Estate of Donald Murdoch Clouston v. Minister of National Revenue, [1974] CTC 2163, 74 DTC 1176

Roland St-Onge (orally: July 6, 1973):—This is an appeal from an assessment dated July 26, 1971, wherein a tax of $81,945.95 was levied in respect of the Estate Tax Act.

It is agreed that: Donald Murdoch Clouston died August 4, 1970, leaving a will dated October 21, 1968 of which the appellant Peter Clouston and the Royal Trust Company are the executors; that the widow has not remarried and was the only person who received payment; and that she has filed income tax returns for 1970 for the payments made to her in 1970.

Clause 4 of the will reads in part as follows:

All the rest and residue of my estate of whatsoever nature and kind and wheresoever situate, of which I may die possessed, including the balance of my life insurances as in paragraph 3(d) provided, is to be invested as hereinafter directed, and from the net annual income derived therefrom the sum of Nine Thousand Six Hundred Dollars ($9,600) per year, payable In monthly instalments, shall be paid tax free to my said beloved wife for and during the remainder of her life, together with any other amount as may in the discretion of my executors and trustees be required to maintain my beloved wife in the station in life to which she is accustomed, including provision for such occasional trips as may not be considered unreasonable by my executors and trustees having regard to the Income of the estate at the time and depletion of the estate If any,

PROVIDED HOWEVER, that in the event of my beloved wife remarrying then the benefits provided under this clause in no circumstances in any one year exceed in total the sum of Twelve Thousand Dollars ($12,000) including provision for occasional trips.

The foregoing provisions for my wife, however, to be charged with the support, maintenance and education of my daughter, Donna Gertrude, in such manner as shall in the opinion of my executors and trustees be commensurate with her station in life and having regard always to the size of my estate and, notwithstanding the remarriage of my beloved wife, ! direct that the annual income to be paid to my wife be supplemented by such amounts as may be required to enable my daughter, Donna Gertrude, to pursue her education at universities or colleges outside of Newfoundland should she so desire.

Counsel for the appellant in his notice of appeal contended that the wording of the will is not contrary to the letter and intent of section 4(b) of the Act.

The provisions of clause 7(1)(b)(i)(B) of the Act are met in that the spouse received periodic payments in ascertained amounts or limited ascertained maximum amounts, and the provisions of subparagraph 7(1)(b)(ii) are met in that no person except such spouse received or otherwise obtained any of the capital or income to which the spouse is entitled or any use thereof.

He also contended that the daughter, Donna Gertrude, could not receive or otherwise obtain any income or capital of the estate during the life of the spouse; that the wording of the will which reads:

The foregoing provision for my wife, however, to be charged with the support, maintenance and education of my daughter, Donna Gertrude . . .

does no more than emphasize the responsibility of the surviving parent to the remaining minor child, which is implied in the will where the minor issue figures.

There is no provision for any payments to be made to the daughter and the normal support she is entitled to expect shall come from annual payments to the spouse even to the extent of any additional payments as may be required to enable the daughter to further her education.

On the other hand the respondent argued that, since the payment of $9,600 to the widow was under the terms of the settlement charged with the support, maintenance and education of the daughter of the deceased, the daughter was a person who might receive or otherwise obtain some of the income to which the widow would otherwise have been entitled or to the use of a portion thereof, with the consequence that in computing the aggregate taxable value of the property passing on the death of the deceased, no amount could be deducted pursuant to paragraph (b) of subsection (1) of section 7 of the Estate Tax Act from the aggregate net value of that property computed in accordance with Division B.

More particularly the respondent argued that three conditions Should be met in order to allow the deduction: firstly, the gift must be absolute and indefeasible within six months; secondly, the spouse must be entitled to receive periodic payments in ascertained amounts or limited to ascertained amounts payable not less than yearly; and thirdly, no person other than the spouse, Maggie Clouston, may receive or otherwise obtain after the death of the deceased and before the death of the spouse any of the income of the settlement or any use thereof.

Counsel for the respondent admitted that the appellant met with the first condition. He has also admitted that, if there is an ascertained amount, it is $9,600 and not $12,350, which amount includes the tax; that, if the bequest made by clause 4 of the will is exempt pursuant to section 7 of the Estate Tax Act, RSC 1970, c E-9, there is no tax payable by the estate under that Act.

But he also contended, very strongly, that Donna Gertrude could receive some income under the settlement and therefore the gift to Maggie Clouston, the wife, does not meet the requirements of subparagraph 7(1 )(b)(ii).

