Supreme Court of Canada
Beament et al. v. Minister of National Revenue [1970] S.C.R. 680
Date: 1970-03-20
George Edwin Beament, Maurice Hamilton Fyfe, Robert Barclay Hutton and Canada Permanent Trust Company, Executors and Trustees of the Estate of Arthur Warwick Beament, deceased Appellants;
and
The Minister of National Revenue Respondent.
1969: December 9, 10; 1970: March 9, 20.
Present: Cartwright C.J. and Abbott, Hall, Spence, and Pigeon JJ.
ON APPEAL FROM THE EXCHEQUER COURT OF CANADA
Taxation—Estate Tax—Valuation of shares of private company—Fair market value—Contractual obligation on estate to wind up company—Effect of obligation on value—Estate Tax Act, 1958 (Can.), c. 29, ss. 3(1) (c), (d), 3(3)(a), 5, 58(1) (o), (s).
In 1961, the deceased incorporated a private investment holding company with an authorized capital divided into class A and class B shares, each carrying one vote and each having a par value of $1. The deceased subscribed for 2,000 class B shares and each of his two children subscribed for 12 class A shares. No other shares were issued. The letters patent conferred a 5 per cent cumulative preferential dividend on the class A shares and entitled the holders of the class B shares to the remaining net earnings of the company arising from income but not from capital gains. On the dissolution or winding-up of the company the holders of the class B shares were limited to receiving the par value of their shares. The holders of the class A shares were entitled to receive all the remaining distributable assets. Pursuant to an agreement, the deceased covenanted with his children to provide in his will for the dissolution of the company and the distribution of its assets in accordance with the provisions of the letters patent. His estate received $10,725.98. The remaining net assets were distributed to the class A shareholders, each receiving assets to the value of $76,481.70. In issue was whether the property that passed from the deceased to his estate on his death was the 2,000 class B shares free, as contended by the Minister, from the obligations assumed by the deceased under the contract. On
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that basis, the value would be $110,000. The Exchequer Court upheld the Minister’s assessment. The estate appealed to this Court.
Held: The appeal should be allowed.
Per Cartwright C.J. and Abbott, Hall and Spence JJ.: What has to be ascertained is the fair market value of the 2,000 shares as of the date of the death of the deceased. It is plain that no sensible person would have paid more for them than $10,725.98, and that on a winding-up the executors could not receive more than that amount. Once it is established (and it has been conceded) that the contract binding the deceased and his executors to have the company wound-up was valid, the real value of the shares cannot be more than the amount which their holder would receive in the winding-up. To suggest that they have in fact any other value would be altogether unrealistic. Once it appears that on the death of the deceased the company had to be wound-up, the fair market value of the 2,000 shares must be the same whether that winding-up takes place under the compulsion of an enforceable contract or pursuant to a mandatory provision in the letters patent.
Per Pigeon J.: The rights conferred upon the two children of the deceased by the agreement were “property”. These rights were to have the company wound-up promptly after the death of the deceased, in order to benefit from any increase in value of the class B shares above their par value. It follows that the class B shares were to be valued taking the agreement into account unless the children’s rights thereunder could be assessed as property to be brought into the estate for taxation purposes under s. 3(1)(d) or (e), a contention that was not raised.
APPEAL from a judgment of Jackett P. of the Exchequer Court of Canada, affirming the Minister’s assessment in an estate tax matter. Appeal allowed.
M.H. Fyfe, Q.C., for the appellants.
D.G.H. Bowman, for the respondent.
The judgment of Cartwright C.J. and of Abbott, Hall and Spence JJ. was delivered by
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THE CHIEF JUSTICE—This is an appeal from that part of the judgment of the President of the Exchequer Court1 dated December 16, 1968, which had the effect of directing that the shares in a private company owned by the late Arthur Warwick Beament, hereinafter referred to as “the deceased”, should be valued under the Estate Tax Act, Statutes of Canada, 1958 (Can.), c. 29, hereinafter referred to as “the Act”, at not less than $110,000 as claimed by the respondent in his Amended Reply to the appellants’ Notice of Appeal to the Exchequer Court.
As this is a case the decision of which turns on its particular facts it is necessary to set them out in some detail; they are not in dispute.
At the time of his death on May 24, 1966, the deceased was the beneficial owner of 2,000 Class B shares of the par value of $1 each in the capital stock of Lakroc Investments Limited, hereinafter referred to as “Lakroc”, and these shares were, under the Act, property passing on the death of the deceased and, as such, liable to estate tax at their fair market value.
