and Hollis— Christina Shaw) and each of the three Alberta directors has ten voting preferred shares of the par value of $1 each.

The Alberta companies were incorporated June 23, 1972, after the enactment of the Succession Duties Act of Nova Scotia, Stats NS 1972, C 1/7.

Following Colonel MacKeen’s death the Minister assessed the estate for succession duty in the sum of $483,443.91 plus interest. He alleged that Dorothy MacKeen, Sally Norwood, Catherine Burkart and Christina Shaw. were “successors” to the amounts of $509,791.50, $281,462.65, $281,462.65 and $281,462.65, respectively, pursuant to paragraph 2(5)

(b) of the Act. Following confirmation by the Minister, the appellants applied to the Supreme Court asking that the assessment be Set aside. The Honourable Mr Justice G L S Hart in chambers, held that the said persons were successors and that the Act was intra vires the Province of Nova Scotia. From that decision the appellants have appealed.

The relevant sections of the Act are paragraph 1(ae) defining “successor”, section 8 which provides by subsection (2) that a successor resident in the provincé must pay duty on property of the deceased situate outside the province and subsection 2(5) which deems resident shareholders of non-resident corporations to be successors. These sections are:

1. (ae) “successor” in relation to any property of the deceased includes any person who, at any time before or on or after the death of the deceased became or becomes beneficially entitled to any property of the deceased

i) by virtue of, or conditionally or contingently on, the death of the deceased, or. . .

[Then follow alternative clauses as to property passing otherwise than by will]

8. (1) Subject as hereafter otherwise provided, duty shall be paid on all , property of a deceased that is situated, at the time of the death of the

deceased, within the province.

(2) Subject as hereafter otherwise provided, where property of a deceased was situated outside the province at the time of the death of a deceased and the successor to any of the property of the deceased was a resident at the time of the death of the deceased, duty shall be paid by the successor in respect of that property to which he is the successor.

2. (5) Where a corporation which is not resident in the province, other than a corporation without share capital, by reason of the death of a deceased acquires or becomes beneficially entitled to property of the deceased,

(a) the corporation shall be deemed not to be the successor of the property except to the entent that the value of the shares of the shareholders of the corporation is not increased in value by the corporation acquiring or becoming beneficially entitled to the property; and

(b) each of the shareholders of the ‘corporation shall be deemed to be a successor of property of the deceased to < the extent of the amount by which the value of his shares in the corporation is increased by. the corporation acquiring or becoming beneficially entitled to the property.

I do not find particularly helpful some of the arguments advanced by both sides as to the interpretation of taxing statutes such as the Act before us. The respondent has, in effect, asked us to conclude that, since Colonel MacKeen clearly intended to avoid taxation of his estate by Nova Scotia, we should interpret the Act broadly to stretch the taxation net to make sure that so-called corporate “devices” do not permit his heirs to escape fair contribution to the tax burden which must be borne by other residents of the province where the deceased’s fortune was mainly accumulated. On the other hand, and similarly logically irrelevant, are the appellants’ suggestions that come close to implying that the heirs of the deceased should be rewarded for the ingenuity of Colonel MacKeen’s legal advisers to escape taxation.

The appellants emphasize the oft-quoted obiter dicta of Lord Tomlin in Commissioners of Inland Revenue v Duke of Westminster, [1936] AC 1 at 19, as follows:

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.

Similarly, Urie, J, for the Federal Court of Appeal in Minister of National Revenue v Smith, [1975] CTC 335 at 344; 75 DTC 5242 at 5248, said that “every taxpayer is entitled to so manage his affairs as to minimize the incidence of tax payable”.

I respectfully agree with Mr Justice Hart who, after a very thorough review of the authorities, said:

. . I must be guided by the plain meaning of the statute as a whole. Before any tax is attracted by the Act the meaning must be clear and unambiguous so that the taxpayer is clearly brought within the wording of the statute. The Court in a case of this sort is not permitted as in a Court of Equity to interpret the legislation so as to be fair and just to the Crown or other taxpayers, but must not be so restrictive in its interpretation as to prefer matters of form to those of substance coming clearly within the meaning of the Act.

