WALSH, J.:—This is an appeal from a notice of re-assessment in respect of the 1965 taxation year of the taxpayer wherein $380,000 was included in his income for that year. The taxpayer died on August 27, 1965 in Ontario where he had formerly carried on the practice of law in the City of Toronto and at the date of his death amounts totalling $483,350 were owed to him by various clients: His daughter, Mrs. Mary Virginia Denton, was a beneficiary under the terms of his last will and codicil, and on or about February 11, 1966 the right to receive these amounts was transferred to her under an arrangement whereby she released the estate of the taxpayer from its liability to pay her the $90,000 balance of a legacy payable to her under his last will and codicil and agreed to pay the estate the sum of $380,000 Canadian funds within one year from the date of the transfer.
The appellant did not include in the income of the taxpayer the amount so transferred to Mrs. Denton on the basis that the right to receive same had been transferred to a beneficiary of the estate of the taxpayer within the time prescribed by Section 64(3) of the Income Tax Act.
In making the re-assessment, the Minister did so on the basis that the amounts totalling $483,350 owed to the taxpayer by his clients at the date of his death were rights or things, the amount whereof when realized would have been included in computing his income, that of this amount an amount of $103,350 was transferred or distributed to Mrs. Mary Virginia Denton, a beneficiary of his estate prior to the time for making an election under the provisions of Section 64(2) of the Income Tax Act, leaving a balance of $380,000 of rights or things not so transferred or distributed.
In the agreed statement of facts the parties admit, inter alia, that the appellant is executor of the last will and testament of the taxpayer and codicil thereto for which letters probate were duly granted and a true copy filed as an exhibit; that on or about November 10, 1965 appellant paid the sum of $10,000 to Mary Virginia Denton, one of the three children of the deceased taxpayer, representing part payment of the legacy of $100,000 made to her in paragraph 3(h) of the will; and that the value of the accounts receivable to the taxpayer at the date of his death as reported in his estate tax return was $483,350. On February 4, 1966 appellant sent the said Mary Virginia Denton a letter offering to transfer the accounts to her, which concluded :
This transfer would be made to you in consideration of your releasing the Estate from its liability to pay you the $90,000 balance of the legacy payable to you under your late father’s Will and in consideration of your agreement to pay the Estate the sum of $380,000 (Canadian funds), such payment to be made within one year from the effective date of the transfer of the foregoing amounts to you.
Would you kindly confirm the foregoing arrangement by signing and returning to us the enclosed copy of this letter.
Mrs. Denton did so on February 5, 1966. She then, on February 7, 1966, sent letters to the debtors of the said accounts advising them of the transfer and requesting that the settlement cheque be sent to her at the Lucayan Beach Hotel in Freeport, Bahamas. On February 11, 1966 appellant sent letters to each of the debtors advising them of the transfer, enclosing copies of the probate and Ontario and federal succession duty and estate tax releases and authorizing them to make the payments to Mrs. Denton in Freeport as requested.
It is further agreed that on February 11, 1966 Mrs. Denton left Canada with her children to join her husband who had accepted employment in the United States of America and that she has remained a non-resident of Canada since that date, and that the appellant, in an endeavour to realize the assets of the estate in a manner most beneficial thereto, discussed with Mrs. Denton a proposal that the said arrangement be entered into, the intention being to utilize the provisions of Section 64(3) of the Income Tax Act and to preclude the inclusion under Section 64(2) in the computation of the taxpayer’s income for the taxation year in which he died of the value of the said accounts receivable at the time of his death. Mrs. Denton sought the advice of counsel as to the effect of the said arrangement on her United States income tax liability and it was as a result of such advice that, upon leaving Canada, she went to Freeport, Bahamas where, between February 18, 1966 and February 21, 1966, she received payment in full of the said accounts receivable. On February 16, 1967, pursuant to the arrangement made, Mrs. Denton paid appellant the sum of $380,000. This payment was included in the capital account of the estate, the entry being as follows :
Payment for purchase of $483,350 legal fees receivable
by deceased at date of death—$470,000 less $90,000—
| balance of cash legacy payable as per Clause 3(h) | |
| of The Will | $380,000.00 |
On June 1, 1966 respondent assessed tax for the 1965 taxation year of the taxpayer on the basis that the amount properly included, pursuant to the provisions of Section 64(2) of the Income Tax Act, in computing the taxpayer’s income for 1965 in respect of the accounts receivable was $483,350. Appellant duly objected to the assessment and served on the respondent a notice of objection dated August 23, 1966, as a result of which, on August 7, 1968, pursuant to Section 58(3) of the Income Tax Act, respondent re-assessed tax for the 1965 taxation year of the taxpayer on the basis that the amount properly included pursuant to the provisions of Section 64(2) of the Income Tax Act in computing the taxpayer’s income for 1965 in respect of the accounts receivable was $380,000. Appellant then commenced this appeal.
