Jordan Page Harshman and Prue Lydia Harshman, Execut‘ors of the Last Will and Testament of Hubert Harry Harshman, Deceased v. Minister of National Revenue, [1971] CTC 288, 71 DTC 5202

GIBSON, J.:—This is an appeal from an assessment for estate tax made August 1, 1968 whereby tax in the sum of $61,444.95 was levied. This assessment added the sum of $93,828.21 to the estate tax payable for the value of certain inter vivos gifts made by the deceased Hubert Harry Harshman to what is called in these proceedings ‘ The Harshman Foundation’’, and for the value at the date of death of the gift to The Harshman Foundation under the will of the said Hubert Harry Harshman deceased. In effect, the assessment disallowed both these sums as deductions in the computation of the aggregate net value of the deceased’s estate for the purposes of estate tax on the ground that they were not gifts to an organization in Canada constituted exclusively for charitable purposes within the meaning of Section 7(1) (d) of the Estate Tax Act. (In this connection, it is agreed that in respect to the bequest to The Harshman Foundation by the will of Hubert Harry Harshman deceased, that there should in any event be deducted from it, if the appellant should succeed on this appeal, the proper capital amounts which for estate tax calculation constitute the limits of the discretion given to the trustees under the will to encroach on the residue of the estate in favour of the deceased’s widow which power of encroachment is provided in paragraph 9 of the will and permits an encroachment of the income up to the sum of $10,000 in any one year and an encroachment upon the capital during the lifetime of the wife to an amount not exceeding in the aggregate 30,000. )

Aside from Section 3 of the Estate Tax Act, the relevant statutory provision to be considered in this appeal in relation to its facts in Section 7 (1) (d) of the Estate Tax Act which reads as follows as amended by Statutes of Canada 1960, chapter 29, section 4 :

(d) the value of any gift made by the deceased whether during his lifetime or by his will, where such gift can be established to have been absolute and indefeasible, to

(i) any organization in Canada that, at the time of the making of the gift and of the death of the deceased, was an organization constituted exclusively for charitable purposes, all or substantially all of the resources of which, if any, were devoted to charitable activities carried on or to. be carried on by it or to the making of gifts to other such organizations in Canada all or substantially all of the resources of which were so devoted, and no part of the resources of which was payable to or otherwise available for the benefit of any proprietor, member or shareholder thereof,

This 1960 amendment to this subsection substantially changed the previous law by enlarging the number of organizations in Canada to which gifts can be given in the lifetime of a decedent or by his will which will qualify as a deduction from the aggregate net value of a decedent’s estate for the purpose of computing aggregate tax value.

The said subsection 7(1) (d) of the Estate Tax Act prior to the 1960 amendment read as follows :

(d) the value of any gift made by the deceased whether during his lifetime or by his will, where such gift can be established to have been absolute, to

(i) any organization in Canada that, at the time of the making of the gift, was a charitable organization operated exclusively as such and not for the benefit, gain or profit of any proprietor, member or shareholder thereof, or

The decedent Hubert Harry Harshman in his lifetime after retirement from business and as far back as 1953, carried out certain charitable endeavours. Among other things he established what is referred to in these proceedings as the Institute of Citizenship which in essence was an organization to promote good Canadian citizenship. Another organization, known as the Macdonald Institute which subsequently became the University of Guelph, was also the object of his charity. Then on September 15, 1963, he established and endowed what is called an organization referred to as “The Harshman Foundation” by way of memorandum of trust. A copy of it was made part of Exhibit 1 on this appeal. That document provides, among other things, the following. First of all it recited that :

WHEREAS the Settlor desires to establish and endow a foundation to be known as “The Harshman Foundation” for the charitable purpose of providing fellowships and scholarships to deserving and qualified young men and women so that they may improve their education by attending suitable institutions of learning;

AND WHEREAS the Trustees have agreed to act as the Trustees of the Foundation and to carry out the wishes and intentions of the Settlor as hereinafter set forth;

It then provided at paragraph 1 as follows:

1. The sum of $100.00 now paid to the Trustees and such further sums and amounts as may be paid or transferred to the Trustees under the trusts hereof and the investment resulting from the investment and re-investment of such amounts and the income arising therefrom from time to time shall be and constitute a fund to be known as the Harshman Foundation to be held and administered by the Trustees on the following trusts and conditions:

(a) not less than 90% of the annual income of the fund shall in the discretion of the Trustees be paid to the Institute of Citizenship or to Macdonald Institute or in part to one and in part to the other as the Trustees may see fit to be used by the recipient to provide fellowships or scholarships in fulfilment of the intention of the Settlor;

(b) if the Trustees feel that either of the above designated recipients are not using the amounts received by them in a manner conforming to the intentions of the Settlor, the Trustees in their discretion may pay income of the fund to one or more educational institutions selected by them to be used by such institutions for the purpose above stated;

(c) if at any time in the future the Trustees should be of the opinion that the capital of the fund has appreciated to an amount which is larger than is required for the purposes of the Foundation, they may in any year disburse for the purpose and in the manner aforesaid, an amount not exceeding 25% of the net realized capital appreciation in the fund during the preceding year;

At paragraph 2 it provided that in addition to all the other powers conferred on the trustees by the other provisions of this agreement or by any law or statute and subject to the other provisions of this agreement, the trustees were to have the following powers, among others, namely :

to make investments other than those authorized for trust funds;

to engage investment counsel...

to act in all respects as owners of the securities and assets held.

The agreement then provided for how the trustees should be appointed and their period of office and how their successors were to be appointed and certain other specific things, like the auditing of the fund, and so forth.

Then paragraph 7 provided as follows:

7. Subject as herein set forth, this agreement and the terms hereof and the trusts hereby created may not be -varied or revoked and the Trustees declare that they stand possessed of the fund as trustees subject to the trusts herein set forth;

Two of the trustees gave evidence on this appeal, namely, Mr. Arthur W. Rogers and Dr. Jordan Page Harshman. They explained the intention of the decedent in setting up the so-called The Harshman Foundation ’ namely, that he was interested in assisting students of need who might with financial assistance in their education be able to take their place in Canadian society in a more substantial way and that in so assisting such persons through the Foundation, that in some measure the so-called brain drain ’ ’ to the United States might be abridged. They also explained that the purpose of the decedent in giving to the trustees the power, under section 1(b) of the trust document, to pay income of the fund to one or more educational institutions selected by them to be used by such institutions for the purpose above stated”, instead of the[44] Institute of Citizenship’’ or when both of those latter organizations were not doing the job of carrying out the kind of activity for which the decedent intended these monies be used.

They also stated that an investment counsel, Leon Frazer and Associates, had at all material times been hired and was employed for the purpose of advising on investments; that the securities held as investments in the fund were held by the Toronto- Dominion Bank in Toronto as custodian ; that a nationally known firm of chartered accountants audited the fund yearly; that at no time did any trustee receive any fee or other payment for carrying on their duties as trustees, nor was it ever intended any trustee was to receive any fee or other payment; and generally that all of the fund has been devoted at all times to the purposes set out in the trust document and in accordance with the wishes of the decedent.

The parties agree that each of the Institute of Citizenship and the Macdonald Institute referred to in paragraph 1(a) of the said memorandum of trust dated September 15, 1963 is ‘‘an organization in Canada’’ within the meaning of Section 7(1) (d) of the Estate Tax Act.

The respondent, however, does not agree that the educational institutions’’ referred to in paragraph 1(b) of the memorandum of trust to which the trustees of The Harshman Foundation might pay the income from the fund that they administer, instead of to the Institute of Citizenship or to the Macdonald Institute, are necessarily organizations within the meaning of an “organization in Canada’’ defined in Section 7(1) (d) of the Estate Tax Act.

The appellant in his pleadings at paragraph 1 states that:

1. The Harshman Foundation (hereinafter referred to as the “Foundation”) was established by Memorandum of Trust entered into on the 20th day of September, 1963, by Hubert Harry Harshman (the deceased) and the trustees hereinafter referred to, for the charitable purpose of providing fellowships and scholarships to deserving and qualified young men and women so that they might improve their education by attending suitable institutions of learning.

