Charles E Murphy, Jr and Leonard Boreman, Executors and Trustees Under the Last Will and Testament of Owen K Murphy, Deceased v. Her Majesty the Queen, [1974] CTC 552

Cattanach, J:—This appeal from a decision of the Tax Review Board dated February 23, 1973 arises from an assessment of the Minister of National Revenue to estate tax levied against the plaintiffs herein as executors and trustees of the estate of Owen K Murphy so named and appointed by the last will and testament, dated May 5, 1968 of the late Mr Murphy.

The assessment by the Minister is predicated upon subsections 3(1), 34(1) and paragraph 38(e) of the Estate Tax Act, SC 1958, c 29, and Article ll(f) of the Schedule to the Canada-United States of America Estate Tax Convention Act, 1961.

Subsection 34(1) reads:

34. (1) In the case of the death, at any time after the coming into force of this Act, of any person domiciled outside Canada at the time of his death, an estate tax shall be paid as hereinafter required upon the aggregate value of all taxable property (hereinafter in this Part referred to as the “property taxable on the death”), being property situated in Canada at the time of his death, the value of which would, if that person had been domiciled in Canada at the time of his death, be required by this Act to be included in computing the aggregate net value of the property passing on his death.

Paragraph 3(1 )(a) reads:

3. (1) There shall be included in computing the aggregate net value of the property passing on the death of a person the value of all property, whenever situated, passing on the death of such person, including, without restricting the generality of the foregoing,

(a) all property of which the deceased was, immediately prior to his death, competent to dispose;

Paragraph 38(e) provides:

38. For the purposes of this Part, the situs of any property, including any right or interest therein of any kind whatever, shall, where that property comes within any of the classes of property mentioned in this section, be determined in accordance with the following rules:

(e) shares, stock, bonds, debentures and debenture stock of a corporation and rights to subscribe for or purchase shares or stocks of a corporation (including any such property held by a nominee, whether the beneficial ownership is evidenced by scrip certificates or otherwise, but not including any shares of the deceased in the capital stock of a corporation incorporated in Canada whose business operations are of an industrial, mining, commercial, public utility or public service nature and are, except for management and the designing, purchasing and transportation of goods, carried on entirely in the country in which, at the time of his death, the deceased was domiciled, whether directly or through ownership of shares in or control of subsidiary or affiliated corporations) shall be deemed to be situated in the place where the corporation is incorporated;

Article ll(f) of the Schedule to the Convention provides:

Where a person dies a citizen of the United States of America or domiciled in Canada or the United States of America, the situs of any rights or interests, legal or equitable, in or over any of the following classes of property, which for the purposes of tax form or are deemed to form part of the estate of such person or pass or are deemed to pass on his death, shall, for the purposes of the imposition of tax on the basis of situs, of property within the taxing State and for the purposes of the credit to be allowed under Article V, be determined exclusively in accordance with the following rules, but in cases not within such rules the situs of such rights or interests shall be determined for these purposes in accordance with the laws in force in the other contracting State:

(f) shares, stock, bonds, debentures, and debenture stock of a company, and rights to subscribe for or purchase shares or stock of a company (including any such property held by a nominee, whether the beneficial ownership is evidenced by scrip certificates or otherwise) shall be deemed to be situated at the place where the company is incorporated;

The facts giving rise to the assessment are straight-forward and undisputed.

The late Mr Murphy was a citizen of the United States resident and domiciled in the Commonwealth of Pennsylvania, one of the United States of America.

Prior to his death on August 25, 1968 Mr Murphy was the president and holder of 98 of issued and outstanding shares of Monarch Massage Equipment Limited (hereinafter sometimes referred to as Monarch), a joint stock company incorporated pursuant to the laws of the Province of Ontario. Two shares in this company were beneficially held by nominees of Mr Murphy. The total of 100 shares constituted all of the issued and outstanding shares of Monarch.

Mr Murphy was also the major shareholder of Niagara Therapy Manufacturing Corporation (hereinafter sometimes referred to as Niagara), a corporation incorporated pursuant to the laws of the State of Delaware. Mr Murphy’s holding of shares in Niagara was approximately 73% and after a plan of reorganization exceeded 80%.

Niagara and Monarch were closely related corporations, governed by boards of directors, the members of which were identical, operated by the same management and with a free interchange of manufacturing equipment and know-how. Mr Murphy was the dominant person in both companies.

