National Trust Company, Limited and Gloria L Montgomery, Executors and Trustees Under the Last Will and Testament of Wilfred Hardman Montgomery, Deceased v. Minister of National Revenue, [1974] CTC 2043

The Chairman (orally: December 5, 1973):—This is an appeal by National Trust Company Limited and Gloria L Montgomery, executors and trustees under the last will and testament of Wilfred Hardman Montgomery, deceased. The appeal is against the reassessment of the Minister of National Revenue under the Estate Tax Act, as it then was, on a sum of $75,000—and I am rounding off the figures—charged against the estate. The issue in this appeal, at least from the point of view of the appellants is that this sum should be, or the tax on this sum should be, assessed against a third party by the name of Parmenter, whose position in the overall picture will become apparent.

The deceased owned two-thirds of J Montgomery Coal Company Limited and Harold Parmenter was the owner of the other one-third of the issued, and I presume common, shares of the company. The company, as the name would indicate, carried on a heating supply business in the city of Hamilton, Ontario and, although it is not clear when Harold Parmenter joined the company, he was, at least from the year 1960 on, in the position that I have outlined.

Mr Parmenter was about 20 years younger than the deceased (and I will refer to Wilfred Hardman Montgomery throughout as “the deceased”), and the two shareholders were not related in any way and, for tax purposes, we can say that they were dealing at arm’s length.

Apparently the deceased had inherited the business, and so it was a long-established concern in the City of Hamilton. On April 5, 1960 these two men entered into what is commonly known in the legal profession as “a buy-sell agreement”, whereby the survivor had the right but not the obligation to purchase the shares of the deceased. (! use deceased in this instance to mean the first of the two parties to die, in reference to the agreement.)

In paragraph 1 of the agreement, it is stated as follows—and I quote only the first two lines thereof:

The first to die of the parties hereto hereby agrees to sell to the surviving party, if the surviving party wishes, all his right . .. .

lt then goes on in the usual form to give the surviving member to the agreement the right to purchase the shares in the company of the other at their book value minus goodwill. There are the usual clauses that one would expect to find in such an agreement, but they do not affect the outcome of this appeal.

The deceased died on April 20, 1971, about 11 years after entering into the “buy-sell agreement”, and at the time of his death the fair market value of his two-thirds interest in the company was $274,620, or $75,020 greater than the amount that the survivor was required to pay should he wish to take up the shares in accordance with the terms of the agreement.

I should say, at this point, that counsel for the appellants had submitted, in the course of his argument, an outline of the main points that he sought to make on behalf of the appellants, and containing some 14 paragraphs, and there is agreement that paragraphs 1 to 11 inclusive are not in dispute.

The deceased made a will through his solicitor, Mr Lewis Ross, QC, of the City of Hamilton, who gave evidence in this hearing as to his having received instructions and having drafted the will after asking the normal exploratory questions usually asked of a person wishing to instruct a solicitor in the drafting of a will, which included, according to Mr Ross, an investigation as to the objects of the bounty of the deceased. Finally, a will was executed in which the sole beneficiaries were the natural objects of his bounty, namely, his family.

In answer to some questions put by me as to the general reputation of the deceased in the Hamilton area, Mr Ross stated that he knew the deceased well and knew others who knew him well and he was noted as a very frugal man, not one given to making grants to charitable organizations or to living in the manner in which, it turns out following his death, he might have been expected to live.

As Mr Ross put it, he never dreamed, when he drew the will, that he was dealing with a dutiable estate, and he said that even the deceased’s wife was shocked at the extent of the estate. However, as I have said, only members of the family were beneficiaries under the will, and the parties agree that, by virtue of paragraph 3(1 )(i) of the Estate Tax Act as it then existed, the amount of $75,000 is liable to tax, and this figure has been referred to in argument as the bargain element in the purchase of the shares. It is deemed to be “property then passing on the death” of the deceased by virtue of subsection 3(1) of the Estate Tax Act. It is the contention, of course, of the appellants that in fact no gift was made or benefit conferred by the deceased, either as a result of the “buy-sell” agreement or by the will.