Then at paragraphs 14, 15 and 16 it sets out the statutory provisions it relies on and the reasons for its appeal. These paragraphs read as follows :

14. At the time the deceased made gifts to the Foundation during his lifetime and at the time of the death of the deceased the Foundation was an organization in Canada and was an organization that had been constituted exclusively for the charitable purposes stated in paragraph 1 of this Notice of Appeal.

15. At all times the resources of the Foundation have been devoted to the charitable activity carried on by it, namely, the payment of scholarships for educational purposes and no part of the resources of the Foundation were payable or otherwise available for the benefit of any member thereof.

16. The gift of income and capital made by the deceased to the Foundation under his will and codicil was absolute and indefeasible and the Foundation was at the time the said inter vivos gifts were made to it and at the date of the death of the deceased and has at least since January 6, 1964, been an organization within the meaning of section 7(1) (d) of the Estate Tax Act. The value of the said inter vivos gifts and of the gift made to the Foundation by the will and codicil of the deceased is deductible in computing the aggregate taxable value of the estate.

The respondent’s position by the pleadings at paragraphs 6 in part is:

6. The Respondent says that if gifts were made by the deceased, either during his lifetime or by his will to the trustees under the memorandum of trust (which is not admitted) the value of such gifts is not deductible under paragraph (d) of subsection (1) of Section 7 of the Estate Tax Act for the purpose of computing the aggregate taxable value of the property passing on the death of the deceased because the said gifts were not made to an organization in Canada that, at the time of making of the gift and of the death of the deceased was an organization described in paragraph

(d) of subsection (1) of Section 7 of the Estate Tax Act.

The respondent in pleading the statutory provisions relied on and the reasons for resisting this appeal, at paragraph 9 pleads as follows :

9. The Respondent says that where the deceased has given or purported to give property to trustees under a trust whereby the income from that property is to be paid in the discretion of the trustees either to persons named in the trust document, or, in the trustees discretion, to other persons not named therein, the value of the property so transferred may not be deducted under Section 7(1) (d) of the Estate Tax Act since:

(a) neither the trust nor the trustees are “an organization constituted exclusively for charitable purposes” within the meaning of Section 7(1) (d) of the Estate Tax Act;

(b) the alleged gift to the trustees is not in law a gift to them that is absolute and indefeasible since they are a mere conduit pipe or vehicle the function of which is to hold the property subject to the terms of trust and to pay the income therefrom to named or unnamed recipients in their discretion ;

(c) to the extent that the gift may, in law, properly be considered to be a gift to the ultimate recipients or beneficiaries thereof, it is not absolute and indefeasible since there is no assurance that any of them will receive any portion of the alleged gift.

The respondent in argument, submitted that “The Harshman Foundation’’ referred to in these proceedings was: (1) a chari- table trust and not a charitable organization within the meaning of Section 7(1)(d) of the Estate Tax Act; and in this connection referred to the similarity of language employed in Section 62(1) (e) of the Income Tax Act which exempts from taxation the income of certain charitable organizations in contradistinction to the language employed in Section 62(1) (g) of the Income Tax Act which is concerned with the exemption from taxation of the income of certain charitable trusts; and (2) that the gifts either in lifetime or by the will of the decedent were not “absolute and indefeasible’’ within the meaning of Section 7(1) (d) of the Estate Tax Act.

The appellant in argument, submitted that “The Harshman Foundation ’ ’ was not an inter vivos or testamentary trust in the same way as was held in M.N.R. v. Trusts and Guarantee Company, Limited (Peter Birtwistle Trust), [1938-39] C.T.C. 371 (P.C.) ; Executors of the Wall of The Honourable Patrick Burns, deceased, et al. v. M.N.R., [1946] C.T.C. 253; and The Trustees of the Estate of James Cosman, deceased v. M.N.R., [1941]

EX.C.R. 33; [1940-41] C.T.C. 340; instead because of the wording of Section 7(1) (d) of the Estate Tax Act since the 1960 amendment, there is nothing to rule out an organization in Canada structured on the trust basis. In other words, the appellant submitted that the testator using a trust structure in fact created an ‘‘organization in Canada’’ within the meaning of Section 7(1) (d) ; and in this connection, the appellant relied in particular on the concluding words of the subsection, namely, that such an organization in Canada may itself be set up for the purpose of ‘‘the making of gifts to other such organizations in Canada all or substantially all of the resources of which’’ are devoted to charitable activities carried on or to be carried on by them.

