Estate of Hubert Victor Lafontaine Whittall v. Minister of Finance for British Columbia, [1977] CTC 204

Seaton, JA:—The executors of the estate of the late Mr Whittall appeal from a decision that certain life insurance policies are to be included in the estate for succession duty purposes.

The facts are not in dispute. They are set out in a statement of facts agreed to by counsel, supplemented by affidavit material. The inferences that ought to be drawn are not agreed upon. It follows that every inference favourable to the respondent that is necessary to avoid disagreeing with the trial judge on a question of fact must be drawn. This appeal is limited to a question of law and therefore would not include consideration of whether or not a permissible inference ought to be drawn.

On February 29, 1964 an agreement was entered into whereby Mr Whittall sold his interest in six insurance policies upon his life to Mrs Whittall. The consideration of $29,330.09 was the total of the cash surrender values of the policies at the date of the transfer. It is not said that that was an inadequate consideration. The agreement provided that the sum would be paid by a promissory note that was payable without interest in equal annual instalments of $4,000 commencing on March 1, 1965. The note was delivered and the policies were transferred. Three weeks later the policies were transferred by Mrs Whittall to a company whose shares were held by Mrs Whittall and 'members of her family. The consideration was again $29,330.09 and that amount was credited to Mrs Whittall on the company’s books. To ensure that every inference favourable to the respondent is drawn I will assume that that transfer was ineffectual and the policies remained the property of Mrs Whittall.

The promissory note was completely paid off in three years. On March 1, 1965 the company referred to above issued a cheque to Mr Whittall in the sum of $12,000 and debited Mrs Whittall’s account in that amount; on March 1, 1966 Mrs Whittall issued her own cheque to Mr Whittall in the amount of $10,000; and on March 2, 1967 she issued a cheque to Mr Whittall in the amount of $7,330.09. On the three occasions on which cheques were given to Mr Whittall there were cheques from Mr Whittall to Mrs Whittall in amounts equal to or greater than the amounts of her or the company’s cheques in favour of Mr Whittall. The factual conclusion most favourable to the respondent is that Mr Whittall gave to his wife all of the moneys with which the promissory note was repaid—that, in effect, he forgave in instalments the amount owing on the note. Consequently I treat the flurry of cheques on each anniversary date as a single transaction and assume that on each such occasion the deceased forgave the debt pro tanto. That I think to be parallel with the inference drawn in MNR v Cox Estate, [1971] SCR 817 at 820; [1971] CTC 227 at 229; 71 DTC 5150 at 5151; 20 DLR (3d) 1 at 3.

Mr Whittall died on September 16, 1972 and the question is whether the insurance policies should be deemed to be the property of the deceased pursuant to subsection 2(2) of the Succession Duty Act, RSBC 1960, c 372 [as amended]. The part with which we are concerned is as follows:

2. (2) For all purposes of this Act, the following property shall be deemed to be property of the deceased and to be property passing on his death:—

(g) Notwithstanding the provisions of the Insurance Act and clause (c) of this subsection,

(i) that portion of the money payable as a result of the death of the deceased under a contract of insurance other than a motor-vehicle liability policy as defined in the Insurance Act that is in the same ratio to the whole that the amount of the premiums paid by the deceased or paid from moneys derived directly or indirectly from the deceased on such contract bears to the total amount of the premiums paid, . . .

but nothing herein contained shall render liable for duty any property bona fide transferred for a consideration that is of a value substantially equivalent to the property transferred.

The learned chambers judge ruled that these were not bona fide transfers.

Subsequent events ought to be examined when considering whether the transfers were bona fide but only in so far as the later conduct helps to determine whether the transfers were bona fide when made. If they were bona fide when made I do not think that characteristic can be taken away. Similarly I do not think it possible to say that these transfers, made in consideration of a valid and enforceable note, were not made for a good consideration simply because payments were forgiven in later years.

The subsequent conduct in this case might justify the inference that at the time of the transfers Mr Whittall had in mind that he might forgive payments on the promissory note in the future. That formulates our question: Can it be said that a transfer made in consideration of a promissory note is other than bona fide because the transferor has in mind forgiving payments on the note?

I go to A-G v Duke of Richmond (No 1), [1908] 2 KB 729 at 740-41, affirmed [1909] AC 466, for help with the meaning of the expression “bona fide”. I refer to that case because of its similarity to this case and because it is a source that was used by this Court in Casson v Westmorland Investments Ltd (1961), 35 WWR 521; 27 DLR (2d) 674. The judgment of Cozens-Hardy, MR is particularly helpful and I must quote from it:

Prima facie, therefore, debts and incumbrances are to be allowed; but then there is an exception, to which exception there is an exception, because it goes on to say: “But an allowance shall not be made (a) for debts incurred by the deceased or incumbrances created by a disposition made by the deceased unless such debts or incumbrances were incurred or created bona fide for full consideration in money or money’s worth wholly for the deceased’s own use and benefit and take effect out of his interest.’’ These incumbrances were of course plainly created by a disposition made by the deceased. It has not been disputed that they were made for full consideration in money or money’s worth, for the figures which I have given were the figures ascertained by officials acting under the Scottish Court, and no suggestion can be made that full and ample consideration was not given to the Earl of March and Lord Settrington for the purchase of that which was really their interest in the estate, or, possibly more accurately, the purchase of their power to prevent the Duke from disentailing the estate. But then it is said they were not created bona fide, because the leading motive, if not the sole motive, was to escape the incidence of estate duty. I am unable to satisfy myself that motive has anything whatever to do with this clause so far as we have to consider it. “Bona fide’’ is a perfectly well-known term; it is used again and again throughout this statute and in other similar statutes, and, after all, it means neither more nor less than created in good faith, not as a sham or as a mere paper transaction, not collusively or as part of a scheme to defraud anybody, but it must be an incumbrance created, and being in fact what it is in form, a genuine transaction, intended to have, and having, in truth, all the effect that its form enables it to have. In my view, it is quite unimportant to consider, when a mortgage is made by an owner of an estate, what his motive may be in effecting the mortgage. It may be that he wishes to raise money with a view to giving money to charity or to found a charity; it may be that he wishes to raise money for the benefit of a daughter on marriage, or for making a present to a son. It may be that he wishes to raise money, one motive for his so doing being to avoid the incidence of estate duty. That is an object and motive which is not illegal, is not immoral, and, so far as I know, there is no possible objection to be raised to an honest, honourable, real transaction, otherwise unobjectionable, merely because a man was induced to enter into it with a view to escaping the incidence of estate duty. I therefore, with great respect to the arguments which have been addressed to us on behalf of the Attorney-General, am unable to attach the meaning which the arguments suggest ought to be attached to the words “bona fide.” I am content on this point to adopt the language of Bray, J that those words “provide that the transaction shall be a real and genuine transaction, intended to have full and real operation, without any secret or covinous arrangement or reservation”.

The appeal to the House of Lords was dismissed. Lord Macnaghten disposed of this aspect of the case succinctly at page 472 as follows:

The debts to Lord March and his eldest son were incurred bona fide, and the incumbrances intended to secure those debts were created bona fide in the only sense in which the term bona tides can be used in such a connection, that is to say, the debts and incumbrances were not fictitious or colourable, but real and genuine to all intents and purposes.

Lord Atkinson’s judgment commenced thus (at p 475):

My Lords, in this case, the facts of which have already been stated with sufficient fulness, fraud is not relied upon by the Crown. It is on the contrary admitted that the transactions which took place between the late Duke of Richmond and his son and grandson, the next heirs in tail to his Scotch estates, up to and inclusive of those of October 20, 1897, were real and genuine as opposed to colourable transactions. If so, the incumbrances on these estates created by the late Duke were, in my opinion, created bona fide within the meaning of s. 7, sub-s. 1(a), of the Finance Act of 1894. It is admitted that the motive which prompted the late Duke to enter into these transactions was to relieve from the payment of estate duty those estates which upon his death would pass to another or to others. That motive does not, however, vitiate the transactions, no more than it vitiates a voluntary alienation of property made with the same purpose and object twelve months before a donor’s death. Just as there is nothing illegal or immoral in making such a gift, or in living for twelve months afterwards so as to make it an effectual means of escape from death duties, so there is, in my opinion, nothing illegal or immoral in making the dispositions of property which were made in this case.

And he said further at page 476:

But if these instruments thus did what they purported to do—conferred in law and in fact the rights and interests they purported to confer—I fail to see how they could be held to have been created otherwise than bona fide.

Lord Loreburn, LC agreed with the conclusion of Lord Macnaghten and Lord Atkinson.

With that guidance I conclude that the transaction that took place in 1964 cannot be said to be other than bona fide. It created a real debt that could on the evidence have been collected. It was not a sham and it was not a mere paper transaction. It was not entered into collusively as part of a scheme to defraud and it was in fact what it was in form: a genuine transaction. I think there to be no ground on which the transfers can be said not to be bona fide.

If the payments in succeeding years could be said not to be bona fide, does it follow that the transfers were not bona fide? I think not. The promissory note was the consideration for the transfers but.there was nothing to lock them together so as to make payments in later years part of the transfers.

The final question is whether the point on which I disagree with the learned chambers judge is one of law or fact. Mr Berardino for the appellant raises what he says are two points of law. First, that there was no evidence upon which a finding of lack of bona fides could be made; and second, that the learned chambers judge misconstrued the meaning of the words “bona fide” because no person properly instructed as to their meaning could have reached the conclusion that the transaction was not bona fide. His contention is based on Canadian Lift Truck Co Ltd v Deputy MNR for Customs and Excise (1955), 1 DLR (2d) 497 at 498, where Kellock, J for the Supreme Court of Canada said:

The question of law above propounded involves at least two questions, namely, the question as to whether or not the Tariff Board was properly instructed in law as to the construction of the statutory items, and the further question as to whether or not there was evidence which enabled the Board, thus instructed, to reach the conclusion it did.

While the construction of a statutory enactment is a question of law, and the question as to whether a particular matter or thing is of such a nature or kind as to fall within the legal definition is a question of fact, nevertheless if it appears to the appellate Court that the tribunal of fact had acted either without any evidence or that no person, properly instructed as to the law and acting judicially, could have reached the particular determination, the Court may proceed on the assumption that a misconception of law has been responsible for the determination; Edwards v Bairstow, [1956] AC 14; [1955] 3 All ER 48.

On that basis I am persuaded that error of law has been shown. I would allow the appeal.