It is also agreed, and this is so whether there is an agreement or not, that the Estate Tax Act is, in general, an Act that levies a tax upon the assets and deemed assets of an estate, and the rate of that tax depends upon the value of the assets, the tax being a debt of the estate generally payable by the executors. Appellants’ counsel contrasts this with the succession duty statute which is common to most, if not all, provinces, in that the tax under a succession duty act falls upon the person receiving the benefit, as the term “succession” would indicate.

it is also agreed that the liability of the executors is limited to the tax applicable to property under their control, and tax in respect of any property passing or deemed to pass which is not under the control of the executors must be assessed against and paid by the successor pursuant to section 14 of the Estate Tax Act (SC 1958, c 29, and amendments thereto).

Counsel for the respondent, in his argument, would have me read paragraph 13(1)(b) in its own context, whereas the appellants contend that sections 13 and 14 must be read together. This, of course, is, as their counsel alleges, because sections 13 and 14 together cover assessment suretyship and collection of tax exigible under this statute (or the statute as it then existed).

Pursuant to subsection 13(3) of the Act, the bargain element is deemed not to be property under the control of the executors and, if it were not for the bargain element involved, in the absence of the so- called “exoneration clause”, this appeal would not be necessary.

It is also conceded that, in order to relieve the executors generally under the Estate Tax Act, or the successor generally under the succession duty statutes, the tax exoneration clause must be clear. Counsel for the appellants really rests his case on the fact that because of subsection 13(3) the general principles applicable to succession duty statutes must be applied rather than estate tax principles in view of the fact that, as I have said, we are dealing with “deemed” property and a bargain element.

Counsel for the appellants says that I need not go outside the four corners of the will to find evidence as to the testator’s intent and that direct evidence is available on a simple interpretation of the will. In addition, he says that I can also come to the same conclusion by inference.

The respondent relies solely on the so-called exoneration clause, which is clause 2(a) of the last will and testament of the deceased, and argues that this brings paragraph 13(1)(b) into play and there I must stop and find that the executors are liable for this tax. It boils down to the question of whether or not I find this so-called exoneration clause relieved or relieves the executors from liability under this Act.

There is also the alternative claim in the appeal, which is urged upon me with less zeal than the first aspect, namely, that the Minister is bound by statute to assess Harold Parmenter to tax, pursuant to subsection 13(3) of the Act. Counsel for the appellants relies on a line of cases dealing with the succession duty aspect of taxation, because, as I have said, he alleges that, with respect to this case, Parmenter should be the person taxed on the bargain aspect, and therefore it is analogous to tax on succession.

He relies heavily on the case of Re Snowball, [1941] OR 269, and I quote briefly from the headnote:

The testator in his lifetime made certain gifts inter vivos and by his will he declared “that all estate and succession duties payable upon or in respect of my estate or property shall be paid out of my residuary estate and that all legacies or gifts bequeathed shall be free from inheritance tax”.

The case was heard in the Ontario Court of Appeal and the judgment of the Court was delivered by the then Chief Justice Robertson, and I refer to page 271, the last paragraph, and quote:

The whole question is whether, on the proper construction of clause 9 of the will, it is the duty of the executor to pay the succession duties on these gifts inter vivos. It is not disputed that, by the provisions of the Succession Duty Act, 1934 (24 Geo. V, ch. 55), which is the Act that applies, the obligation to pay any duty in respect of such gifts inter vivos is imposed upon the donee. By subsec. (1) of sec. 6 ‘‘all property situate in Ontario and any income therefrom passing on the death of any person” is made subject to duty. By subsection (2) of that section “property passing on the death of the deceased” includes “any property taken under a disposition operating, or purporting to operate, as an immediate gift inter vivos, whether by way of transfer, delivery, declaration of trust or otherwise, made since the 1st day of July, 1892.” Then, by section 10, subsection (1) “every heir, legatee, devisee or donee, and every person to whom property passes, for any beneficial interest in possession or in expectancy, shall be liable for the duty upon so much of the property as so passed to him, and which is dutiable in Ontario according to the provisions of this Act”.

