The Queen v. Boger Estate, 93 DTC 5276, [1993] 2 CTC 81 (FCA)

Heald, J.A.:—This is an appeal from a judgment of the Trial Division allowing the respondent's appeal with respect to a reassessment by the Minister of National Revenue ("the Minister”) dated January 12, 1984 in respect of the 1979 terminal tax return of Alexander Boger ("the taxpayer"). The reassessment disallowed a rollover pursuant to subsection 70(9) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") of farm land and depreciable property given to the taxpayer's children under his will because this property had not been "transferred or distributed" to the children and had not been established to have become "vested indefeasibly" within the time limit set out in subsection 70(9). [1]

The judgment of the Trial Division referred the reassessment back to the Minister for reconsideration and reassessment on the basis that the farm lands consisting of six quarter sections of land and the farm equipment that passed to the taxpayer's four daughters under his will as amended by a consent order of the Court of Queen's Bench of Alberta, pursuant to the Family Relief Act of Alberta, which made additional provision for the widow [2] , were to be effectively rolled over pursuant to the provisions of subsection 70(9) of the Act.

Facts

The parties agreed that the facts are accurately stated by the learned trial judge at pages 2 to 5 of his reasons for judgment (Boger Estate v. Canada, [1991] 2 C.T.C. 168, 91 D.T.C. 5506). I would summarize them as follows: The taxpayer, a farmer, died testate on March 10, 1979. He was survived by his widow Olga, and four daughters, one of whom was a minor. In his will he named his daughter Sharon as the executrix (the respondent). The estate had a total value in excess of $446,000. It consisted of seven quarter sections of land (one of which was known as the "home quarter”), as well as farming equipment, livestock and grain. The land and other assets were an integral part of his farming business and were used by him in that business immediately prior to his death. By the taxpayer's will, the widow received only a life estate in the home quarter. A terminal tax return to date of death was filed. A “spousal rollover” of the home quarter pursuant to subsection 70(6) of the Act was claimed. A "farm rollover” of the remaining land and farming equipment pursuant to subsection 70(9) was also claimed. The farming equipment was sold by auction in September 1979. It was not until April 1981 that the executrix became the registered owner of the farm lands qua executrix. Three quarter sections of land were sold in August 1982 with the consent of the adult beneficiaries and of the Public Trustee of Alberta on behalf of the minor beneficiary. Capital distributions to the children totalling $310,000 were made between September 1981 and September 1982. In 1983, the Minister reassessed the terminal tax return with the following major changes:

(a) a spousal rollover was given to the widow on all the property received by her as a result of Alexander Boger's death as well as on the incremental property she received pursuant to the provisions of the Alberta Family Relief Act, (see footnote 2, supra); and

(b) the "farm rollover” with respect to the remaining land and farming equipment was disallowed and the taxpayer was deemed to have disposed of the remaining land at fair market value, immediately prior to his death resulting in substantial capital gains. The proceeds from the farm machinery auction were included as income in the taxpayer's 1979 return.

The decision of the Trial Division

The learned Trial Judge identified three principal issues:

(a) were the farm lands "transferred or distributed" to the taxpayer's children within the meaning of subsection 70(9) of the Act;

(b) did the farm lands "vest indefeasibly" in the taxpayer's children not later than 15 months after the death of the taxpayer within the meaning of subsection 70(9) of the Act; and

(c) was the Minister estopped from asserting that the taxpayer, the executrix or the beneficiaries were liable for tax given the issuance of a clearance certificate under section 159 of the Act. [3]

With respect to issue (a), the trial judge held that a formal conveyance was not necessary to transfer or distribute the farm lands. He stated at page 181 (D.T.C. 5516):

In this instance the creation of a valid will passing the taxpayer's property to his spouse and children is a sufficient” transfer" for purposes of subsection 70(9). The fact that the “residue” of the estate was left to the children does not, in my opinion, change the character of the property entitled to the rollover. Surely Parliament did not intend that a specific bequest of each item of farm land and depreciable property be made before a "farm rollover” could occur, the object of subsection 70(9) being to provide a measure of tax relief when transferring these assets from one generation to another.

Additionally, he held that the fact that the farm lands were sold directly by the executrix to a third party did not vitiate the transfer under the will. At page 182 (D.T.C. 5517), the trial judge found, as a fact, that the sale of the farm lands was made by the executrix upon the direction and consent of the children and that the executrix was not acting on behalf of the taxpayer at that time but rather, on behalf of the children as owners of the land.