“I do not believe that the Court has any right to set aside bona fide transactions obviously designed for the avoidance of tax on the ground that they are artificial and designed to minimize or avoid payment of tax. The jurisprudence which has arisen around the provisions of part 16 of the Income Tax Act, which deals with tax evasion and avoidance, does not apply here since those provisions are not contained in the Nova Scotia Succession Duty Act. The argument of the Crown that the scheme of distribution adopted by Colonel MacKeen was patently designed to avoid the provisions of the Act and that the Court should therefore interpret the Act so as to catch the taxpayer must fail, and what remains to be determined is whether or not the taxpayer has successfully brought himself outside the ambit of the legislation.

I would, however, modify the last sentence to read that what is to be determined is whether or not the statute has successfully brought the taxpayer within its ambit.

The plain or natural meaning of the legislation must be sought, uninfluenced by ethical or political biases or presumptions and unaffected by either the legislator’s wish to ensure fair taxation of estates acquired in Nova Scotia or by the testator’s wish to escape such taxation. Moral obligations are irrelevant in the face of the amorality of a taxing statute. The issue is simple: has the legislature used words which in their plain meaning embrace the bequests?

The widow and daughters of the deceased were not shareholders of the subsidiary corporations which by the will receive an interest from the estate. The respective parent corporations were the shareholders of the receiving subsidiary corporations. The widow and daughters were thus not shareholders of non-resident corporations which “acquired” property of the deceased within the meaning of subsection 2(5).

The issue is then whether the parent corporations can be said to have become “beneficially entitled” to the property by virtue of their subsidiaries having acquired it. If so, the widow and daughters become deemed successors and as such dutiable in respect of the increased value of their shares.

The learned chambers judge relied on Montreal Trust Company v Minister of National Revenue, [1958] SCR 146; [1958] CTC 60; 58 DTC 105, (the Torrance Estate case), where Rand, J, at 149, 62 and 1052 Said:

Mr Marler for the appellants urged as the test to determine whether a successor had become “beneficially entitled to any property” that formulated by Wynn-Parry, J in In Re Miller’s Agreement; Uniacke v Attorney General. The test was, that it must be “postulated of him [the successor] that he has a right to sue for and recover such property”. If the word “recover” extends to the application of money to one’s benefit, and “sue for” to an ultimate and alternative resort as the effective cause of payment, I am disposed to accept it.

Mr Justice Hart concluded (and I respectfully agree):

In my opinion the Legislature of Nova Scotia in using the expression “Where a corporation . . . becomes beneficially entitled to property of the deceased” it was using it in the broad sense to cover the situation where the corporation is put in a position to ultimately exercise the rights of ownership over property of the deceased. It would be unnecessary to use additional words such as “directly or indirectly” or “is controlled by” to effect its purpose. “Becomes beneficially entitled to” is broad enough to cover situations in which the property is registered in another name or held in trust or placed in any form in which the corporation can legally recover the property for its own benefit.

The subsidiary companies which received the bequests from Colonel MacKeen were in all cases wholly owned subsidiaries of their parents. There is no doubt in my mind that the parent corporations could cause the subsidiaries to be wound up and the value of their assets would then belong to the parent corporations. The bequest of Colonel MacKeen could legally be brought into the entire control of the parent companies, and to the extent that the shares of the parent companies were increased in value the resident shareholders of those companies would be deemed to be successors to the properly of the deceased.

I agree that being “entitled” to property means being able to “legally recover” it, that is, in the present context, to have the right and power, by lawful means, to fully enjoy the property. The adverb “beneficially” indicates that the person entitled to enjoyment of the property may not have full legal title.

In the modern sense of the phrase, a person is “beneficially entitled” to property if he is the real or beneficial owner of it, even though it is in someone else’s name as nominal owner. The nominal owner of the property, whether real property, choses in action or other personal property,-has legal title to it. The real owner, the person “beneficially entitled”: to it, can require the nominal owner to let him use or have possession of the property, or to give him. the income from it, or otherwise to let him have the benefit and enjoyment of it. He usually can require the nominal owner to convert the property into another form or to transfer the legal title to some other nominal owner. Above all, he is able, unless restricted by the terms of a specific trust, to call on the nominal owner to convey the property to him and to transfer its legal title to him, the real owner. If he does so, he will then fully acquire the property by achieving full ownership and will cease to be merely beneficially entitled to it.