The first full paragraph on page 272 says:

The donor of a gift inter vivos, by making the gift, assumes no obligation whatsoever to the donee to make any provision for payment of succession duties that may become payable in respect of the gift, upon his death. If, in this case, the residuary estate of the deceased is to bear the burden of the succession duties claimed from the donees, It is because the testator has said so in clause 9 of his will.

The last paragraph on page 272 says:

I think there is no question that in our common usage a “gift bequeathed” means a “gift by will”. No doubt the use of “bequeath” was at one time less restricted. Counsel quoted Shakespeare to prove it. The more modern Oxford English Dictionary says, however, that ‘‘to leave by will’ is now “the only Surviving sense of the word”.

In that case, it was held that the donees were the ones responsible for the tax on what they had received.

The second case cited was Re Poulin, [1944] OWN 119. Again it is a decision of Chief Justice Robertson. In the headnote it is stated that:

.. The testator had, however, made gifts inter vivos amounting to over $300,000, and succession duties were also claimed in respect of these gifts.

The question propounded was whether the direction in clause 9 of the will justified the trustees in paying, out of the estate, the succession duties on these gifts inter vivos.

On page 120, towards the bottom of the page, Chief Justice Robertson says:

. . . The testator was dealing specifically with the assets of his estate in clause 9, as in the other clauses of his will, and there is no difficulty in concluding that he intended to direct that the succession duty levied In respect of his estate should be paid out of the general funds of his estate.

It is quite another matter to make any such implication in respect of the testator’s gifts inter vivos. There is nothing in the will to support any implication that the testator intended to burden his estate with succession duty in respect of such gifts, in relief of the persons who received them. In that respect the case is like the Snowball case, referred to by Chevrier J. In that case, however, the testator had used words to define what gifts made by him were to come within his direction in regard to payment of succession duty out of his estate, and the real point for decision in the Snowball case was whether the definition contained in the will was wide enough to include gifts inter vivos, and it was held that it was not. In the present case there are no words whatever defining the gifts in respect of which succession duty is to be paid, pursuant to the direction in clause 9.

In the second paragraph on page 121, the learned Chief Justice stated:

In cases such as this it is necessary to bear in mind the principle stated by Lord Watson in Scale et al v Rawlins et al, [1892] 342, in these words: “We are not at liberty to speculate upon what the testator may have intended to do, or may have thought that he had actually done. We cannot give effect to any intention which is not expressed or plainly implied in the language of his will.”

At the bottom of that page, Mr Justice Kellock (as he then was), after setting out the facts, stated:

It is argued on behalf of the appellants that the word “leviable” in clause 9, being the word employed in The Succession Duty Act in question, 3 George VI, 2nd session, c 1, dealing with the incidence of duty on both persons and property, is sufficiently wide to indicate an intention on the part of the testator to provide for payment of succession duties on gifts inter vivos out of the estate, in exoneration of the donees. I cannot accept this contention.

Appellants’ counsel also cites other cases in support of this principle, but I do not think it is necessary to dwell any further on that point, as I think the law is well established in those two cases. I should say that, on my putting the question to learned counsel for the respondent, he concedes that the bargain element in this case is analogous to a gift and, in my view, it is analogous to a succession under the Acts dealing with successions.

Counsel for the appellant then turns to three cases where it has been specifically held that the exoneration clause does not relieve the successor from payment of tax. The first of these is Re McCreath, [1969] 2 OR 719. The facts, briefly, so far as they are pertinent to this problem, were:

A testatrix some time before her death, and before executing her will, created two substantial inter vivos trusts, the capital of which was to go to her children on her death. In her will she provided that all death duties payable on her death were to be paid out of her general estate except “duties that may be payable by a purchaser or transferee in connection with any property transferred to or acquired by such purchaser or transferee upon or after my death pursuant to any agreement with respect to such property”.

That is a clause that is not in the case at bar before me and, in any event, in that case there is no evidence there was such property. This was a different type of case in that it would be a case that would fall under paragraph 3(1 )(e) of the Estate Tax Act, because the deceased retained an interest in the capital during her lifetime.

