Walsh Estate v. Minister of Finance (B.C.), [1979] CTC 251, at 257 (BCSC)

Anderson, J:—This is an appeal from the decision of the Minister of Finance that a debt owing by the estate of the deceased to one Lucie Johnston did not constitute a debt of the estate for the purposes of the Succession Duty Act, RSBC 1948, c 1.

Section 3 of the Act reads as follows:

(1) In determining the net value of the property of the deceased, or the dutiable value of property or of the transmission of a beneficial interest in property, the fair market value shall be taken as at the date of the death of the deceased, but subject, in case of any future or contingent income or interest, to the provisions of section 22, and a deduction or allowance shall be made as provided in this section for reasonable funeral expenses, debts, and encumbrances, and for probate fees, but an allowance shall not be made.

(a) for debts incurred by the deceased, or encumbrances created by a disposition made by the deceased, unless such debts or encumbrances were incurred or created bona fide for full consideration in money or money’s worth wholly for the deceased’s own use and benefit, and take effect out of his interest; nor

(b) for any debt in respect whereof there is a right to reimbursement from any other estate or person, unless such reimbursement cannot be obtained; nor

(c) more than once for the same debt or encumbrance charged upon different portions of the estate; nor

(d) shall any allowance or reduction be made for the expense of administration of the estate (except probate duty) or the execution of any trust created by the will of a testator.

(2) The allowances made under subsection (1) in determining the dutiable value shall be deducted from the value of only those portions of the property out of which the funeral expenses, debts, encumbrances, and probate fees are payable respectively, and where the property situate within the Province forms only part of the property of a deceased, the allowances shall be deducted from the value of the property within the Province to the extent only of an amount which bears the same ratio to the value of the property within the Province as the value of that property bears to the gross value of all property of the deceased, wherever situate, both within and without the Province.

The “Statement of Agreed Facts” reads as follows:

Counsel for Devina Maria Walsh, also known as Diane (sic) Marie Walsh, and Canada Permanent Trust Company, Executors of the Will of Frank Henry William Walsh, deceased, and Counsel for the Minister of Finance respectively agree to the following facts:

1. The deceased Frank Henry William Walsh was married to Devina Marie Walsh at Nanaimo, British Columbia, on November 9, 1957.

2. Devina Marie Walsh commenced divorce proceedings against the deceased in the Supreme Court of British Columbia, Nanaimo Registry under No 5920/001521 in which Judgment By Way of Decree Nisi was granted by His Honour Judge Cashman on June 30, 1975, which Judgment was entered in the Nanaimo Registry of the Supreme Court of British Columbia on August 5, 1975. A copy of the said Judgment By Way of Decree Nisi is attached hereto and marked as Schedule ‘A’.

3. The deceased Frank Henry William Walsh went through a form of marriage on March 7, 1976, at Las Vegas, Nevada, one of the United States of America, with one Lucie A Johnson, also known as Lucie A Walsh. A copy of the Affidavit of Milton Keefer, Attorney at Law and the marriage certificate exhibited thereto is attached hereto and marked as Schedule ‘B’.

4. At the date of the purported marriage to Lucie A Johnson, March 7, 1976, no Judgment By Way of Decree Absolute had been granted to dissolve the marriage between Frank Henry William Walsh, deceased, and Devina Marie Walsh and therefore Frank Henry William Walsh, deceased, was a married man at the date of the purported marriage to Lucie A Johnson.

5. The deceased Frank Henry William Walsh commenced an action against Lucie A Johnson in the Supreme Court of British Columbia, Nanaimo Registry, on May 19,1976, under No SC 0965 wherein the deceased claimed a Declaration that the marriage solemnized between Frank Henry William Walsh and Lucie A Johnson be null and void. Attached hereto and marked as Schedule ‘C’ and ‘D’ respectively are the Writ of Summons and Statement of Claim issued in the said nullity proceedings.

6. Frank Henry William Walsh, deceased, died on a boating accident August 1, 1976.

7. On October 28,1976, Letters Probate of the Last Will and Testament of Frank Henry William Walsh, deceased, was granted to Diana Marie Walsh and Canada Permanent Trust Company as Executors of the Will of Frank Henry William Walsh, which Letters Probate and Will is attached hereto and marked as Schedule ‘E’ to this agreed Statement of Facts.

8. The Will of Frank Henry William Walsh, deceased, named as beneficiaries Devina Marie Walsh, wife of the deceased, and the infant children, Mark Anthony Walsh born June 24, 1958, Todd Michael Walsh born August 9, 1960, and Michelle Anne Walsh born March 5, 1962.