The issue on this appeal is whether or not the so-called “The Harshman Foundation ’ established by the memorandum of trust dated September 15, 1963 and operated pursuant to its terms and the intention of the decedent ‘‘at the time of the making of the gift and of the death of the deceased’’ gives to the trustees of it the capacity or quality of an “organization in Canada” within the meaning of the words contained in Section 7(1) (d) of the Estate Tax Act.

After careful consideration of the whole of the evidence, in my view, the trustees by accepting the terms of the trust prescribed by the settlor in the trust document dated September 15, 1963, and by acting as fiduciaries pursuant to it during the lifetime of the decedent Hubert Harry Harshman, and by carrying out his intentions as evidenced by the said trust document and by his communications with them, constituted ‘‘at the time of the making of” the inter vivos gifts referred to in the evidence, an “organization in Canada’’ and at the time ‘‘of the death of the deceased’’, it was the same organization in Canada; that this organization at the time of the making of the inter vivos gifts was entitled to receive them and at this latter time, was legally entitled to claim the capital and income of the residue of the estate of the deceased subject to the provisions for encroachment in favour of the widow from the trustees under the will of the deceased; that this organization was ‘‘charitable’’ within the meaning of The Commissioners for Special Purposes of the Income Tax v. John Frederick Pemsel, [1891] A.C. 531; that the evidence established that the alternative “educational institutions” which the trustees of The Harshman Foundation could select for the purpose of paying them the income from the fund of The Harshman Foundation instead of to either or both of the Institute of Citizenship or the Macdonald Institute, were intended by the deceased to be only educational institutions in Canada*[1] ; and that the purposes of the gifts inter vivos and by the will in this case were ‘‘absolute and indefeasible’’ within the meaning of Section 7(1) (d) of the Estate Tax Act as judicially considered in the Guaranty Trust Company of Canada in the capacity of Executor of the Will of Dorothy Elgin Towle, deceased v. M.N.R. case (supra).

The cases referred to by the respondent of The Executors of the Will of The Honourable Patrick Burns, deceased, and The Royal Trust Company v. M.N.R., [1946] EX.C.R. 229; [1946] C.T.C. 13; [1947] S.C.R. 132; [1946] C.T.C. 253; M.N.R. v. Trusts and Guarantee Company, Limited (Peter Birtwistle Trust), [1938] Ex.C.R. 95; [1938-39] C.T.C. 356; [1939] S.C.R. 125; [1938-39] C.T.C. 363; [1940] A.C. 138; [1938-39] C.T.C. 371; and Trustees of the Estate of James Cosman v. M.N.R., [1941] Ex.C.R. 33; [1940-41] C.T.C. 330, were all cases where the Court held that under the relevant statutory provisions being considered in each, the trust was not a “charitable institution”.

Section 7(1) (d) of the Estate Tax Act, as amended in 1960, substantially enlarged the number of organizations in Canada to which inter vivos or testamentary gifts could be made which would qualify for deductions for the purpose of computing the aggregate taxable value of property passing on the death of a deceased donor for the purposes of estate tax by the addition of the words ‘‘or to the making of gifts to other such organizations in Canada all or substantially all of the resources of which were so devoted ’ ’. This subsection does not prescribe how such an organization in Canada must be created. In my view, it may be created in many possible ways, one of which, as found, was the way it was done in this case.

In the result, therefore, the said trust document does purport to create and from other evidence adduced, there was in fact created and in existence for the objects and purposes and pursuant to its terms, an organization in Canada that, ‘‘at the time of the making of the gift and of the death of the deceased, was an organization constituted exclusively for charitable purposes, all or substantially all of the resources of which, . . . were devoted to charitable activities carried on or to be carried on by it or to the making of gifts to other such organizations in Canada all or substantially all of the resources of which were so devoted ; and no part of the resources of which was payable to or otherwise available for the benefit of any proprietor, member or shareholder thereof’’.

The appeal is allowed with costs and the matter is sent back for reassessment not inconsistent with these Reasons.

Counsel for the appellants may prepare in both official languages an appropriate judgment to implement the foregoing conclusions and may move for judgment in accordance with Rule 172(1) (b).