The so-called exoneration clause 2(a) of the will in the case before me, except for the portion I have recited, is basically, if not identically, the same. I quote from page 722 of the judgment of the Chief Justice of the Ontario High Court, Mr Justice Wells, beginning at the third last paragraph from the bottom of the page and continuing on into the first two paragraphs of the next page, 723:

I have mentioned all these facts because the question which is being put to me arises from the directions as to the payment of death duties In the testatrix’s will. The question arises. whether the two trusts are included in that direction or whether they are excluded by the statement which I have already quoted at the end of her directions and conditions when she said, “This direction shall not extend to or include any such taxes or duties that may be payable by a purchaser or transferee in connection with any property transferred to or acquired by such purchaser or transferee upon or after my death pursuant to any agreement with respect to such property”.

The question put to me by the trustees on which they have asked the opinion, advice and direction of the Court is as follows: Are the executors and trustees obligated to pay out of the deceased’s estate the estate, inheri- tance and succession taxes or duties that may be payable in connection with any property forming part of the Trusts?

(They are obviously referring to the trusts on behalf of the children.) I continue the quote:

A computation has been made which has been put before the Court by the executors which shows that the total of estate taxes and succession duties in Ontario is probably in the nature of some $20,128,838.

lt is quite obvious I think that in so far as Mrs McCreath’s personal property is concerned that if this is charged to her estate it will be insufficient to pay these death duties and will in fact wipe out the entire estate leaving still a surplus owing which would probably have to be extended to the trusts. Do the trusts fall under the direction in her will is the question, and for taxation purposes, are they to be deemed part of her estate or are they excluded by paragraph 5(e).

I have gone into the facts relative to her knowledge of the possible duties her estate would have imposed on it in some detail because I do not think that one should be lightly taken to have made a solemn last will and testament and then devise matters so that it becomes a solemn hoax and farce. As Kellock, J, observed, speaking of a will, in Re Hughson, Diocesan Synod of Fredericton v Perrett et al., [1955] SCR 498 at p 503; [1955] 3 DLR 225 at p 230: “Paragraph II is not to be regarded as meaningless if a rational meaning can be given to it.”

Again, in the last paragraph of the judgment of the learned Chief Justice, on page 723:

It would seem to me that the interests vested in the children on her death under the two trust agreements make a transmittal to them which is not only taxable to them and owing by virtue of such by the word “transferee” which Mrs McCreath used in the paragraph of her will. They became on their mother’s death transferees of her interest in the two trust agreements. They acquired title to these funds and under certain circumstances such as their coming of age, for example, they can demand payment of the capital to them if they so wish. Under these circumstances it appears to me that Mrs McCreath exempted her personal estate from liability for death duties in respect of the trusts. Each trust bears the tax it is liable to pay from the assets of the trust out of the trust funds peculiar to that agreement.

Again, in the last sentence of the second last paragraph on page 724, he says:

The trustees are not obligated to pay out of the deceased’s estate any taxes that may be payable in connection with the property forming part of the trusts. It is unnecessary in view of this opinion to answer Qq 2 and 3.

Another case cited by the appellant is Re Meyerhoff’s Application (1963), 43 WWR 345 (BC SC), an application by the trustees before Mr Justice Mcinnes of the British Columbia Supreme Court. What happened in that case was that once again the testator had made inter vivos trusts, this time in favour of his daughters, and the question posed to the learned Justice was as stated on page 346, and I quote:

(a) Whether estate tax on the assets subject to the Trust Indenture of 21 February, 1944, ought to be borne by the cestuis que trust of the said Trust Indenture, Rose Marie Sioux Meyerhoff and Joan Victoria Meyerhoff, and paid out of the said assets or whether the tax on the said assets ought to be paid out of the general estate of Henry Meyerhoff, considering the terms of his Will dated the 2nd day of September, AD 1960.