Lakroc was a private investment holding company incorporated on March 15, 1961, under the Canada Corporations Act, R.S.C. 1952, c. 53, with an authorized capital divided into 10,000 Class A shares and 40,000 Class B shares all of the par value of $1 each. In summary the provisions attaching to the Class A and Class B shares of Lakroc set out in the letters patent conferred a 5 per cent cumulative preferential dividend on the Class A shares and entitled the holders of the Class B shares to the remaining net earnings of the company arising from income but not from capital gains. On the dissolution or winding-up of the company the holders of the Class B shares were limited to receiving the par value of their shares and no more and the holders of the Class A shares were entitled to receive all the remaining distributable assets. Each Class A and each Class B shares carried one vote.
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The deceased was the beneficial owner of the 3 Class B shares of Lakroc subscribed for by the applicants for incorporation and on March 15, 1961, he subscribed for 1,997 Class B shares and paid the allotment price of $1,997. On the same date his adult daughter, Mrs. M.P. Van Harlingen and his adult son, J.A. Beament each subscribed for 12 Class A shares of Lakroc for which they each paid the allotment price of $12. No other shares were issued during the lifetime of the deceased and on his death the issued shares of Lakroc were beneficially owned as follows:
| Mrs. M.P. Van Harlingen |
12 Class A shares |
| J.A. Beament |
12 Class A shares |
| The deceased |
2,000 Class B shares |
|
|
|
The deceased’s children subscribed for their Class A shares pursuant to an agreement under seal dated March 15, 1961, made between them and the deceased. In this agreement the deceased, therein called “the Controlling Shareholder”, covenanted with his two children as follows:
3. The Controlling Shareholder covenants and agrees that he will provide in his Will and maintain therein a direction to his executors to take all necessary steps as soon as conveniently may be after his death to cause the debts of the Company to be paid, its assets to be distributed rateably amongst the shareholders of the Company in accordance with the provisions of the Letters Patent incorporating the Company and to surrender the Letters Patent of the Company. The word “Will” as herein used includes any codicil or other testamentary document effective on the death of the Controlling Shareholder, by whatever name it may be called, and the words “Letters Patent” include any Supplementary Letters Patent.
The Will of the deceased dated July 23, 1965, contains the following provision:
15. I DIRECT my Trustees, as soon as conveniently possible after my death, to do all things necessary to cause Lakroc Investments Limited to pay its debts, to distribute its assets amongst its shareholders and to surrender its charter.
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As a result of the death of the deceased, the 2,000 Class B shares of Lakroc beneficially owned by the deceased became vested in the appellants as his executors and as required by para. 3 of the agreement of March 15, 1961, and para. 15 of the Will of the deceased, steps were immediately taken to procure the dissolution of Lakroc by paying its debts, distributing its net assets rateably among its shareholders and surrendering its charter.
After paying the debts of Lakroc, its net assets were distributed in accordance with the provisions of its letters patent relating to the Class A and Class B shares. With respect to the 2,000 Class B shares beneficially owned by the deceased at the time of his death, his estate received $10,725.98 made up as follows:
| Dividend declared by directors of Lakroc equal to its net earnings from income accrued to the date of death of the deceased....................................................... |
$ 8,725.98 |
| Par value of 2,000 Class B shares......................................................................... |
$ 2,000.00 |
| |
$10,725.98 |
In accordance with the letters patent, the remaining net assets were distributed to the Class A shareholders, Mrs. Van Harlingen and J.A. Beament who each received assets to the value of $76,481.70.
In their Estate Tax Return dated August 5, 1966, the appellants declared the value of the 2,000 Class B shares of Lakroc at $10,725.98. By Notice of Assessment dated March 31, 1967, the respondent increased the value of the 2,000 Class B shares by $144,239.14 making a total valuation for the shares of $154,965.12 and asserted this valuation in his original Reply in the Exchequer Court. By his Amended Reply in the Exchequer Court, the Respondent abandoned the valuation of $154,965.12 and asserted that the value of the Class B shares was not less than $110,000.
It was common ground in the Court below, and on the argument before us, that the sole question to be decided is what amount should be
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included in “the aggregate taxable value” of the property passing on the death of the deceased in respect of the 2,000 Class B shares, that this question must be resolved in accordance with the statutory definition of “value” contained in s. 58(1)(s)(ii) of the Act which reads:
58. (1) In this Act,…
(s) ‘value’,…
(iii) in relation to any other property, means the fair market value of such property.
computed in each case as of the date of the death of the deceased in respect of whose death such value is relevant or as of such other date as is specified in this Act, without regard to any increase or decrease in such value after that date for any reason.,
that if the appellant’s contention is upheld that amount should be $10,725.98 and that if the respondent’s submission is accepted it should be $110,000.