He considered it expedient that Monarch should become the wholly- owned subsidiary of Niagara. To accomplish that end Mr Murphy would transfer 98 of the shares in Monarch, owned by him, and cause the transfer of two of the shares owned on his behalf to Niagara in exchange for 100,000 shares of Niagara to be allocated and issued to him from the authorized but unissued shares in the capital stock of Niagara.

To implement this desired result Mr Murphy consulted his legal adviser for many years, Leonard Boreman. It will be observed that in the style of cause herein, Mr Boreman is a party in his capacity as an executor and trustee of the estate of Mr Murphy.

Mr Boreman was admitted to the bar of the Commonwealth of Pennsylvania in 1937 and since that date has continuously practised before the Supreme Court of Pennsylvania, all inferior courts of that State, the Supreme Court of the United States and all inferior courts exercising federal jurisdiction. He is a senior member of a firm of practitioners with offices in Pittsburg, Pa. During the practice of his profession he has particularly emphasized and specialized in the field of federal estate and income taxation.

In Mr Boreman’s opinion the proposed exchange of shares owned by Mr Murphy in Monarch for shares of equivalent value in Niagara would constitute a plan of reorganization within the meaning of the United States Internal Revenue Code, 1954, which Code is an Act of Congress.

While he testified that the proposed exchange could have been effected by oral agreement, nevertheless, he reduced that plan to writing in a document dated May 6, 1968 entitled “Agreement and Plan of Reorganization”, to which Niagara, Monarch and Owen K Murphy were parties, because the agreement was a plan of reorganization and as such would be subject to the scrutiny of the Internal Revenue Service.

This document was introduced in evidence as an exhibit and provides basically for the transfer of Mr Murphy’s 100 shares of Monarch owned by him outright or beneficially in exchange for 100,000 shares. of Niagara to be issued to him as fully paid by Niagara.

However the agreement further provided that the exchange of shares would not be consummated until a ruling had been issued by the Internal Revenue Service that the exchange of shares was tax free pursuant to the provisions of the United States Internal Revenue Code.

The pertinent paragraphs of the Agreement and Plan of Reorganization to this effect read as follows:

3. The aforesaid exchange shall not be consummated unless and until a ruling has been issued by the Internal Revenue Service determining that said exchange is tax free pursuant to Section 368(a)(1)(B) and Section 354 of the Internal Revenue Code of 1954, as amended, and is likewise in compliance with Section 367 of said Code, and the parties agree to proceed immediately upon the execution of this Agreement to apply for said ruling.

4. Closing of the above exchange shall take place not later than thirty (30) days from the receipt of a favorable ruling from the Internal Revenue Service as provided in Paragraph 3.

5. In the event that a favorable ruling as above provided cannot be obtained, this Agreement shall thereupon be deemed null and void and neither party shall have any further liability to the other.

The Agreement and Plan of Reorganization was executed by ail three parties thereto at Adamsville, Crawford County, Pennsylvania as mentioned above on May 6, 1968.

On June 14, 1968 Niagara submitted a request for a ruling that the transaction proposed in the Agreement was not in. pursuance of a plan having as one of its principal purposes the avoidance of United States federal income taxes and that the plan would not result in the realization of a gain or loss for Mr Murphy. Further information was requested by the Internal Revenue Service which was furnished forthwith.

On August 25, 1968 Mr Murphy died.

On December 9, 1968 the Internal Revenue Service issued a favour able ruling to the effect that the acquisition by Niagara of all the outstanding shares of Monarch would constitute a tax-free reorganization and that there would be no avoidance of income tax on the part of Mr Murphy, now deceased.

The transfer of shares was thereupon completed.

As indicated above the Minister of National Revenue by an assessment dated October 23, 1970 assessed the plaintiffs to estate tax in the amount of $55,372.14 which amount represents the estate tax payable on the 100 shares of Monarch valued at $350,000 and 5 shares of Monarch Massage Distributors Limited valued at $19,147.59.

There is no question that, by virtue of paragraph 38(e) of the Estate Tax Act and Article ll(f) of the Schedule to the Canada-United States of America Estate Tax Convention Act, 1961, both of which had been quoted above, the shares in Monarch are deemed to be situated in the Province of Ontario, where Monarch was incorporated, nor was this disputed.

That being so, if beneficial ownership in those shares remained vested in Mr Murphy on August 25, 1968, the shares would constitute property of the deceased of which he was competent to dispose and so is properly included in computing the net aggregate value of the property passing on death and subject to tax accordingly under subsection 3(1) of the Estate Tax Act.