The last paragraph on that page reads:

In looking at the affidavit of William F Fodchuk, filed herein, it appears that the estate which devolved to the executrix named in the will, amounts to $112,458.11, with debts of $4,988.45. According to the same affidavit, paragraph 8, the value of the trusts in favour of the two daughters was assessed at $313,395.22. The estate taxes levied against the estate amount to $88,056.18, and the tax liability was allocated pursuant to the provisions of the Estate Tax Act, (1958 ch 29), as follows: $20,030.59 against the estate and $68,025.59 against the trusts.

This was an opposite situation, in which the daughters were applying to the Court to have the estate bear the burden of the entire $88,000 and, towards the middle of the page, in the second last paragraph, the learned Justice says:

One must assume in approaching this matter that Mr Meyerhoff, deceased, was a man of considerable intelligence and foresight to have built up an estate amounting to some $450,000. He cannot reasonably be presumed, when he drew this last will in September, 1960, to have overlooked the fact that he had already settled upon his daughters an estate valued at $313,000, and that very heavy estate duties would be levied in respect thereof. No evidence whatever was adduced before me to show that there was any hostility or ill will existing between the testator and either of his daughters on the one hand, or his second wife on the other, and I must assume, and I do, that he intended to deal fairly and equitably with all three entitled to rely on his bounty. As ! say, he cannot be presumed to have overlooked the trust he set up or the provisions of art. 6(a) thereof . . .

He then quotes from that trust, and I move on to page 353, to the second paragraph in italics, which contains the judge’s comments:

The donor of a gift inter vivos, by making the gift, assumes no obligation whatsoever to the donee to make any provision for payment of succession duties that may become payable in respect of the gift, upon his death. If, in this case, the residuary estate of the deceased is to bear the burden of the succession duties claimed from the donees, it is because the testator has said so in clause 9 of his will.

(I think I should say here that, in all these instances where the trial judges are referring to clauses, they are referring to the so-called “exoneration clauses” re the payment of debts, etc.)

On page 354, in the second last paragraph, Mr Justice Mcinnes says:

In view of the authorities cited, and with particular reference to the Snowball case, supra, I am of the opinion, and so find, that Mr Meyerhoff did not intend by his will to Impose upon his widow, as trustee and sole beneficiary, the obligation of paying the estate tax upon a trust which he had created some 16 years earlier. To do so would have imposed upon her an extra burden of $68,000. Adding this amount to the $20,000 levied against the estate, a total of $88,000, would leave her with a net estate of $24,000. While the mere fact that this would impose an onerous burden upon the widow would afford no ground for disregarding the terms of the will, it would, in my opinion, require much clearer and more explicit language than that used by the testator to impose this burden upon her. In saying this I refer again to the fact that the law Imposes upon the donee of any gift or bequest, whether inter vivos or not, the obligation of paying any duties in respect thereof. This obligation is not altered so as to impose the same upon the trustee of the estate, unless done so in clear and express language in the will. I find this lacking in the will under consideration on this application.

Counsel for the appellants in the case before me also says that I may draw inferences and form conclusions in this case. Can the deceased have intended that wife and children should pay the tax on property which is not even part of his estate? He cites Re Hill, [1953] OWN 351, a decision of the Chief Justice of Ontario, Mr Justice Gale, in which the question posed to him was as set out on page 352:

Are the succession duties payable in respect of the dower interest of Isabella Christina Hill in the estate of Reginald Mark Hill payable out of the residue of the estate?

At page 353, about four lines down, the learned Justice states:

. . . In one sense it is true that a joint tenancy is a benefit given by either the donor or the transferor, but it seems to me that in the same broad sense a dower interest may be regarded as a benefit conferred upon the wife by the husband which comes into enjoyment, as does a joint tenancy, only upon the latter’s death. I appreciate that in some respects the phrase is more suitable to a joint tenancy, but that is not entirely so and it is difficult to conclude that the deceased did not intend to have his estate pay the succession duty on the right to dower. On the contrary, I believe that he did, in view of the other terms of the will. I am told that the succession duty in respect of this dower interest exceeds $6,000 and I cannot conceive of a man with an estate in excess of $250,000 providing for his widow only to the extent of $500 a month for six months and $250 a month thereafter, and then superimposing upon her the obligation to pay or have charged against her dower interest a sum of such considerable size. It is true that the amount could perhaps be realized out of a sale of properties in the course of the administration of the estate, but I prefer to think that, looking at the nature and size of the estate and the provisions of the will, it is impossible to believe that the testator intended that his wife should be required to pay that amount of duty.