9. Lucie A Walsh commenced an action in the Supreme Court of British Columbia under No C770880 against Devina Marie Walsh also known as Diana Marie Walsh and Canada Permanent Trust Company, Executors of the Will of Frank Henry Walsh, deceased, claiming a Declaration that the purported marriage solemnized between Lucie A Johnson and the deceased Frank Henry William Walsh be pronounced null and void, maintenance, relief pursuant to section 12 of the Family Relations Act, damages on a quantum meruit, costs and such further and other relief as the Supreme Court of British Columbia may deem just on February 23, 1977, which Writ of Summons and Statement of Claim are attached as Schedule ‘F’ and ‘G’ to this agreed Statement of Facts.

10. Devina Marie Walsh and Canada Permanent Trust Company, Executors of the Will of Frank Henry William Walsh filed a Statement of Defence to the action of Lucie A Johnson in the Supreme Court of British Columbia, No C770880 on May 25, 1977, which Statement of Defence is attached hereto and marked Schedule ‘H’ to this agreed Statement of Facts by which Statement of Defence the Defendants counterclaimed against Lucie A Walsh for damages for the use, occupation and injury to the premises situate at 3790 Hammond Bay Road, Nanaimo, British Columbia.

11. Anne Rainbow, Guardian and litem for the infants Mark Anthony Walsh, Todd Michael Walsh and Michelle Anne Walsh, by consent was added as a Defendant to Action No 0770880 in the Supreme Court of British Columbia. Attached to this agreed Statement of Facts as Schedule ‘I’ is a Statement of Defence of the Defendant Anne Rainbow which was filed June 6, 1977.

12. That the parties to Action 3770880 in the Supreme Court of British Columbia, Vancouver Registry, reached an all inclusive settlement of the action in regard to the claims of Lucie A Jonnson and the counterclaims of the Defendants Devina Marie Walsh and Canada Permanent Trust Company, Executors of the Will of Frank Henry William Walsh, whereby the Estate of Frank Henry William Walsh agreed to pay Lucie Johnson the sum of $45,000 on or before November 2,1977, on certain terms as set out in a letter dated November 2, 1977, from J W Horn to R D McBride (referred to hereinafter as the Settlement Agreement), Schedule ‘J’.

13. On November 28, 1977, Anne Rainbow as Guardian ad litem for the said infant children by Originating Petition applied for an Order that Anne Rainbow may enter into an agreement to compromise the infants’ claim as beneficiaries of the Estate of Frank Henry William Walsh, deceased, pursuant to the claim of Lucie A Johnson made in Schedules ‘F’ and ‘G’. Attached hereto and marked as Schedule ‘K’, ‘L’ amd ‘M’, respectively, are the said Originating Petition and the Affidavits of John Horn and Anne Rainbow sworn November 28, 1977, and filed in support of the said Petition.

14. On November 28, 1977, the Honourable Mr Justice Legg of the Supreme Court of British Columbia ordered that the settlement agreement relating to Supreme Court of British Columbia Action C770880 which was contained in the said Settlement Agreement be approved, which Order is attached hereto and marked as Schedule ‘N’ to this agreed Statement of Facts.

15. Pursuant to paragraphs 2 and 3 of the said Settlement Agreement a setoff was made against the settlement sum of $45,000 by the Executors of the Will of Frank Henry William Walsh, deceased, in the amount of $4,228.28.

16. Pursuant to the said Settlement Agreement, and pursuant to the Order of the Honourable Mr Justice Legg, the Executors of the Will of Frank Henry William Walsh paid to Lucie A Johnson, her solicitors and creditors, the net sum of $40,771.72 from the Estate of Frank Henry William Walsh.

17. The revised assessment of the Minister of May 3,1978, included the said settlement sum of $45,000.00 for Succession Duty purposes, thereby increasing the net value of the estate by that amount. The assessment of the Minister did not treat the said settlement sum of $45,000.00 as an allowable debt of the estate. Attached and marked as Schedule ‘O’ is the revised assessment of the Minister dated May 3, 1978.

18. By its Notice of Appeal dated the 21st day of July, 1978, the Appellant appealed to the Minister of Finance for the Province of British Columbia, which Appeal was rejected by the Minister’s notification dated August 17,1978, copies of which notices and Notification are hereto annexed and marked as Schedules ‘P’ and ‘Q’ to this Statement of Agreed Facts.

DATED at the City of Victoria, Province of British Columbia this day of February, AD 1979.