The position taken on behalf of Her Majesty, as I understood it, was that the provision in the agreement with respect to obtaining a ruling from the Internal Revenue Service that the transaction was tax-free was a true condition precedent in that the condition was the act of a third party and until the performance of that act by the independent and external third party the contract did not become effective. Following on that premise it was contended that there was no right of specific performance by any party to the agreement until the condition had been fulfilled with the consequent result that Owen K Murphy remained both the legal and beneficial owner of the shares of Monarch as at the date of his death.

In contradistinction thereto, the contention on behalf of the plaintiffs, as I understood it, was that on the execution of the agreement on May 6, 1968 the deceased ceased to be the beneficial owner of the shares in Monarch, that on that date Niagara became the beneficial owner of the shares and that the role of the deceased from that date forward was trustee of the shares for the benefit of Niagara. On that premise it follows that the deceased was not competent to dispose of the shares to any party other than Niagara and accordingly the only rights which the deceased died possessed of under the agreement were rights or causes of action ex delicto surviving to the benefit of the estate of the deceased which rights are deemed to be situate where the rights or causes of action arose and where those rights may be enforced, that is, in this instance, the State of Pennsylvania by virtue of paragraph 38(n) of the Estate Tax Act and Article ll(m) of the Canada-United States of America Estate Tax Convention Act. The right of the deceased or his personal representatives to enforce those rights is predicated upon the premise that the condition with respect to the ruling by the Internal Revenue Service was not a true condition precedent but a condition for the benefit of the deceased which he could waive.

Against this background of facts and rival contentions the first question which must be determined is the proper law of the contract, that is, by what law is the interpretation of this particular contract and the rights conferred thereunder to be governed.

The prima facie rule is that the law of the place where the contract was executed is the proper law and in my opinion in the present instance there are no exceptions established to that rule, nor any circumstances which justify a departure therefrom.

The Agreement and Plan of Reorganization which is the contract here in question was executed at Adamsville, Pennsylvania on May 6, 1968.

While Monarch, an Ontario corporation, was a party to the agreement, nevertheless, the transaction with respect to the exchange of shares was exclusively between Mr Murphy and Niagara.

Mir Murphy was domiciled and resident in Pennsylvania and Niagara was incorporated under the laws of the State of Delaware and the management of that corporation was effectively controlled from the State of Pennsylvania.

Therefore the transaction with respect to the shares was between two non-residents of Canada and was made outside of Canada.

Monarch was a party to the contract because it was a party to a plan of reorganization within the meaning of those words as used in the United States Internal Revenue Code. The parties acknowledged that provisions of that Code were applicable to all three parties to the agreement and submitted the pian for a ruling by the Internal Revenue Service.

From this the inference is irrebutable that the parties must have intended or must be presumed to have intended the law of Pennsylvania to be the proper law of the contract.

I, therefore, conclude that the interpretation and effect and the rights and obligations of the parties io the contract are to be governed by the law of the Commonwealth of Pennsylvania.

Following on that conclusion the next question that must be answered is, what is the law of that foreign country.

The law of a foreign country cannot be determined by the Court itself from its own knowledge, inquiry or by hearing authorities and argument but it must be proved as a fact by skilled witnesses and not by the production of the books in which the law is written as was the law prior to 1844 when The Sussex Peerage, 11 CI & Fin 85, was decided.

In The Sussex Peerage, Lord Denman said at pages 115-16:

There does not appear to be, in fact, any real difference of opinion upon this point. There is no question raised here as to any exclusive mode of getting at this evidence, for we have both the materials of knowledge offered to us. We have the witness, and he states the law, which he says is correctly laid down in these books. The books are produced, but the witness describes them as authoritative, and explains them by his knowledge of the actual practice of the law. A skilful and scientific man must state what the law is, but may refer to books and statutes to assist him in doing so. That was decided, after full argument, on Friday last, in the Court of Queen’s Bench. There was a difference of opinion, but the majority of the Judges clearly held, on an examination of all the cases and after full discussion, that proof of the law itself, in a case of foreign law, could not be taken from the book of the law, but from the witness who described the law. If the witness says, “I know the law, and this book truly states the law,” then you have the authority of the witness and of the book. You may have to open the question on the knowledge or means of knowledge of the witness, and other witnesses may give a different interpretation to the same matter, in which case you must decide as well as you can on the conflicting testimony: but you must take the evidence from the witnesses.