N 0 witnesses were called by either party and no explanation was given as to the discrepancy of $13,350 between the amount of the accounts ■ collected by Mrs. Denton in the amount of $483,350 and the amount of $470,000 which she paid for them, partly by accepting same in lieu of the balance of $90,000 owing her under the $100,000 legacy to which she was entitled, and partly by the cash payment by her of the sum of $380,000, which is the amount for which the taxpayer has now been re-assessed, and counsel for the parties conceded that this was not an issue in the present appeal.
Three options were open to appellant for dealing with the deceased taxpayer’s income tax liability in the year 1965 with respect to these accounts receivable and to avoid having them included in his taxable income for that year in which he died :
(a) it could have, within one year from the date of his death or within 90. days after the mailing of a notice of assess- ment in respect of his tax for the year of his death, whichever was later, availed itself of the provisions of Section 64(2) (a) of the Income Tax Act and included one-fifth of the value of said accounts in computing his income for each of his last five taxation years including the year of death, and paid the resulting additional tax for any year other than the year in which he died within thirty days from the day of mailing of the notice of assessment for the year in which he died; or
(b) it could have filed a separate return of the value of these accounts and paid tax thereon for the taxation year in which he died as if he had been another person entitled to the same deductions to which he was entitled under Section 26 of the Act for that year (that is to say his deductions for dependants) ;
(c) the third option and that which it adopted forms the subject of the present appeal and results from the wording of Section 64(3) of the Act, which reads as follows:
64. (3) Where before the time for making an election under subsection (2) has expired, a right or thing to which that subsection would otherwise apply has been transferred or distributed to beneficiaries or other persons beneficially interested in the estate or trust,
(a) subsection (2) is not applicable to that right or thing, and
(b) an amount received by one of the beneficiaries or other such persons upon the realization or disposition of the right or thing shall be included in computing his income for the taxation year in which he received it.
By transferring’ the accounts receivable to a beneficiary who was not herself taxable for income in Canada on the realization by her of these accounts, the appellant was able to receive from her an amount representing nearly the full value of them without the estate paying income tax on behalf of the deceased in the year 1965 for the amounts received in payment for this transfer. The fact that Mrs. Denton did not have to pay income tax on the amount of the accounts so purchased when she received payment of them, since she was not at that time a beneficiary resident in Canada and taxable therein when these accounts were realized’is not, of course, relevant to the present issue which merely concerns: the applicability of Section 64(3) to the determination of the deceased’s income tax liability.
The whole case turns on the interpretation to be given to the words: “transferred or distributed to beneficiaries or other persons beneficially interested in the estate or trust’’. The word “transferred” used by itself has been dealt with in several previous: decisions. In rendering judgment in the case of David Fasken Estate v. M.N.R., [1948] Ex. C.R. 580; [1948] C.T.C. 265, Thorson, P. referred to two dictionary definitions of the word ‘‘transfer’’. The New English Dictionary gives the meaning
2. Law. To convey or make over (title, right or property) by deed or legal process.
Webster’s New International Dictionary, 2nd ed., says:
2. To make over the possession or control of, to make transfer of; to pass; to convey, as a right, from one person to another; as, title to land is transferred by deed.
At page 592 [279] he states:
In Gathercole v. Smith (1880-81), 17 Ch. D. 1 at 7, James, L.J., spoke of the word “transfer” as ‘‘one of the widest terms that can be used” and Lush, L.J., said, at page 9:
“The word ‘transferable,’ I agree with Lord Justice James, is a word of the widest import and includes every means: by which the property may be passed from one person to another.”