In the course of his reasons the learned President said:
… No attack has been made on the bona fide of the arrangements. No resort has been made by the respondent to any provision designed to deal with tax avoidance schemes where closely related persons are involved. It follows, therefore, as I appreciate the matter, that it must be appraised in the same way as it would be appraised if the Class “A” shares had been taken up by persons who were dealing with the deceased at arm’s length and who subscribed very substantial sums for a relatively small annual dividend and a covenant by the deceased that the company would be wound up on his death so that they would then receive any capital gains that had been acquired by the company.
This was not challenged by the respondent and the appeal was argued on the basis that it correctly states the way in which the question should be approached.
The learned President stated succinctly the issue on which the appeal turns as follows:
The appeal therefore turns, as I appreciate it, on the narrow issue as to whether the property in question that passed from the deceased to his estate on his death was
(a) the 2,000 Class “B” shares as held by the deceased under the terms of the contract with his children concerning their acquisition, or
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(b) the 2,000 Class “B” shares free from the obligations assumed by the deceased under that contract.
The learned President had no difficulty in determining what amount the appellants could in fact obtain for the 2,000 shares. He put this as follows:
In fact, what passed from the deceased to his estate were the shares subject to the obligations assumed by the contract, and, as so held, they cannot be regarded as having a value to any sensible person of more than $2,000 plus undeclared current earnings.
Having said this the learned President proceeded to an elaborate examination of the scheme of the Act and reached the conclusion that it required the value of the shares to be estimated as if the deceased held them free from the obligation arising from the contract and that, while the existence of the obligation in fact reduced the value to $10,725.98, no effect could be given to this because the obligation was neither a “debt” under s. 5(1)(a)(i), which by s. 5(2) is extended to include an “other obligation of the deceased that was created or imposed by or under the authority of a statute” nor an “encumbrance” under s. 5(1)(a)(ii). The learned President was further of the opinion that the result would have been otherwise if the obligation to cause the company to be wound up had been created by the terms of the Letters Patent incorporating the company.
It should be mentioned that in argument before us counsel for the appellants made it clear that he did not contend that the obligation to cause the company to be wound up constituted either a “debt” or an “encumbrance”.
The conclusion of the learned President is summed up in the following paragraph in his reasons:
My analysis of the scheme of the Estate Tax Act leads me to the conclusion, therefore, that what was intended was that the ‘value’ of all property passing on death should be included in computing the estate tax base, but that there can only be deducted, in that computation, the value of some, and not of all, obligations of the deceased that pass to the estate. In other words, there seems to have been a deliberate intention, in the framing of the scheme of the
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statute, to impose the estate tax on a tax base that might, in some cases, substantially exceed the net worth of the estate even in a case where none of the lettered paragraphs of section 3(1) have any application.
With the greatest respect I find myself unable to agree with this interpretation of the Act. What has to be ascertained is the fair market value of the 2,000 shares as of the date of the death of the deceased. It is plain, as the learned President points out, that no sensible person would have paid more for them than $10,725.98, and that on a winding-up the executors could not receive more than that amount.
Once it is established (and it has been conceded) that the contract binding the deceased and his executors to have the company wound up was valid, the real value of the shares cannot be more than the amount which their holder would receive in the winding-up. To suggest that they have in fact any other value would be altogether unrealistic. When the true value of the shares in the circumstances which exist is readily ascertainable, I can find nothing in the Act that requires the computation of the value they would have had under completely different circumstances followed by an inquiry as to whether any deductions should be made from that value.
It would, of course, be within the power of Parliament to enact that an asset of a deceased person which in fact could produce only $10,725.98 for his estate should be valued for purposes of taxation at ten times that amount but, in my opinion, it would require clear and unambiguous words to bring about such a result. Nowhere in the words of the statute can I find the expression of such an intention applicable to the facts of the case at bar.
Argument was addressed to us on the question whether if the executors, in breach of the terms of the contract of the deceased with his children and of the provision in para. 15 of his Will, had transferred the 2,000 shares to a purchaser for value who took either with or without notice, such purchaser would have been entitled to hold the shares free from the obligation to cause the company to be wound up. I do not find it neces-
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sary to consider this question. It is clear that the contract to cause the company to be wound up was one specifically enforceable in a suit by the holders of the A shares against the executors. When they did neither, it is irrevelant to consider what result would have flowed from the executors acting in breach of contract or in breach of trust. It would, I think, be improper to compute the fair market value of an asset on the assumption that the vendor in making a sale would be guilty of intentional wrong-doing; I find nothing in the Act which compels the Court to make such an assumption.