Lord Campbell, Lord Langdale, Lord Brougham and the Lord Chancellor spoke to like effect.

Experts on foreign law may refer to Codes, textbooks and precedents in support of their views and the passages cited will then be treated as part of their testimony but in the end it is the testimony of the witness which prevails.

The reason for this was expressed by Lord Brougham in The Sussex Peerage (supra) where he said at page 115:

... The witness may refer to the sources of his knowledge; but it is perfectly clear that the proper mode of proving a foreign law is not by showing to the House the book of the law; for the House has not organs to know and to deal with the text of that law, and therefore requires the assistance of a lawyer who knows how to interpret it. . . .

There was only one expert witness called to prove the law of the Commonwealth of Pennsylvania and that was Mr Leonard Boreman whose qualifications I have outlined above.

I have not overlooked that Mr Boreman is a party in this matter, that he was the legal adviser to all three parties to the contract, that he was the draftsman of the contract and that he is a beneficiary under the will of the late Mr Murphy and was a witness to that will. In Pennsylvania a witness to a will is not disqualified as a beneficiary.

Despite Mr Boreman’s obvious interest the manner in which he gave his testimony transcended forensic argument and was an exposition of the law of Pennsylvania as he interpreied that law on this particular matter. I was convinced thai his professional integrity outweighed any possible interest.

Mr Boreman testified that under the law of Pennsylvania the beneficial ownership of the shares in Monarch passed from Mr Murphy to Niagara upon the execution of the contract upon the principle of equitable conversion.

As I understand the equitable doctrine of notional conversion it is based, in equity, on the principle that equity looks on that as done which ought to be done. Therefore where there is a binding obligation to convert equity imposes a notional Conversion.

It was also my understanding that the doctrine was applicable exclusively to directions with respect to land by way of contract, will, settlement or otherwise. The rule alters the nature of things. It makes money into land and land into money.

Mr Boreman testified that under Pennsylvania law the doctrine of equitable conversion is not restricted to real property but is also applicable to intangibles such as shares which have a particular quality of not being capable of substitution by other shares. He cited and interpreted precedents to this effect.

It seems to me that for the doctrine of conversion to be applicable is dependent upon there being a binding obligation to convert.

In this respect Mr Boreman testified that the condition requiring a ruling by the Internal Revenue Service was not necessary and accordingly was not material, nor was it an inducement to the parties to enter into the contract. He also testified that the condition was solely for the benefit of Mr Murphy since it affected his liability to income tax and, since the condition had been inserted for his benefit, he or his personal representatives could waive that condition.

He also testified that under the law of Pennsylvania, a contract which provides that the contract is conditional upon the act of a third party or the happening of some future event the proper interpretation of the contract may show that the parties did not intend that such act or happening shall be a condition of the parties’ duty of performance.

In these circumstances, in spite of the express words of the contract, the act or event is not a condition precedent to the existence of the contract and the parties are bound thereby. The parties mean thereby that the duty of immediate. performance is conditional on the event specified.

Mr Boreman’s opinion that the ruling by the Internal Revenue Service as to the tax-free consequences of the transaction was not necessary is borne out by prior rulings in like circumstances, by the fact that a favourable ruling was given on December 8, 1968, some three months subsequent to Mr Murphy’s death on August 28, 1968, and a subsequent bulletin that in these particular circumstances a prior ruling was not necessary.

Further Mr Boreman testified that as legal adviser to the parties and from his experience as a practitioner in this field he was confident that the transaction was tax-free under the Internal Revenue Code but that as draftsman of the contract he inserted the condition, ex abundant! cautela, and for the purpose of establishing to the satisfaction of the Internal Revenue Service the willingness of the parties to make full disclosure. He testified that the contract need not have been reduced to writing but that this was done in order that there might be available a complete document for submission to the Internal Revenue Service which was also done out of a superabundance of caution.

I expressed reservations as to the propriety of such evidence when it was being given bearing in mind the parol evidence rule that when a transaction is reduced to writing extrinsic evidence is, in general, inadmissible to contradict, vary, add to or subtract from, the terms of the written agreement between the parties.

The ground for the exclusion of such evidence is that when the parties have deliberately put their agreement into writing, it is conclusively presumed that they intend the written document to form the full and final statement of their intentions. Therefore the intention of the parties is to be derived from the words used therein.

I also had in mind that the draftsman of a document is the worst person to construe it.