Paragraph 17 of the statement of claim of Lucie A Johnson reads as follows:

17. The Plaintiff further says, and the fact is that prior to going through the form of marriage with the said Frank William Henry Walsh, Deceased, at the time and place hereinbefore mentioned, the said Frank William Henry Walsh, Deceased, did say to the Plaintiff many times, and on numerous occasions during 1976 that he would marry the Plaintiff, and as a result the Plaintiff did move her residence and that of her child from her former marriage, did give up her employment, and materially alter her social and financial situation.

The argument of counsel for the appellants is that the obligation of the estate to pay the amount of the settlement approved by Legg, J is a debt within the meaning of Section 3 of the Act. He relied upon three authorities, as follows: Master in Equity of the Supreme Court of Victoria & Pearson, [1897] AC 214 (JCPC). The Commissioner of Stamps (Western Australia) and The West Australian Trustee, Executor and Agency Company (1925), 36 CLR 98 (Aust HC). J L Guay v Her Majesty the Queen, [1975] CTC 150; 75 DTC 5090.

In the Pearson case (supra) the headnote reads as follows:

Law of Victoria—Administration and Probate Act, 1890, s 97—Valuation of Testator’s Estate—Bank Deposit Receipts—Liability on Bank Shares.

Held, that in a statement of a testator’s estate under s 97 of the Administration and Probate Act, 1890, bank deposit receipts should be valued at the price which they would fetch in the market, and not according to the amounts appearing on the face of them to be payable; also, that sums payable in respect of bank shares at the times mentioned in various schemes for the reconstruction of those banks are debts of the deceased, and may be deducted from the sum total of the assets in order to ascertain the balance liable to probate duty. (My italics.)

That case is of little assistance because it merely states the propostion that the word “debt” includes debts payable at some future date.

The judgment of Starke, J in the Commissioner of Stamps case (supra) reads at p 117 as follows:

During the years 1919,1920 and 1922, Mortimer Kelly derived income from sources within Australia, and was assessable to income tax pursuant to the provisions of the Federal Income Tax Acts. He died in November 1922, and certain assessments were made upon his executors in respect of the income so derived by him (see Income Tax Assessment Act 1922, sec 62). The tax amounted to £317 19s 8d, and was paid by the executors. Under the Administration Act 1903 of Western Australia a duty is imposed upon the final balance of the real and personal estate of the deceased, and that balance is arrived at by ascertaining the value of the real and personal estate of which the deceased person was possessed at his death and deducting the debts due by him (see Act, secs 86, 88). The executors sought to deduct the sum of £317 19s 8d, as a debt due by the deceased person, from the value of his real and personal property for the purpose of ascertaining the duty payable under sec 86 of the Administration Act. The Supreme Court of Western Australia held that the executors were entitled to make the deduction; and , in my opinion, that decision should be affirmed. The deduction of “debts due by the deceased” is clearly allowed for the purpose of ascertaining the value of the real and personal property left by the deceased, and the phrase is, I think, one of wide import. It is not necessary that the debts should be actually payable at the time of the death; it is enough if the liability arises out of some obligation imposed upon the deceased by some statute such as the Federal Income Tax Acts, or out of some contract entered into by the deceased which subsequently falls due or ripens into a debt. Thus, the wide import of the phrase “debts of the deceased” in the Administration Act is rather well illustrated in sec 10: the real as well as the personal estate of every deceased person “shall be assets in the hands of the executor . . . for the payment . . . of the debts of the deceased in the ordinary course of administration.” Here, at all events, the phrase covers all the liabilities of the deceased which his legal personal representative must discharge as such. (See Williams on Executors, 11th ed, vol II pp 1077 et seqq.) The Income Tax Acts imposed the liabilitiy for the income tax upon the deceased in respect of the income derived by him from sources within Australia during the years in question in this case, and assessment is but a method of ascertaining the extent of that liability. The deceased was bound to discharge the liability, and, in cases within sec 62 of the Income Tax Assessment Act, the obligation to discharge that liability is thrown, in the event of his death, upon his legal personal representative as such which shows, I think, that the liability is the liability or debt in the large sense, of the deceased person. The provisons of sec 89, sub-secs (e) and (f) support this view. Consequently the appeal should be dismissed.

It should be noted that Starke, J did not have to give such a wide meaning to the words “debts due by the deceased.’’ He could have held, as did Higgins, J and Knox, CJ, that the assessments for income tax was simply a demand for payment of a definite sum that had not been previously ascertained. The obligation always existed and could have been calculated with certainty at any time in accordance with the provisions of the taxing statute.

In the Guay case (supra) the headnote reads as follows:

Estate tax—Company earnings appropriated by director— Debt owed by estate of deceased director to company—Deductibility in computing aggregate net value of estate—Estate Tax Act, RSC 1970, c E-9, ss 5 and 6—Income Tax Act, RSC 1952, s 8(1) (see s 15(1) of the new Act).