The word “transfer” is not a term of art and has not a technical meaning. It is not necessary to a transfer of property from a husband’ to his wife that it should be made in any particular form or that it should be made directly. All that. is required is that the husband should so deal with the property as to divest himself of it and vest it in his wife, that is to say, pass the property from himself to her. The means by which he accomplishes this result, whether direct or circuitous, may properly be called a transfer.
He was dealing with Section 32(2) of the Income War Tax Act and its predecessor Section 7 of the 1926 Act which were somewhat analogous to Section 21(1) of the present Act dealing with transfers of property between husband and wife. Further on he states, at pages 595-96 [282] :
If then it was not a condition of liability under section 7 of the 1926 Act that the transfer therein referred to was made for the purpose of evading taxation there can be no such condition in section 32(2) of the 1927 Revision. Moreover, quite apart from any statutory provisions relating to the Revised Statutes, it is not permissible, where the words in a taxing Act are clear, to read into it either conditions of liability thereunder or exemptions therefrom other than those that are within its express terms. Full effect must be given to its words without additions or subtractions. In my opinion, the words section 32(2) of the 1927 Revision, and the corresponding part of its predecessor, section 7 of the 1926 Act, are free from any ambiguity and liability thereunder is not confined to cases where the transfer of property was made for the purpose of evading taxation, nor does the fact that the transfer was made in good faith or for valuable consideration place it outside the scope of the sections.
This judgment was referred to and followed in the case of Roy Otto German v. M.N.R., [1957] C.T.C. 291, by Mr. Justice Thurlow who stated at page 295 :
In my opinion, the expression “has transferred” in Section 21(1) of the Income Tax Act has a similar meaning. I read that expression as referring to an act whereby the husband has divested himself of property and vested it in his wife; that is to say, has passed the property from himself to her. Had the appellant in this case deeded a share of his homestead property to his wife, whether for consideration or not, there would undoubtedly have been a transfer of such share to her. Had he deeded his property to a purchaser and directed the purchaser to pay the price to his wife, again in my opinion there would have been a transfer. In such a transaction, the property having been his, the price paid for it would also have been his, but for the transfer of it to his wife accomplished by his direction to the purchaser to pay it to her.
The word ‘‘transfer’’ was also discussed in the Tax Appeal Board case of Donald F. Campbell v. M.N.R. (1963), 32 Tax A.B.C. 208, where, at page 204, the Assistant Chairman, after referring to the exhaustive examination of the meaning of ‘‘transfer’’ by Thorson, P. in the Fasken Estate case (supra) stated: ‘‘That term embraces any passing of ownership.’’ In the case of Joseph B. Dunkelman v. M.N.R., [1960] Ex. C.R. 73; [1959] C.T.C. 375, Thurlow, J., considering the taxability of income from property transferred or from property substituted for property transferred by the appellant to a person under 19 years of age within the meaning of Section 22(1) of the Act again referred to the Fasken Estate case (supra) and then went on to say at page 78 [380] :
And in St. Aubyn v. Attorney-General, [1952] A.C. 15, Lord Radcliffe put the matter in almost the same way when he said at p. 53 :
“If the word ‘transfer’ is taken in its primary sense, a person makes a transfer of property to another person if he does the act or executes the instrument which divests him of the property and at the same time vests it in that other person.”
The expression “has transferred” in Section 22(1) has, in my opinion, a similar meaning. All that is necessary is that the taxpayer shall have so dealt with property belonging to him as to divest himself of it and vest it in a person under 19 years of age. The means adopted in any particular case to transfer property are of no importance, as it seems clear that the intention of the subsection is to hold the transferor liable for tax on income from property transferred or on property substituted therefor, no matter what means may have been adopted to accomplish the transfer.