In Hilder v Dexter, [1902] AC 474, the Earl of Halsbury, LC sat in the House of Lords when that body had occasion to consider the interpretation of a Companies Act which had been drafted by him. He said at page 477:

... I have more than once had occasion to say that in construing a statute I believe the worst person to construe it is the person who is responsible for its drafting. He is very much disposed to confuse what he intended to do with the effect of the language which in fact has been employed. At the time he drafted the statute, at all events, he may have been under the impression that he had given full effect to what was intended, but he may be mistaken in construing it afterwards just because what was in his mind was what was intended, though, perhaps, it was not done. . . .

He therefore abstained from giving any judgment in that case.

What the Earl of Halsbury stated was a practical expedient rather than a substantive rule of law.

i was informed, however, that under the law of Pennsylvania, contrary to the law in Canada, debates in the legislature, facts and events prior to drafting a document and like declarations of intention are admissible as aids in the interpretation of documents. That being so I received that evidence.

I may say that if I! were called upon to interpret the agreement here in question under Ontario law, I may have found that in accordance with the ‘express language of the agreement the obligations thereunder depended on a future uncertain event the happening of which depended entirely upon the will of a third party. This would be a true condition precedent and until that event occurred there would be no right to performance by either Niagara or Mr Murphy.

But I am not called upon to interpret the contract under Ontario law. What I am required to do is to ascertain how the contract is to be interpreted under the applicable law of Pennsylvania and to ascertain that law I must look to the evidence of a skilled witness who is called to depose what that law is as a matter of fact.

This was done. Mr Boreman stated what the law of Pennsylvania is from his own knowledge and he referred to textbooks and decisions to render his own knowledge more accurate.

As was stated by Lord Brougham in The Sussex Peerage (supra) I have no “organs to know and to deal with the text of that law and therefore [require] the assistance of a lawyer who knows how to interpret it’’.

Mr Boreman was the only witness who was called to depose as to ‘what the law of the Commonwealth of Pennsylvania is. If there had been the evidence of another witness which conflicted with that of Mr Bore- man I would then be entitled to examine and construe the passages cited in order to arrive at a satisfactory conclusion on the conflicting testimony. I would be entitled to do that if the evidence of Mr Boreman was obscure.

I approach this matter bearing in mind that it is not the function of this Court to substitute its own interpretation of the foreign law predicated upon the citations proffered for the sworn testimony of an expert as to what the foreign law is on this particular matter. This is not a case where I find myself unable to accept the testimony of a foreign lawyer which may be done in exceptional cases. The exceptional cases I have in mind are when a foreign expert arrives at a result so extravagant and involving such a misunderstanding of concepts familiar to lawyers of all countries that the evidence of the foreign expert cannot be accepted and the Court concludes that it can safely and must interpret the matter for itself, based on those universally accepted concepts. The proposition put forward by Mr Boreman, and for which he cites and interprets authorities, is not so astounding as to warrant its rejection.

There was no contradictory expert evidence and the proposition advanced by Mr Boreman was not obscure. In my opinion this is not a case where ! may or should resort to my own interpretation of the citations with a view to reaching a conclusion as to the law of Pennsylvania.

What counsel for Her Majesty is, in effect, asking me to do is to accept the construction of the agreement put upon it by him, without having called any evidence in support of that construction and he is inviting me to say that Mr Boreman was wrong. This, in my view, appears to go far beyond the law and practice relating to the proof of foreign law.

In my view, in the circumstances of the present appeal, I have no alternative but to accept the evidence of Mr Boreman as conclusive as to what the law of Pennsylvania is on this particular matter.

The substance of that evidence was that the beneficial ownership of the shares in Monarch owned by Mr Murphy vested in Niagara on the execution of the contract, that Mr Murphy remained the bare legal owner and held the shares as trustee for Niagara, that the contract was enforceable against either party and accordingly at his death the asset owned by Mr Murphy was his rights under the agreement and not the ownership of shares in Monarch. Therefore he was not possessor of an asset situate in Canada which passed on his death and his estate is not subject to estate tax thereon.

In response to a question put to him Mr Boreman unequivocally stated that if the value of the shares in Monarch fell drastically, the loss, under Pennsylvania law, must be borne by Niagara and not by Mr Murphy which is another way of saying that his evidence as I! have summarized it must be so in order that this result follows.

For the foregoing reasons the appeal is allowed and the plaintiffs are entitled to their taxable costs.