Marcel H Roy;■ F * v. Minister of National Revenue, [1978] CTC 2180, 78 DTC 1123

The Chairman [TRANSLATION]:—This is an appeal by Marcel H Roy against an income tax assessment for the 1974 taxation year.

Issue

The point at issue is an assessment in which the respondent added $3,139.33 to the appellant’s income for the 1974 taxation year, pursuant to the issue of a T3 form by the respondent as the result of an audit of Estate J Horace Brabant, of which the appellant was the residuary legatee, as well as executor. The $3,139.33 was claimed by the said estate as expenses in 1974, but was disallowed as such by the respondent, who. considered it to be income of the estate and added it to the appellant’s personal income for that year. The appellant objected to this assessment and filed an appeal with the Board.

Facts

The facts are relatively simple, and there is no disagreement between the parties. In 1969 Mr J Horace Brabant died, leaving in his estate certain properties, including a building with four apartments and two garages, and a semi-commercial building with four stores and twelve apartments. The said properties continued to produce income for the estate after Mr Brabant’s death. The appellant, Mr Marcel H Roy, was appointed residuary legatee and executor of the estate in a will dated October 27, 1964 (Exhibit A-3).

In his capacity as executor, the appellant filed a T3-1974(F) form as well as a trust information return and income tax return (Exhibit I-1-4).

Following the filing of this return, the appellant received the following letter (Exhibit I-2) from the Chief, Audit:

Upon examination of the above-mentioned return. it was noted that interest on bank loans used to pay part of the estate taxes was deducted from income. Please note that interest thus paid is not deductible under ss 60(d), 20(1)(c), or any other provision of the Act.

Enclosed are revised copies of your T3 Supp form, in which “other income’’ has been revised to $3,139.33. the interest on bank loans used to pay estate taxes.

Your 1974 income tax return will be revised accordingly.

Yours truly,

(Signed) M Ste-Marie

Encl for the Chief, Audit

The statement of trust income allocations was in fact revised and $3,139.33 was added to the income of the beneficiary, Mr Marcel H Roy. The basic issue in the case at bar therefore concerns interest in the amount of $3,139.33 paid on a bank loan taken out by the estate and endorsed by the appellant both in his capacity as executor and personally. The question is whether the estate obtained the loan to pay estate taxes, as maintained by the respondent, in which case the interest on the loan is not deductible, or whether the loan was obtained to enable the executor to pursue the normal financial operations of the estate, as maintained by the appellant. Before deciding on this question, however, I would like to examine another point tn this matter.

The reassessment shows that the respondent disallowed the deduction of interest paid by the estate. Consequently, the estate was left with a balance of $3,139.33 in income for 1974. This income was added to the appellant’s personal income for the 1974 taxation year, since he was the beneficiary.

The question is whether the $3,139.33 was income or a final asset of the estate that could be enjoyed by the beneficiary, or perhaps even simply a stage in the executor’s administration of the estate so it could be finally settled.

The reason for subsections 104(1) and (2) of the Income Tax Act, SC 1970-71-72, c 63, as amended, is easy to understand. Subsections 104(1) and (2) read as follows:

104. (1) Reference to trust or estate—In this Act, a reference to a trust or estate (in this subdivision referred to as a. “trust”) shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property.

(2) Taxed as individual.—k trust shall, for the purposes of this Act, and without affecting the liability of the trustee or legal representative for his own income tax. be deemed to be in respect of the trust property an individual; but where there is more than one trust and

(a) substantially all of the property of the various trusts has been received from one person, and

(b) the various trusts are conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary, or group or class of beneficiaries,

such of the trustees as the Minister may designate shall, for the purposes of this Act, be deemed to be in respect of all the trusts an individual whose property is the property of all the trusts and whose income is the income of all the trusts.

Applying this section to the case at bar, it will be seen that Estate Brabant also refers to the executor, having ownership or control of the property in the estate, but it is the estate which is “deemed to be in respect of the trust property an individual”. It should be noted that although this section speaks of legal representatives of a trust or estate, it Woes not mention “beneficiaries”.