He concludes that the making of a loan is not a transaction within the meaning of the expression “has transferred prop- erty’’. With regard to the question of taxation of income of one person in the hands of another, he says, at page 77 [379] :
... It goes without saying that, if the rule set out in Section 22(1) applies, the appellant will be liable for tax on the income in question, regardless of how harsh or unjust the result may appear to be. But, as it is not within the purview of the general taxing provisions of the statute to tax one person in respect of the income of another, the subsection must, in my opinion, be regarded as an exception to the general rule, and while it must be given its full effect so far as it goes, it is to be strictly construed and not extended to anything beyond the scope of the natural meaning of the language used, regardless again of how much a particular case may seem to fall within its supposed spirit or intendment.
All of the above cases dealt with a different section of the Act where the words ‘‘has transferred’’ were used alone and not in conjunction with the words ‘‘or distributed’’, but in the case of the Hugh Hawk Estate v. M.N.R. (1957), 17 Tax A.B.C. 71, it was Section 64(3) itself which was considered. In that case the deceased and his three sons operated their own farms under an arrangement whereby grain and livestock were sold under a partnership name and the proceeds divided amongst them in certain proportions. After the deceased’s death an agreement was reached by his widow and sons, although never put in writing, whereby all the interests of the deceased in grain or livestock became the property of the sons in return for which certain payments were to be made to the widow. It was held that the cattle and grain which formed part of the deceased’s estate were ‘‘transferred or distributed’’ to his sons as beneficiaries, within the meaning of Section 64(3), and therefore their value was not taxable in the hands of the executors under Section 64(2). In his judgment, W. S. Fisher, Q.C., after referring to the meaning of the word ‘‘transfer’’ as defined in the case of Gathercole v. Smith {supra) and the quotation from the judgment of Thorson, P. in the Fasken Estate case (supra), concluded that as the three sons were beneficiaries of their father’s estate, together with their mother, transfer, even though de facto in nature, was sufficient to bring it within the provisions of Section 64(3) of the Act. In another Tax Appeal Board case dealing with Section 64(3), namely that of Ernest George Willis Estate v. M.N.R., [1968] Tax A.B.C. 177, a contrary conclusion was reached. In that case the finding was based on the fact, however, that the company which had acquired assets of the deceased in exchange for paid up shares pursuant to a court order following his death to give effect to an arrangement he had made during his lifetime but had not carried into effect, was not a person beneficially interested in the estate merely because it had paid the estate tax assessed against the estate, but was merely a creditor of the estate. The decision of W. O. Davis, Q.C. refers, at page 185, to the argument of counsel for the Minister, which is similar to the argument made in the present case, as follows:
Counsel for the respondent urged that, inasmuch as the word “transfer” is used in conjunction with the word “distributed” in Section 64(3), it was evidently intended to connote something in the nature of a bequest as opposed to a sale such as had occurred in the instant matter, the word “distributed” carrying with it no element of payment for value received but suggesting a distribution of something to someone who was already entitled to that something as, for example, a beneficiary under a will.
It also refers, at page 184, to a definition of “beneficial interest’’ taken from Black’s Law Dictionary as ‘‘profit, benefit, or advantage resulting from a contract’’, pointing out, however, that the definition goes on to say:
When considered as designation of character of an estate, is such an interest as a devisee, legatee, or donee takes solely for his own use or benefit, and not as holder of title for use and benefit of another. People v. Northern Trust Co., 330 111. 238, 161 N.E. 525, 528.
In conclusion, at page 187, he states:
Having given careful consideration to all the facts and circumstances involved herein and to the authorities referred to by counsel, I have reached the conclusion that the said rights and things were not transferred or distributed within the terms of Section 64(3) but were sold by the executor of the estate to Princeton Stock Ranch Ltd. for good and valuable consideration, namely, 98 shares of the company stock.
Respondent’s contention in the present case is that the transaction in form and substance really breaks down into two separate transactions:
(a) a transfer by consent of book debts having a value of at least $90,000 in satisfaction of the balance of the legacy payable to Mrs. Denton under the will of her late father ;
and
(b) a sale of book debts having a value of at least $380,000 for full and valuable consideration made by the executor in the course of the administration of the estate to Mrs. Denton, whose title thereto was acquired not as a legatee or beneficiary under the will of her father but rather as a purchaser for value.