From the evidence adduced and the cases cited to me, the determination of this appeal involves, firstly, an interpretation of section 7 of the Estate Tax Act and secondly, an interpretation of clause 4 of the will. Counsel have referred the Board to various cases on paragraph 7(1)(b) and with respect to the meaning of "absolute and indefeasible within six months”.

One of these cases is that of Mr Lucky v MNR, [1972] CTC 2412; 72 DTC 1369, in which it was decided that a gift cannot be subject to a condition or limitation.

As already mentioned, the Minister has admitted that Donald Clouston gave his wife an interest and that the gift is absolute and indefeasible, but he does not admit that the gift is for an ascertained amount for three reasons; first, because the tax rates vary from year to year and it can, at best, be a guess as to what they will be the next year—therefore the $9,600 tax-free amount cannot be ascertained; secondly, the further amounts for Donna Gertrude to pursue her education at universities or colleges outside of Newfoundland subject to the discretion of the trustees are not ascertained; and thirdly, the very amounts charged to be expended on Donna Gertrude under the wife’s interest are unascertained.

Counsel for the respondent also admitted that the settlement meets the requirement of periodicity.

So the question at issue is whether the appellant meets the third condition embodied in subparagraph 7(1)(b)(ii) which says:

(ii) no person except such spouse may receive or otherwise obtain . .. any of the income of the settlement to which such spouse is entitled or any use thereof,

According to clause 4 of the will there is no doubt that Donna Gertrude is entitled to receive a portion of the estate income. I would like to repeat in part the said relevant portion of clause 4, which reads as follows:

The foregoing provision for my wife, however, to be charged with the support, maintenance and education of my daughter, Donna Gertrude, In such manner as shall, in the opinion of my executors and trustees, be commensurate with her station in life and having regard always to the size of my estate and, notwithstanding the remarriage of my beloved wife, I direct that the annual Income to be paid to my wife be supplemented by such amounts as may be required to enable my daughter, Donna Gertrude, to pursue her education at universities or colleges outside of Newfoundland should she so desire.

According to this clause it is obvious the wife must support and provide for the maintenance and education of her daughter, Donna Gertrude, in such manner as shall, in the opinion of the executors and trustees, be commensurate with her station in life, which means the wife will receive less because of this obligation to maintain her daughter according to her station in life.

I am certain that in the case of failure on the part of the mother to maintain her child, the latter would have a right of action against the mother and the estate to obtain the necessary funds from the estate to provide for her maintenance and even to pursue her education at universities or colleges outside of Newfoundland.

Consequently this case is subject to a charge which allows a person other than the spouse to obtain, before the death of the spouse, any of the income from the settlement. This possibility is enough to say that the appellant does not comply fully with the exempting section of the Act and, consequently, it is not allowed to make use of the said subparagraph 7(1)(b)(ii) of the Estate Tax Act.

Furthermore, all the cases cited to me by counsel have convinced me that a gift given in a will under a charge of maintenance of children allows a person other than the spouse to receive or obtain before the death of the spouse any of the income of the settlement.

In conclusion, I would rest on the finding of my colleague Mr. Cardin in the case of Tétreault Estate v MNR, [1973] CTC 2057; 73 DTC 61 when he says at page 2059 [613]:

The conditions contained in clause 4 of the Will, under which the wife is required by express provisions in the Will to undertake the instruction, education and care of the children, are. not merely a reminder to the wife to look after the care and education of the children, but are in fact, in my view, an express condition of the legacy to the wife. Although the conditions cover the same subject matter as Article 165 of the Civil Code, they are nonetheless distinct and operative in themselves, and do not meet the requirements of subparagraph 7(1)(b)(ii), so that the deduction allowed in that section of the Act are not applicable in the case at bar.

Mr. Frost has expressed the same view in Matson Estate v MNH, [1971] Tax ABC 708; 71 DTC 504; when he says at page 713 [506]:

The true object of section 7 of the Act is to permit a deduction from the aggregate net value of an estate (not necessarily the residue as spelled out by the terms of the Will) of the value of any gift to the spouse given outright or by trust settlement or under an annuity arrangement whereby the spouse receives periodic payments, provided no other person has any rights therein during the lifetime of the spouse. The gift must be pure, absolute, indefeasible and unsullied with no strings attached. Any power in the trustees to use capital or income for the benefit of children or any provision reducing the income of the spouse in the event of remarriage destroys the exemption.

So in the light of those decisions and for the other reasons I have given, I have to dismiss the appeal.

Appeal dismissed.