Sometimes the respective rights and duties of the beneficial owner and the nominal owner may be spelled out in a formal trust agreement. When company shares are issued to a nominal shareholder, the solicitor will usually have him sign at least a short declaration of trust, attached to the share certificate, declaring that he holds it for the beneficial owner and that he will transfer it if requested to do so. Indeed, such* declarations of trust were executed by the directors of the MacKeen subsidiary companies in respect of their qualifying shares iiY those companies. In other cases, a trust or agency arrangement may be oral. Again, the relationship may be inferred from the control exercised by the beneficial owner over the nominal owner, as sometimes where a wholly-owned private investment company holds in its name investments of the owner of the company.

It seems to me apparent that a company may, depending on its make-ùp and status, become the beneficial owner of the assets of its subsidiary, and thus be beneficially entitled to them within the meaning of the latter phrase as used in the Succession Duty Act. I respectfully consider inapplicable, and, indeed, not quite accurate, the following dicta of Pennycuick, J, in Rodwell Securities Ltd v Inland Revenue Commissioners, [1968] 1 All ER 257 at 260, a case on which the appellants strongly relied:

According to the legal meaning of the words, a company is not the beneficial owner of the assets of its own subsidiary.

That case involved the meaning of “beneficial owner” under a very different statute involving a very different corporate set-up. The learned judge construed that phrase in the section before him as not equating ownership and control because of other sections dealing specifically with control.

Here, in considering control, we must be concerned with the facts of the particular case before us—the status and relations of these companies and their shareholders immediately after Colonel Mac- Keen’s death. By reason of that death, each subsidiary company acquired from his estate property in expectancy and became the nominal owner of that property. The parent of each MacKeen subsidiary wholly owns and controls that subsidiary. The parent by that control has the right and power to cause the subsidiary to pass any necessary shareholder and director resolutions, and to convey and transfer the property to it, with any transfer documents completed?

Mrs MacKeen’s subsidiary, Point Pleasant Investments Ltd, on Colonel MacKeen’s death, could be called on to pass resolutions and to assign to the parent company, Francklyn Investments Ltd., any income received by it from the executors. Francklyn, in turn,, could be caused to distribute that income to Mrs MacKeen.

The subsidiary companies of the MacKeen daughters receive no immediate interest until Mrs MacKeen’s death. Nevertheless, each could be called upon after Colonel MacKeen’s death to assign to its parent company its future right to receive a share of the estate, or upon Mrs MacKeen’s death, to transfer the portion of the “Rockingham Securities’’ then received by it.

In each case the subsidiary company in assigning or transferring to its parent its share in the estate would thus distribute its entire capital and assets to its parent; just as if it had been formally wound up. It would be thus quite unnecessary, although legally quite possible, for the parent to cause the subsidiary to be formally wound up, as suggested by Mr Justice Hart.

Each parent and each subsidiary is an investment company. Each, according to the agreed statement of facts, engaged in no “activity”, between incorporation and Colonel MacKeen’s death, except to issue its own shares, and, in the case of each parent, to become beneficial owner of the issued. shares of its subsidiary. No subsidiary company has, as an ordinary trading company would have had, any minority shareholders, any creditors (not even the Department of National Revenue), any employees, or any customers, whose interests might have to be considered before it could lawfully distribute capital or transfer assets and whose interests might well be protected by bankruptcy law or other preferential legislation or rules of law.

Each parent company on Colonel MacKeen’s death became the beneficial owner of the interest in his estate which was at that time acquired by its respective subsidiary, the nominal owner of that interest. Each parent company thus became “beneficially entitled” to that interest.

The conclusion that each parent company is, by the ordinary, plain meaning of the words, “beneficially entitled” to the estate interest acquired by its subsidiary, is reinforced by the consideration that by the combined operation of paragraph 1(ae) and subsection 2(5) each parent, on the facts of this case, is in any event deemed to be so “beneficially entitled’’.

Let me explain. By subsection 2(5) each MacKeen parent company is, as the sole beneficial shareholder of its subsidiary, undoubtedly deemed to be the successor in respect of the property bequeathed to that subsidiary. A “successor” by paragraph 1(ae) is declared to be a person who “becomes beneficially entitled’ to property of the deceased on his death. The parent company, having been deemed a successor by subsection 2(5), must then by paragraph 1(ae) be deemed to be a person beneficially entitled to the property in question.