So, in a reverse way, the learned Chief Justice found that the duty should be payable out of the estate because that was a reasonable inference to draw, considering all the circumstances.

Counsel for the respondent has submitted that he relies entirely on the wording of paragraph 2(a) of the will and narrows it down even further to the portion of paragraph 2(a) which deals with: “Any gift or benefit given by me, either in my lifetime or by survivorship.” The argument of the respondent is that the “buy-sell” agreement was a benefit conferred upon Mr Parmenter which took effect only on the death of the deceased. According to him, it therefore fits squarely within the “exoneration clause”, which, if I accepted that explanation, would be something other than an exoneration clause because it would impose upon the executors the duty to pay a succession duty.

He also argues, with great force and persuasion, that the will was drawn some years after the said agreement was entered into, and that the deceased was presumably aware at that time that the shares were worth more than they had been worth in 1960 and, if he had intended to truly exonerate the executors of the estate, he would clearly have so specified. To me that would, before dealing with the actual meaning of the words and casting my memory back to the evidence of Mr Ross, result in an inference by me that, knowing the shares to be worth more than they were in 1960, and knowing the likelihood of his dying before Mr Parmenter, the deceased nevertheless increased the bargain aspect of this “buy-sell” agreement by emburdening his executors, and thereby his family, with the additional tax that would be payable. In the light of the evidence of Mr Ross, I cannot draw that inference, but I! do not base my final decision in this case on that evidence, because I think that I can find for the appellants within the confines of the will.

As has been argued forcefully by counsel for the appellants, the benefit was not a benefit by survivorship, because there was no obligation upon the survivor to fulfil the terms and conditions of the agreement. There may well have been a benefit to the estate if Mr Parmenter had died first. There might well have been nothing to the estate if Mr Parmenter had decided to walk away (because, remember, the goodwill was excluded from the transaction) and start his own business, leaving the existing business to the estate to operate. In fact, one almost has to conclude, from the evidence of Mr Ross, that it was really Mr Parmenter who was the most active of the controlling shareholders.

The question of survivorship presented me with a problem, but I think I can agree with appellants’ counsel when he says that, when we are dealing with a person’s will, while recognizing that we should give everyday meaning io the words that we are interpreting, we cannot lose sight of the fact that we are interpreting a legal document, a very important document, and perhaps the most important legal document of all. We should keep in mind the legal jargon and the legal connotation attaching to certain words. Survivorship, I feel certain, is a word that is looked upon in the profession as something that evolves out of a joint ownership, and is a technical term rather than an everyday word that would be used by the man on the street, so that the deemed benefit that exists in this case exists by the “buy-sell” agreement itself, and not by the legal definition or acceptable interpretation of the term “survivor” or “survivorship”.

Counsel for the appellants argues that there is no ambiguity in the will and that, if there is ambiguity in the will, it is put forth by the respondent and, if it is propounded by the respondent, it is his responsibility to satisfy me that it is equivocal. I can find no equivocation in a will which a professional man has been fully instructed to draft and who, after taking the precautions that any competent solicitor would take, produces a will which gives benefit only to the family of the deceased. I can find no ambiguity in the belief or the inference that the testator, the deceased in this case, could not have intended to burden his family further with a tax on a sum of money that none of its members would receive.

I could go on further into the alternative arguments raised by the appellants to the argument of the respondent that paragraph 13(1 )(b) is not an answer in itself, but I think I have answered both questions in the reasons I have given to this point.

From all the evidence, and relying on the contents of the ‘buy-sell” agreement, I come to the conclusion that the appellants must succeed, because, after reading the entire will, I find within the four corners thereof a clear indication that the testator did not wish to burden his family further with the additional tax on this bargain element in the “buy-sell” agreement.

The appeal will therefore be allowed and the assessment referred back to the Minister for reassessment accordingly.

Appeal allowed.