In the Matter of the Estate of Stella Maud Waters, Deceased., [1955] CTC 126

MCLENNAN, J.:—The question raised in this motion is whether certain preference shares in the Dodds Medicine Company received by the executors of the last will and testament of the deceased as a stock dividend and the redemption money representing the shares since redeemed are capital or income of the estate of the deceased.

Stella Maud Waters died on July 15, 1940, and by her will devised her estate to her trustees upon trust to pay income to her son and daughter for life with remainder to them in certain events, failing which the capital is to be divided into two equal shares to be held in trust for two grandsons with cross remainders between them and an ultimate contingent remainder.

The will gave to the trustees powers which are set out in paragraphs XII (a), (b) and (c) and paragraphs XIII and XIV, which include powers to postpone conversion, to invest and to retain the original assets and distribute them in specie.

During argument of the motion Mr. Watson was appointed to represent the potential issue of John Gavin Waters and the unborn issue of Lieutenant-Commander Donald Mackenzie Waters.

Amond the unrealized assets of the estate are 8,000 out of 30,000 issued common shares of the Dodds Medicine Company incorporated under The Companies Act (Ontario) as a private company.

The company paid dividends on its issued capital stock each year from the date of the testatrix’s death.

On October 19, 1951 at the annual meeting of the shareholders of the company the chairman advised the meeting the directors felt that the company should elect to proceed under Section 95A of the Income Tax Act and pay 15 per cent tax on the undistributed income on hand at April 30, 1949, and also on an amount equal to the dividends paid by the company during the taxation year ending on April 30, 1950, and resolutions were passed in accordance with this recommendation and the directors were authorized to increase the authorized capital of the company by the creation of preference shares to a par value of $500,000.

On November 28, 1950, two by-laws were passed by the directors, (1) authorizing the directors to issue shares as fully paid for the amount of any dividends which the directors might lawfully declare payable in money, and (2) increasing the capital of the company by the creation of 500,000 non-cumulative, redeemable preference shares of the par value of $1, and authorizing the application for supplementary letters patent confirming the by-law. These by-laws were confirmed at a shareholders’ meeting on December 11, 1950.

Supplementary letters patent were issued under date of December 12, 1950, designating the 30,000 shares of the capital stock of the company as 30,000 common shares and increasing the capital stock of the company by the creation of 500,000, 3 per cent non- cumulative, non-voting, redeemable preference shares of the par value of $1, ranking in priority to the common shares and enjoying and being subject to the preferences, priorities, rights, privileges, limitations and conditions set out in the supplementary letters patent.

At a meeting of the directors held on January 25, 1951, it was reported that the tax on the undistributed income as of April 30, 1949 had been paid and a resolution provided for an election of the company to be assessed and pay a tax of 15 per cent on the sum of $39,900 being an amount equal to the dividends declared and paid by the company on the shares in the taxation year ending April 80, 1950.

On February 9, 1951 a resolution of the directors provided for the payment of a stock dividend of $240,000 payable forthwith and for the allotment and issue of 240,000 preference shares to the holders of the common shares in proportion to the shares held by them. This amount of preference shares represented the undistributed income as of April 30, 1949, less tax, and the undistributed income for the year ending April 30, 1950 less tax. The mixing of the accumulated earned surplus and the surplus arising from the current operations of the preceding year is a fact which does not appear in the three cases which I will mention.

The balance sheet of the company as of April 30, 1950 in addition to the authorized and issued capital at $30,000 also showed earned surplus at $287,463.66. The balance sheet of the company as of April 30, 1951 showed authorized capital at 30,000 common shares and 490,400 preference shares and the issued capital stock as 30,000 common shares and 230,400 preference shares and the earned surplus at $42,589.31.

The executors of the will received 64,000 of the preference shares on February 19, 1951. Since then the company has redeemed 17,920 shares in lots of 1,280 shares each at irregular intervals and has paid dividends at the rate of 3 per cent per annum on the unredeemed portion annually, commencing on May 1, 1951 down to and including May 1, 1953. The executors therefore, as of May 11,1953 had in their hands $17,920 representing the redemption price of that number of shares, $4,834.40 in accumulated dividends and 46,080 unredeemed preference shares.

By consent of all counsel the question submitted in the notice of motion was amended so that the only question to be decided is

“Are the 64,000 3% non-cumulative, non-voting redeemable preference shares of the Dodds Medicine Co. Ltd. of the par value of $1 each received by the Executors of the last will and testament of the deceased as a stock dividend on February 19, 1951, or the redemption money representing such part of the said shares as have been redeemed, capital or income of the estate of the deceased ? ’ ’

After considering the will and particularly clause XIII (c) I have come to the conclusion that the testatrix did not provide for the eventuality of the executors receiving shares in the nature of an accretion arising from an asset already part of the capital of the estate and the question must be decided on the facts according to the principles already established.

I had the benefit of a very able argument from all counsel concerned in which many decisions of the Courts in England and in Ontario were discussed. After reading all the cases cited to me I have come to the conclusion that the real question is whether I am bound by Re Fleck, [1952] O.R. 113; [1952] C.T.C. 196; affirmed [1952] O.W.N. 260; [1952] C.T.C. 205 and Re Mills, [1953] O.R. 197; [1953] C.T.C. 115 or by Re McIntyre, [1953] O.R. 910; [1953] C.T.C. 372.

In Re Fleck it was held by Mr. Justice Hoge that the preference shares there in question were income and Mr. Justice Gale in Re Mills felt that he was bound by that decision. In Re McIntyre the Chief Justice of the High Court distinguished Re Fleck and came to the conclusion that the preference shares were capital in the hands of the trustees.

The facts which are the basis upon which the Chief Justice of the High Court distinguished Re Fleck are present in the matter before me and I have come to the conclusion that I am bound by Re McIntyre.

The anwser to the question will therefore be that the preferred shares and the redemption money representing those shares which have been redeemed are part of the corpus of the estate.

Costs of all parties will be paid out of the estate, those of the executors as between solicitor and client.