Once it appears that on the death of the deceased the company had to be wound up, it seems to me that the fair market value of the 2,000 shares must be the same whether that winding-up takes place under the compulsion of an enforceable contract or pursuant to a mandatory provision in the Letters Patent.
The appeal was fully argued and judgment was reserved. In the course of considering the matter it apeared to the Court that the arrangement made between the late Mr. Beament and his children described in the above statement of facts might have the result of attracting tax under the provisions of s. 3 of the Estate Tax Act and particularly under clauses 3 (1)(d) and 3(1)(e). The Court invited further argument on this question and counsel were heard in regard to it.
I find it unnecessary and undesirable to express any opinion on the question so raised as on further consideration it appears that it does not arise on the pleadings. As stated earlier in these reasons, the sole question put before the Exchequer Court and before us was what amount should be included in “the aggregate taxable value” of the property passing on the death of the deceased in respect of the 2,000 Class B shares which were admitted to be property passing on his death; and with that question I have dealt above.
It was agreed at the argument that the judgment of the learned President as to “the second
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matter in appeal” should stand. As to “the first matter in appeal” I would allow the appeal with costs in this Court and in the Exchequer Court and direct that the judgment of the Exchequer Court be varied to provide that the assessment under appeal be referred back to the respondent for re-assessment of the value of the 2,000 B shares at the sum of $10,725.98.
PIGEON J.—I agree with the Chief Justice but I wish to add the following.
Respondent’s submission was essentially that unless clause 3 of the agreement of March 15, 1961, “was a covenant that ‘attached to’, ‘ran with’ or ‘formed part of’ the shares so as to be binding upon a stranger who acquired them in the open market”, the Class B shares of Lakroc Investments Limited were to be valued for estate tax purposes without taking into account the effect of clause 3. In my view, that submission is ill-founded.
Section 3(3)(a) of the Estate Tax Act enacts:
3. (3) For the purposes of paragraph (c) of subsection (1),
(a) the artificial creation by a person or with his consent during his lifetime of a debt or other right enforceable against him personally or against property of which he was or might be competent to dispose, or to charge or burden for his own benefit, shall be deemed to be a disposition by that person operating as an immediate gift inter vivos made by him at the time of the creation of the debt or right, and, in relation to any such disposition, the expression “property” in this Act includes the benefit conferred by the creation of such debt or right;
Of course, s. (3)(1)(c) applies only to dispositions made within three years prior to the death and the agreement of March 15, 1961, is not within that period, but this does not mean that s. 3(3)(a) is to be left out of consideration entirely. It appears to me that the matter must be considered in the same way as the definition of “loss” was treated by the majority in Minister
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of National Revenue v. Wahn. It was held “to be implicit in the wording” of the definition that a loss operates to reduce the taxpayer’s income from other sources for the year in which it is sustained although it does explicitly apply in respect of other years only. Here, while a right enforceable against the decedent personally is expressly declared to be “property” only for the purposes of s. 3(1)(c), that is if created within three years before the death, I fail to see how such right would cease to be “property” after the expiry of that period. The result would be that while the benefit conferred by such right would be brought into the estate as having been created within three years when such is the case, it would also be included in the estate when such is not the case as not being a deductible debt. In my view, the clear implication of the provision bringing into the estate a benefit conferred by a right created within three years is that such benefit is not brought in, if created more than three years before the death.
I must also note that property is defined in s. 58(1)(o) as including “a right of any kind whatever”.
In my view, therefore, the right conferred upon the two children of the deceased by clause 3 of the agreement of March 15, 1961, was “property”. This right consisted in being entitled to have Lakroc wound up promptly after the death of Mr. Beament, so that as owners of the Class A shares they would have the benefit of any increase in value of the Class B shares above their par value.
This right being “property” it follows that the Class B shares were to be valued taking it into account. Parliament cannot have intended that the same value would be included in two separate items of “property”. In other words, the effect of the extensive definition of “property” permeates the whole Act. It does not merely add to the common law concept, it alters it and influences the meaning of the word wherever
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found, including the provisions defining value as much as those defining the content of the “estate”.
The conclusion that the rights of the decedent’s children under clause 3 of the agreement were “property” does not mean that those rights could not possibly be brought into the estate for taxation purposes under s. 3(1)(d) or (e). However, as the Chief Justice has pointed out, when counsel for the respondent was invited at the rehearing to make a statement in that respect, he informed the Court that the assessment appealed from was not based on those provisions. They are therefore left out of consideration.
I concur in the disposition of the case as proposed by the Chief Justice.
Appeal allowed with costs.
Solicitors for the appellants: Beament, Fyfe, Ault, Hutton & Wilson, Ottawa.
Solicitor for the respondent: D.S. Maxwell, Ottawa.
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