The appellant, in his capacity of executor, paid the estate’s debts out of the estate’s assets and income for a period of three years. He administered the properties and collected the rent. He paid off about 15 specific legacies, including a debt of $10,000 to the widow of the deceased six months after his death, in accordance with the latter’s marriage contract. He also paid the property taxes and filed income tax returns for Estate Brabant in the amount of $8,000 in 1971, $14,000 in 1972, and $12,000 in 1973.

In 1972 the estate was assessed for $156,191.85 in federal and provincial estate taxes. On April 17, 1974 the estate taxes were paid, except for approximately $14,000, which was subsequently paid off by the sale of the deceased’s residence.

The estate has not been divided in any way except for the payment of legacies. The two properties forming the core of Estate Brabant cannot be transferred to the residuary legatee until the last heir, is deceased. The appellant’s testimony revealed that one of the two heirs is still living.

lt seems apparent that the payment of $3,139.33 in interest, whether deductible or not, was made for the estate in the course of administering its assets. Since the respondent disallowed the deduction of the interest on loans, the estate might be (and l'am not deciding here whether the $3,139.33 is deductible) taxed on the $3,139.33, which was added to its income, and the estate might have to pay the taxes, through its legal representative who, in the case at bar, is the appellant, in his capacity of executor. In my opinion, there is a big difference between the role of the estate’s legal representative, the executor, and that of the beneficiary, even when it is the same person.

Since the estate was still not settled in April 1974, the estate taxes were still not completely paid, the estate’s assets had still not been divided, the transfer of the properties to the name of the residuary legatee had still not been made, and the executor was still administering the estate s assets, the estate should have been taxed for the income of $3,139.33 (if the interest was not legally deductible) and the taxes should have been paid out of the estate’s assets, through the appellant, in his role of executor. This, in my opinion, is the scope of subsections 104(1) and (2) of the Income Tax Act.

An estate’s income is definitely taxable once it has been transferred to the beneficiary, but first the estate must have been settled, the division made and all the estate’s debts paid. This was not the case in the matter before the Board. In his arguments regarding this matter, counsel for the respondent stated:

Mr Chairman. I wish to take the following position in this matter. The loan was taken out in the name, of Estate J Horace Brabant. Mr Roy was a party to the loan as endorser as well as executor and residuary legatee, although he did not incur any legal obligations.

Even assuming the deduction had been allowed, Mr Roy would still have had to incur the expenditure. The. expenditure was made by the estate. Mr Chairman.

The appeal before this Court this morning is that of Mr Roy only. I cannot see how the Board could allow Mr Roy to claim an expense, to deduct an expense, which may be claimed by the estate. Perhaps we should re-examine the facts in this case. The Estate claimed $3, 139.33 in expenses, leaving a net and residual income of zero.

The Department performed an audit and disallowed the expenses. It then issued a T3 form and. Mr Roy was taxed as the residuary legatee.

Mr Roy-is now, appealing the inclusion of this amount in his income.

Mr Chairman. I respectfully submit that unless Mr Roy can prove that he is not the residuary legatee. he has no reason for appealing the refusal of this deduction in the estate s assessment.

The evidence shows that Mr Roy is indeed the residuary legatee of the Estate Brabant, but the confusion which has arisen between Mr Roy’s role as executor in the administration of the estate and his role as residuary legatee prior to the settlement of the estate has, in my opinion, given risen to the exact contradictory conclusions that subsections 104(1) and (2) of the Income Tax Act were trying to avoid.

Since this appeal deals with Mr Roy’s personal assessment and not that of Mr Roy as executor of the estate he administered, I must conclude that the respondent erred or at least was premature in sending. Mr Roy, as residuary legatee, a tax assessment for 1974 in which income which may have been earned by the estate in 1974, through Mr Roy who managed its assets, was added to his personal income. The estate itself should have been taxed, through the executor, in accordance with the provisions of the Income Tax Act.

Since, in the circumstances, the assessment of the appellant as residuary legatee before the estate was settled was incorrect in fact and in law, I shall not decide whether interest in the amount of $3,139.33 paid by the estate in 1974 for loans is deductible from the estate’s income for the taxation year 1974.

For these reasons, the appeal is allowed and the assessment vacated.

Appeal allowed.