Finally, the trial judge rejected the submission that the sale of the farm lands within the 15-month period precluded the application of subsection 70(9). He dealt with this argument as follows at page 182 (D.T.C. 5517):

Subsection 70(9) simply does not say that the property must remain in the hands of the children for the rollover to apply. So long as the property is transferred to the beneficiaries, the estate may claim a rollover under subsection 70(9). However, when the property is subsequently disposed of by the beneficiaries, as has happened here, the beneficiaries, as owners of the property, become liable for any capital gains upon disposition even if the sale is made by the trustee.

With respect to issue (b), the trial judge dealt with this matter at page 172-73 (D.T.C. 5510-14). He discussed at some length the three judgments of this Court in Hillis v. The Queen, [1983] C.T.C. 348, 83 D.T.C. 5365. In Hillis, the principal issue was the interpretation to be given to subsection 70(6) of the Act (the spousal rollover provision) [4] . He began his analysis by considering dictionary definitions. After examining the relevant jurisprudence, he held:

1. that an interest is vested if (a) the person entitled to it is ascertainable and, (b) that person can take possession forthwith and can only be prevented from doing so by the existence of some prior interest. A vested interest is distinct from a contingent interest which gives no right of enjoy- ment unless or until a future event occurs (a condition precedent) [page 177 (D.T.C. 5513-14)]; and

2. that a vested interest is defeasible if it is subject to a condition subsequent or determinable limitation which condition or limitation must be contained in the grant [pages 177 (D.T.C. 5514)].

The trial judge concluded that the property interests of the children in the assets of the estate were vested, since they were not subject to a condition precedent, and were indefeasible as well since they were not subject to a condition subsequent under the terms of the will. He decided that this conclusion was consistent with the reasoning of Clement, D.J. in Hillis, supra. In that case Mr. Justice Clement had decided, that, despite the fact that the children’s interests were adversely affected by the court order issued pursuant to the Family Relief Act of Alberta, the childrens’ interests under the Intestate Succession Act were vested indefeasibly in the children upon the death of the intestate. An order under provincial dependent relief legislation could result in the transfer of property away from the children but would not alter the fact that the property had vested indefeasibly in the children and any interest not affected by the order must certainly have vested indefeasibly in the children.

Analysis

Issue (a) — were the farm lands "transferred or distributed" to the children within the meaning of subsection 70(9) of the Act.

It is the submission of the appellant that the trial judge erred in holding that all of the taxpayer's property was transferred to his widow and children on death pursuant to the provisions of his will. The submission is that the estate beneficiaries did not acquire any proprietary rights in the estate's property until such time as the executrix conveyed the particular assets of the estate to the beneficiaries. It is the essence of this submission that there has been no transfer or distribution to beneficiaries until the administration of the estate has been completed and title has been conveyed to the beneficiaries. It is implicit in this argument that the personal representative of the estate must take a positive action to "transfer or distribute” legal title or physical possession before the beneficiaries under the will can be said to have obtained any property rights. In support of this view, the appellant relies on the reasons for judgment of Pratte, J.A. in the Hillis case, supra, as well as a discussion of the law in England after the 1925 English reform by Megarry and Wade, (The Law of Real Property, 5th edition, page 564) and the decision of the Privy Council in The Commissioner of Stamp Duties (Queensland) v. Livingstone, [1965] A.C. 694, at page 707, [1964] 3 All E.R. 692. The respondent submits that these authorities do not reflect the law of Alberta. I agree. Although subsection 2(1) of the Devolution of Real Property Act, R.S.C. 1980, c. D-34 provides that the real properly devolves on the personal representative of the deceased, section 3 of that Act recognizes the beneficial entitlement of the beneficiaries to the property of the deceased. That section provides:

3. . . . the personal representative of the deceased person holds the real property as trustee for the persons beneficially entitled thereto. . . .

I agree also with the submission of counsel for the respondent that when said section 3 is read in conjunction with section 9 and subsection 10(1) of that Act, it is apparent that “ beneficial entitlement" arises on death in Alberta and not at some later date. [5] This view of the matter is similar to the opinion expressed by Mr. Justice Clement and myself in the Hillis case, supra. [6] In Hillis, the statutory provision under Saskatchewan law was section 4 of the Intestate Succession Act by which the surviving widow became entitled to the first $10,000 together with one-third of the residue of the estate. With respect to that provision, Mr. Justice Clement stated at page 352 (D.T.C. 5369):

In my opinion the provisions come into operation upon the death of the intestate and effect an indefeasible vesting in the beneficiary of the interest provided, to which the Administrators must give effect albeit subject to dealings with the vested interest by the beneficiary. In this view, the vesting of the interest is not dependent upon an order of the court granting administration of the intestate's estate: it takes place by force of imperative statutory provision operating at the moment of death of an intestate.