Respondent’s counsel argued that the use of the word “distributed” in connection with the word ‘‘transferred’’ in Section 64(3) in a cognate sense has the effect of narrowing the meaning of the word ‘‘transferred’’, quoting as authority for this Maxwell on Statutes, 12th ed., at page 289:
When two or more words which are susceptible of analogous meaning are coupled together, noscuntur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general.
He contended that both words had to be used because, while the word ‘‘transfer’’ would apply to the distribution of a specific asset to a beneficiary who had an equitable interest in the asset transferred, ‘‘distributed’’ has reference to a distribution of the assets of the estate of the deceased to those who are entitled thereto but who during the course of the administration thereof do not have any equitable interest in any specific asset. In this connection he referred to the case of Commissioner of Stamp Duties (Queensland) v. Hugh Duncas Livingston, [1965] A.C. 694, which held that in the case of an unadministered estate the assets as a whole were in the hands of the executor, his property, and until administration was completed, it could not be said of what the residue, when ascertained, would consist or what its value would be. It was further held that what the widow was entitled to in respect of her rights under the testator’s will was a chose in action, capable of being invoked for any purpose connected with the proper administration of her husband’s estate. A similar finding was made by the Supreme Court in the case of M.N.R. v. Fitzgerald (George V. Steed Estate), [1949] 8.C.R. 453; [1949] C.T.C. 101, in which Kerwin, J. at page 460 [125] refers to a proprietary interest either legal or such an equitable interest as is recognized by our courts, which Steed did not have, stating:
. . . All that devolved upon his death was a right to have the estate of Bonnie Steed administered; and that right was a chose in action properly enforceable...
In the present case, while Mrs. Denton had an equitable interest in the legacy left her in her father’s will, she only had an eventual interest in her share of the residue of the estate when same would be distributed on the death or remarriage of certain of the income beneficiaries. He contended, therefore, that Mrs. Denton was not ‘‘a beneficiary or other person beneficially interested’’ in the estate or trust save to the extent of the balance due her under the legacy, and that beyond this her right only consisted in a right to have the estate administered so ultimately she would obtain her proper share in the residue when same was distributed. With respect to the sum of $380,000, therefore, she was simply a purchaser for value from the trustees of the accounts due to the estate, and to this extent the accounts could not be considered as having been transferred to: her qua beneficiary or person beneficially interested.
He contended that this interpretation conforms to the apparent scheme of Parliament in enacting Section 64(3). Section 85F gives a special privilege to taxpayers who carry on a profession or the business of farming by permitting them to compute their income on a Cash basis rather than a current earnings basis. As a consequence of this, if there had not been any specific statutory provision, then on the cessation of business, the amounts subsequently received would not be subject to tax since they would no longer be income from a source. In support of his contention he quoted the British case of Bennett v. O g st on (1930), 15 Tax Cas. 374 at 378, approved by Lord Simonds, L.C. in Gospel v. Purchase, [1951] 2 All E.R. 1071 at 1074D, in which Rowlatt, J. stated :
When a trader or a follower of a profession or vocation dies or goes out of business ... and there remain to be collected sums owing for goods supplied during the existence of the business or for services rendered by the professional man during the course of his life or his business, there is no question of assessing those receipts to income tax; they are the receipts of the business while it lasted, they are arrears of that business, they represent money which was earned during the life of the business and are taken to be covered by the assessment made during the life of the business, whether that assessment was made on the basis of bookings or on the basis of receipts.