The deceased, a minority shareholder of a company, was in fact its president and a director who made the decisions and wielded the authority in the company. On several occasions he alone dealt directly with customers of the company. Money received from these customers was not always handed over to the company. The Department of National Revenue became alert to this practice and, while the deceased was still alive, commenced a complete investigation which was concluded after his death in 1952. The investigation revealed that the deceased owed the company sums of money for advances made to him, and for expenses. In addition, company earnings appropriated by him amounted to $183,508. This amount was added to the income of the company, and tax paid thereon. The estate and the Department had agreed in writing that in arriving at the income of the deceased for tax purposes, any part of the appropriations repaid to the company (either directly or by payment of the company’s taxes) would not be added to the deceased’s income. A sum of $108,617 was agreed to be paid by the estate towards tax due from the company, and the estate in fact paid a sum of $30,000 on this account. It was recognized that this sum was part of the appropriations which the estate had to reimburse, and the sum of $108,617 was excluded from the deceased’s income. The executors now contend that the Minister had acknowledged for income tax purposes that the sum of $183,503 was a sum which the deceased owned the company at the time of his death, and therefore this was a debt deductible in computing the aggregate net value of the estate under the Estate Tax Act. The Minister contended that this was not a civil debt which the deceased owed the company, but that these amounts were deemed dividends which constituted income of the shareholder for income tax purposes. This principle did not affect any rights of action that may have existed between the estate and the company, and consequently the amount appropriated was not a liability of the estate. The Tax Review Board, in an unreported decision, ruled that this was not a debt deductible from the assets of the estate. The executors appealed.

Held: The appeal was allowed. The sum of $183,508 was a debt of the estate which should be deducted in computing the aggregate net value of the estate. A debt was a liquidated money demand recoverable by action. The appropriations by the deceased, allegedly made unlawfully and wrongfully, would amount to a failure to execute his mandate as a director to collect monies owing to the company, and these sums would be recoverable by civil action. The amount of the money demand was liquidated by the Department itself and set at $183,508, which amount was confirmed by the Department as being an asset of the company and an obligation of the estate.

There is no question that in the Guay case the sum of $183,507.99 was an unascertained debt owing by Guay to the company, and that this sum was “liquidated” by the Department of National Revenue. This case does not carry the appellant very far.

In summary, counsel for the appellant argues that if the estate of a deceased person agrees to compromise a claim made against the estate arising out of the deceased’s conduct prior to his death, that the amount of the settlement constitutes a debt for the purposes of section 3 of the Act.

I am unable to accede to the argument of counsel for the appellant for the following reasons:

(1) A debt is a sum payable in respect of a liquidated money demand recoverable by action. See judgment of Jackett, P Pin A W Beament Estate v MNR, [1969] 1 Ex CR 407; [1968] CTC 558 at 567; 68 DTC 5016 at 5022; reading as follows:

The word “debt”, in the absence of a special statutory definition, means ‘a sum payable in respect of a liquidated money demand, recoverable by action” (cf Diewold v Diewold). Moreover, Paliament appears to have used the word “‘debt”’ in section 5(1)(a) in a sense that did not include obligations generally for, by section 5(2), it is provided that a statutory debt or “other obligation” imposed by statute shall be deemed to be a “debt” that falls within section 5(1)(a). It follows, as it seems to me, that no deduction is permitted for any liability in damages or other such obligation not based on a statute, no matter how substantial such liability may be.

The settlement agreement in respect of the claim for damages for breach of contract, or upon a quantum meruit, made by Lucie A Johnson against the appellant cannot therefore be construed as a debt owing by the deceased.

(2) The right to claim maintenance pursuant to a statute is not a claim in debt. See judgment of Wright, J in Canadian Imperial Bank v McFadzean (1978), 5 WWR 751 at 753, as follows:

Despite the change in wording in the two sections quoted and the enlargement of rights re unliquidated damage claims, I do not believe the basis for the decision in Re Freedman has been affected, and the case remains a valid authority.

A maintenance order does not create a property right. It is something the court may alter or take away when it pleases. It is not a legal debt. See also Jachowicz v Bate (1958), 66 Man R 174, 24 WWR 658,14 DLR (2d) 99, and Kergan v Kergan (1965), 50 WWR 172 (Alta).

(3) As of the date of death of the deceased, while there may have been a right to claim for maintenance, or for damages for breach of contract, it is not possible to say that as of the date of death of the deceased there was a “liquidated money demand recoverable by action.”