Turning again to subsection 2(5) and applying it again, the parent company is a non-resident corporation. It is a “successor” via its subsidiary. By the combined effect of subsection 2(5) and paragraph 1(ae), as above, it must therefore be itself deemed to have become beneficially entitled to the property. Accordingly its shareholder ‘shall be deemed to be a successor” of the property.

Accordingly, both on the plain meaning of paragraph 2(5) and on the statutorily deemed effect of it, I conclude, as did Mr Justice Hart, namely:

. . . Francklyn Investments Limited, Bluewater Investments Limited, Iberian Investments Limited and Hollis Investments Limited are non-resident corporations which by reason of the death of Colonel MacKeen became beneficially entitled to property of the deceased as a consequence of bequests to their subsidiaries, and that Dorothy MacKeen, Sally Norwood Catherine Burkart and Christina Shaw, the sole common shareholders of those companies, were residents of Nova Scotia at the time of his death and shall be deemed to be successors to the property of the deceased to the extent of the amount by which the value of their shares are increased by the parent corporations having become beneficially entitled to the property.

Three secondary arguments of the appellants should be mentioned but can be briefly disposed of:

(1) I cannot accept the contention that the subsidiary companies ‘‘acquired” no interest in Colonel MacKeen’s estate because the property was given by his will to his executors in trust and not directly bequeathed to the subsidiaries. Paragraph 1(w) of the Act defines “property”:

(w) “property” means property of every description whatever, whether real or personal, movable or immovable, or corporeal or incorporeal, and without restricting the generality of the foregoing, includes

(i) any estate or interest in any such property, a right of any kind whatever and a chose in action, and

. (ii) money.

The subsidiaries clearly received an “estate or interest”.

(2) Similarly, I reject the claim that the subsidiaries, other than Point Pleasant (Mrs MacKeen’s subsidiary) neither acquired nor became beneficially entitled to any interest in “Rockingham Securities” because the bequests to each of them are conditional or contingent on the gifts taking effect and not being void, with gifts over to the respective daughters, subject to the further contingency that the daughters be alive at the time of division or have issue then alive. Again, the interests, albeit contingent and future interests, are nevertheless “property” within the scope of the definition and thus “property” within the meaning of that word as used in subsection 2(5).

(3) The appellants point out that Mrs MacKeen and her three daughters hold ten common shares each of the respective parent companies and do not have voting control of those companies. Three Alberta lawyers, nominal shareholders of the subsidiary companies, each hold, apparently beneficially, ten voting preferred shares of $1 par value of the parent companies. Thus the common shareholders could not force the lawyers to cause the subsidiaries to do anything, eg, make gifts to the parents. I respectfully can see no relevancy in the lack of full formal control by the common shareholders. We were concerned in the foregoing discussion whether the parent had the power and the right to direct the subsidiary, which it undoubtedly has, and not whether Colonel MacKeen’s wife or daughters could be prevented by the Alberta lawyers from personally enjoying the bequests in due course

—an almost unthinkable possibility.

The appellants also contended, as they did in the court below, that subsection 2(5) is ultra vires the province of Nova Scotia. I fully agree with Mr Justice Hart that the section is intra vires and I respectfully adopt his reasons in which he reviewed the relevant authorities and the opposing arguments and concluded:

The Nova Scotia Succession Duty Act under section 8 makes resident successors to property of deceased persons situate outside the province liable for payment of succession duties. Section 2 subsection (5) deems the shareholders of non-resident corporations becoming beneficially entitled to property of deceased persons as a result of their death to be successors to the extent of the increase in value of their shareholdings. In my opinion this is clearly direct taxation upon residents of the province and establishes a method for the calculation of the benefit being received by the successor. It is not taxation on property outside the province but rather on persons within the province to the extent to which they have been benefited by transfers to non-resident corporations.

I add that the legislation does not affect transmission in Alberta or title to personal property situate in Alberta. It does not seek to tax a beneficiary with respect to personal property passing to him by virtue of a transmission under the law of another province; here the beneficiaries became entitled under Nova Scotia law.

The appeal should be dismissed with costs.