Similarly, in the case of Frankel Corporation Limited v. M.N.R., [1959] S.C.R. 713; [1959] C.T.C. 244, where a profit made on the sale of a business operation, including inventory, was held to be not taxable, it was found that the sale of the inventory was not a sale in the business of the appellant but was made as a part of a sale of a business of the appellant and consequently the proceeds of the sale were not income from a business within the meaning of Section 4 of the Income Tax Act. A similar finding was made in the case of Crompton (Inspector of Taxes) v. Reynolds and Gibson, [1952] 1 All E.R. 888, where a firm purchased a business, including a book debt which was acquired at a written-down figure but which was later collected in full and a profit of £50,000 thereby being made by the new firm. It was held that although the debt was a trading debt in the hands of the old firm its acquisition by the new firm and its subsequent collection was not a transaction within the scope of its business but produced an accretion of value analogous to the profit made by the sale of a fixed asset and this was therefore not taxable. In line with this reasoning he argued, therefore, that Section 64 was necessary to provide for the taxation of income from book debts which, on the death of the deceased, had never entered into his computation of profit. The scheme of the legislation is that these debts are then to be taxed either in the hands of the deceased or of the beneficiary. If they have been transferred or distributed to a beneficiary in this quality then they will be included in the beneficiary’s income if and when realized. If the extent to which the purchaser for value is also beneficiary is not to be taken into consideration in the interpretation of Section 64(3), this would lead to some peculiar results. F'or example, a professional man might leave a substantial sum of accounts receivable, as in the present case, and a token legacy of perhaps only $1,000 to a trusted servant or friend who would then be a beneficiary, although only to this extent. By arranging for the sale of the receivables to such a beneficiary (which sale could readily be financed by a short term loan when the accounts are as readily collectable as in the present case) then even if the sale were made at a discount, taking into consideration the taxation which the purchaser would have to pay on collection of these accounts, the estate might nevertheless save substantial sums if the recipient were in a much lower tax bracket than the deceased. The appellant’s attorney was very frank in the present case in admitting that after payment of 50% estate tax on these accounts and income tax at the rate of approximately 70% on the balance, the total sum paid in taxation would have amounted to 85% of the value of the accounts and arrangement worked out with Mrs. Denton was an attempt to avoid this. Avoidance of taxation that can be done within the provisions of the governing statute is perfectly permissible and respectable as has frequently been stated by courts both in England and Canada. However, when the interpretation of the meaning of the words used in a section of the Income Tax Act is in doubt, it is preferable to adopt an interpretation which brings a result which conforms to the apparent scheme of the legislation, rather than one which will defeat it. In the case of Highway Sawmills Limited v. M.N.R., [1966] 8.C.R. 384; [1966] C.T.C. 150, Cartwright, J. stated at page 393 [157-158] :
The answer to the question what tax is payable in any given circumstances depends, of course, upon the words of the legislation imposing it. Where the meannig of those words is difficult to ascertain it may be of assistance to consider which of two constructions contended for brings about a result which conforms to the apparent scheme of the legislation.
The case of M.N.R.. v. Pillsbury Holdings Limited, [1965] 1 Ex. C.R. 676 ; [1964] C.T.C. 294, in interpreting Section 8(1) (c) of the Act, held that it was intended to sweep into income, payments, distributions, benefits and advantages that flow from a corporation to a shareholder by some route other than the dividend route, which payments might be expected to reach the shareholder by the more orthodox dividend route if the cor- poration and the shareholder were dealing at arm’s length, but that there could be no question of conferring a benefit or advantage within the meaning of Section 8(l)(c) on a shareholder where a corporation enters into a bona fide transaction with him. In rendering judgment, Cattanach, J. stated at page 687 [303] :
... To come within that paragraph, it must be an arrangement or device whereby a corporation confers a benefit or advantage on a shareholder qua. shareholder.
I believe a similar distinction should be made in the present case. Section 64(3) applies to transfers or distributions of the right or thing to a beneficiary or other person beneficially interested in the estate or trust only when such transfer or distribution has been made to him qua beneficiary, and not to the extent that he has acquired it as a purchaser for value. Therefore, had Mrs. Denton been a legatee of an amount equal to or in excess of $483,350 and had accepted the accounts in satisfaction of this legacy, no tax would have been collectable from the estate of the deceased when these accounts were paid, and since Mrs. Denton herself was not taxable in Canada, the accounts would have been collected without payment of income tax on them by anyone, and this would have been a perfectly proper and legitimate application of Section 64(3) of the Act. I cannot interpret this section, however, as applying to all rights or things which may be transferred or distributed by way of a sale for value to a purchaser who also happens to be a beneficiary or other person beneficially interested in an estate or trust irrespective of how small his benefit or beneficial interest in same may be. I therefore find that with respect to the rights or things so transferred which are in excess of the amount for which the purchaser is a beneficiary or person beneficially interested in the estate he is simply
a. purchaser for value and the estate or trust is taxable under the provisions of Section 64(2) on the amounts so transferred. The appeal : 1S therefore dismissed, with costs.
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