The appellant makes a further argument (memorandum of fact and law, paragraphs 24 to 26) based on the fact that the words "transferred" and "distributed" as employed in subsections 70(6) and 70(9) are used in a disjunctive sense. This implies, says the appellant, that these are well recognized and separate concepts and relate solely to the administration of estates by personal representatives. Thus, in the view of the appellant, the word "transferred" contemplates the registration of a formal conveyance pursuant to the provisions of the Land Titles Act of Alberta. Likewise, the word "distributed" requires positive action by the personal representative to divest himself of rights over both personal and real property in the estate. The necessary consequence of this view is that subsection 70(6) and subsection 70(9) require the complete administration of the estate before any rollover can occur, that is to say, the property cannot be "transferred or distributed” by will or intestacy on the death of the deceased.

I am not persuaded by this submission. As pointed out by counsel for the respondent, the language of subsections 70(6) and 70(9) does not refer to a transfer or a distribution by the personal representative. Furthermore, the language employed in those subsections contemplates a transfer or distribution on or after the death of the taxpayer. Additionally, as noted by the trial judge at page 180 (D.T.C. 5516), in quoting from the Fasken decision [7] : "The word transfer is not a term of art and has not a technical meaning.” Accordingly, and for the reasons expressed herein, I conclude with respect to issue (a) that the trial judge did not err in holding that a formal conveyance was not necessary to transfer or distribute the farm lands. I also agree with his conclusion that the fact that the farm lands were sold directly by the executrix to a third party could not vitiate the transfer under the will. I also agree with his rejection of the submission that the sale of the farm lands within the 15-month period precluded the application of subsection 70(9) for the reasons given by him at page 182 (D.T.C. 5517) quoted supra.

Issue (b) — did the farm lands “vest indefeasibly" in the taxpayer's children not later than 15 months after the death of the taxpayer within the meaning of subsection 70(9) of the Act.

The appellant submits that the trial judge erred in holding that when a will does not contain a condition subsequent, legal and equitable property interests vest in residuary beneficiaries at the date of death of the testator. The submission is that, prior to the distribution of assets in an estate, the interests of residuary legatees are constrained by the duty of the personal representative, in appropriate circumstances, to liquidate the assets of the estate debts. Legatees' rights are further affected by dependents relief and family relief legislation in many of the provinces as well as by the involvement of the Public Trustee in estates where the beneficiaries are minor children.

The appellant submits that the trial judge committed further error by basing his analysis of the term "vested indefeasibly" on the distinction between whether an interest is vested or contingent. In focusing on the will alone, and determining whether or not the will contained a condition subsequent, the trial judge actually determined whether the interests of the daughters were vested or contingent. In the view of the appellant, such a determination is irrelevant to the determination which the Court was required to make, namely, whether or not the property vested indefeasibly. In the appellant's submission, the correct test for deciding whether property is vested indefeasibly is to decide whether the beneficiary has the right to determine whether the property will be retained or disposed of to someone else. In the view of the appellant, such a determination requires a comprehensive assessment of the indicia of ownership of the property including:

(a) whether the bequest was specific or residual;

(b) whether an application has been made under the Family Relief Act;

(c) whether the public trustee is involved; and

(d) whether the personal representative has taken steps to determine how the property will be distributed.

Based on this analysis, the appellant's conclusion is that the farm lands and farm equipment bequeathed to the children in the taxpayer's will did not vest indefeasibly in them within 15 months of the taxpayer's death.

I am unable to agree with these submissions. The trial judge, at page 177 (D.T.C. 5513-14) has accurately stated the legal principles determinative of this issue as summarized earlier herein. After differentiating between "vested" and "contingent" interests, he proceeded to define the circumstances in which "a vested interest" is “liable to be defeated or'defeasible' ”. He found that "to be vested "indefeasibly" an interest must not be subject to a condition subsequent or a determinable limitation set out in the grant". On the basis of these definitions as applied to the facts in this case, he concluded at page 177 (D.T.C. 5514) that the property interests here in issue are “ unquestionably vested". He so concludes because: (a) there is no condition precedent to be fulfilled before the gift can take effect; and (b) the persons entitled (the children) are ascertained and ready to take possession forthwith, there being no prior interests in existence. Likewise, he held that the vested interest of the children is not defeasible since it is not subject to any condition subsequent contained in the will.

I find the above reasoning of the learned trial judge to be compelling and persuasive indeed. Accordingly, I conclude that the trial judge did not err when he found that the farm lands in question "vested indefeasibly” in the taxpayer's children not later than 15 months after the taxpayer's death as that expression is used in subsection 70(9) of the Act.

Conclusion

For the foregoing reasons, I would dismiss the appeal with costs.

Appeal dismissed.