(4) Even if I am wrong in holding that a claim for maintenance made pursuant to a statute is not a claim in debt, there is no proof before me that the amount which the appellant agreed to pay was to satisfy a claim for maintenance only and that the quantum meruit and damage claim were not major factors in reaching settlement. As has been previously noted, only obligations imposed by statute or by contract fall within the meaning of the word “debt”. A claim for damages is not a debt.

(5) There are many reasons why the settlement approved by Legg, J cannot be viewed as the recognition of a claim in debt against the deceased. Some of these reasons are as follows:

(a) The settlement may have been to avoid litigation.

(b) The settlement may have amounted to the acceptance of a moral obligation to Lucie A Johnson by the estate.

(c) The settlement may have been to protect the name of the deceased.

(d) The settlement may have related only to the claim for damages and not to maintenance.

It should be noted that the parties separated shortly after the purported marriage, and the claim for maintenance would not therefore be a substantial one.

It seems to me that in view of the above stated contingencies or uncertainties that the Court cannot hold that the order made by Legg, J was the recognition of a debt owing by the deceased as of his death.

(6) Exemptions in a taxing statute are to be strictly construed. see the judgment of Ritchie, CJ in Dame Mary Wylie v City of Montreal (1885), 12 SCR 384 at 386, reading as follows:

I am quite willing to admit that the intention to exempt must be expressed in clear unambiguous language; that taxation is the rule and exemption the exception, and therefore to be strictly construed; but in this case the intention to exempt seems to me to be made as clear as plain unequivocal language can very well make it.

(7) While as a matter of policy it may seem reasonable that all liabilities arising out of acts of omissions by the deceased during his lifetime and approved by the Court as being properly payable by the deceased’s executors should be deducted from the amount of the gross assets of the deceased’s estate for the purpose of calculating succession duties, such matters of policy are for the Legislature and not the Courts. Section 3 of the Act permits deduction of debts owing by the deceased as of the date of death, but does not permit deduction of all liabilities of the estate. There may be good reason for not permitting all liabilities to be deducted as, for example, to prevent for succession duty purposes a redistribution of the estate by means of settling a claim against the estate and calling it a “debt”. I do not say that such a thing must have happened here, but it may be one of the things that the Legislature had in mind in restricting deduction to “debts”as defined by Jackett, P in the Beament case (supra).

(8) Even if wide scope should be given to the word “debt” as suggested by Starke, J in the Commissioner of Stamps case (supra), I cannot conceive that the right to claim maintenance, which was not exercised during the lifetime of the deceased, can convert the settlement of a claim for maintenance made after the death of the deceased into a debt owing during the lifetime of the deceased.

If this matter should go to appeal, the argument of counsel for the respondent, that to permit such a deduction would be contrary to public policy, will remain open.

Counsel have gone to great pains in providing me with all relevant cases dealing with the meaning of the word “debt”, and I am, therefore, setting forth a list of the cases, not already referred to herein, together with a note of the subject matter dealt with in each case. Such a list may prove to be a useful catalogue for the assistance of counsel in other cases.

In re Brewster, Butler v Southam. [1908] 2 Ch D 365; Be Mathew's Will Trusts (1961), 3 All ER 869; In re Mitchell, [1913] Ch 201; In re Neville, [1925] Ch 44; meaning of word “debts” in a will.

Webb v Stenton (1883), 11 QBD 518; Heppenstall v Jackson, [1939] 1 KB 585,McCraney v McLeod (1885), 10 PR 539; meaning of “debt accruing due” in garnishment proceedings.

In re Keet, [1905] 2 KB 666; More v More (1962), Ch 424; meaning of “debts” in bankruptcy proceedings.

Law v Coburn (Inspector of Taxes), [1972] 1 WLR 1238; time when debt is incurred.

Diewold v Diewold, [1941] SCR 35; definition of “debt” where word “debt” used in statute but not defined.

Standard Oil Company of British Columbia Limited v Wood (1964), 47 WWR 494; meaning of word “liquidated”.

MacCaulay Brothers v Victoria Yukon Trading Company (1902), 9 BOR 136; meaning of “liquidated demand”.

Union Bank v Tyson (1915), 7 WWR 1117; liability on an accommodation endorsement is not a debt.

Gardner v Newton (1916), 10 WWR 51; a person having a claim for unliquidated damages is not a creditor.

Trustee of Advanx Ty-Re-Pair v Blackburn et al, [1940] 1 WWR 653; “credit note” not a debt.

O’Neil v Hart, 1905] VLR 107; rents payable after death are not “debts”.

Re Freedman (1924), 55 OLR 206; a judgment for alimony is not a debt.

For the above reasons the appeal is dismissed.