The Queen v. Landsman, 84 DTC 6278, [1984] CTC 274 (FCA)

Le Dain, J:—This is an appeal and a cross-appeal from a judgment of the Trial Division allowing an appeal in respect of a reassessment under the Estate Tax Act, SC 1958, c 29, as amended, against the estate of the late Sam Landsman, who died on December 14, 1966.

The reassessment was made on November 24, 1970 and confirmed, following objection, on September 7, 1973. An appeal to the Tax Review Board by the then executor of the estate, the late Mr Louis Landsman, was dismissed by the Board on December 13, 1975. The judgment of the Trial Division allowing the appeal was rendered on July 13, 1978, and notice of appeal from that judgment was filed by the Crown on September 14, 1978. The attorneys who acted for the estate in the Trial Division and for some time after the appeal appear to have ceased to do so in 1979. By judgment on June 23, 1981 Mr Louis Landsman was replaced as executor of the estate by Mrs Sharon Landsman, who in her quality as executrix became the respondent in the appeal. Mr Louis Landsman, who was the brother and business associate of the deceased and who gave important evidence at the trial, died later in 1981.

The issues in the appeal are the value of the shares held by the deceased in certain companies and the deductibility of a debt owed by the deceased to a bank. The issue in the cross-appeal is the value of the debts owed to the deceased by some of the companies in which he held shares.

At the time of his death the deceased owned shares in several companies engaged in real estate activity. The most important (sometimes hereinafter referred to as “the operating companies”) were three: Manhattan Development Corporation, which was completing construction of an apartment building (“Hamilton House”) in Côte St Luc, Quebec, and owned vacant land in St Laurent, Quebec: Wentworth Development Corporation, which owned a shopping centre in Chomedy, Quebec; and Wentworth Development Corp. (Ontario) Ltd, which was completing construction of an apartment building in Ottawa. The other real estate companies in which the deceased owned shares (sometimes referred to as “the lending companies”) had loaned money to the operating companies. Some of the operating and lending companies owed money to the deceased. The value of the deceased’s shares and the debts owing to him turns in the final analysis on the value at the time of death of the properties owned by the operating companies because that value determined not only the equity in the operating companies and their capacity to pay the debts owing directly to the deceased, but more importantly their capacity to repay the loans from the lending companies on which the deceased’s equity in those companies depended.

The companies in which the deceased held shares, with the value placed on them in the estate tax return and in the reassessment, are as follows:

The companies which owed debts to the deceased at the time of his death, with the face value of the debts, are as follows:

The Estate Tax Act, SC 1958, c 29, as it applied at the time of the deceased’s death, provides in section 2 that an estate tax shall be paid on the aggregate taxable value of all property passing on death and that the aggregate taxable value is the aggregate net value minus permitted deductions, as computed in accordance with the provisions of the Act, and it defines “value” in section 58(l)(s) as follows:

“value”

(i) in relation to any income right, annuity, term of years, life or other similar estate or interest in expectancy, means the fair market value thereof ascertained by such means and in accordance with such rules and standards, including standards as to mortality and interest, as are prescribed by the regulations, and

(ii) in relation to any other property, means the fair market value of the 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.

The shares of the deceased in the above companies were valued by the Department at adjusted book value. The estate contends that the equity shown on the books of the companies did not in fact exist at the time of death because the properties owned by the operating companies did not have the value placed on them by the Department. Mr Louis Landsman, and Mr Sidney Raphael, the auditor of the companies, testified that because of lending restrictions imposed by the banks beginning in 1965 the operating companies were in such financial difficulties at the time of the deceased’s death that they were going to be forced to sell their properties on less favourable terms than they would normally have been able to obtain in order to avoid bankruptcy. They further testified that because of these circumstances there was not enough value in the properties at the time of death to enable the operating companies, after paying other creditors, to repay the loans from the lending companies. Since the equity shown on the books of the lending companies was off-set by the amounts of the loans receivable, there was in fact no equity, and the shares therefore had no value. It was also a clear implication of the evidence on behalf of the estate that the deceased stood to lose the rest of his interest, whether in the form of equity in the operating companies or in the debts owing to him by some of the operating and lending companies. The situation was summed up by Mr Raphael as follows: “At the date of Mr Landsman’s death it was obvious that all was lost, in my opinion.”

The properties of the operating companies were in fact sold or otherwise disposed of after the death of the deceased for considerably less than the values placed on them by the Department. Hamilton House, the apartment building owned by Manhattan Development Corporation was valued, because it was still in the process of construction, at its cost as shown on the books of the company, which was $3,788,202.93, but it was sold on January 25, 1967 for $3,485,000 pursuant to an agreement of sale concluded on November 18, 1966, almost a month before the deceased’s death. Thus the estate claimed that some $300,000 was lost on the sale of the property. The vacant land owned by Manhattan Development Corporation and Broadway Construction Company in Ville St Laurent, Quebec, was valued by the Department at $988,100, but it was sold on April 3, 1967 for $562,000. Mt Louis Landsman testified that there was only about $3,200 left from the proceeds of the sale after paying the creditors. The shopping centre in Chomedy, Quebec, owned by Wentworth Development Corporation, was shown on the books of the company as having a value of $590,234. It was ceded to the hypothecary creditor some time after the death of the deceased in satisfaction of a hypothec of $450,000. The apartment building in Ottawa owned by Wentworth Development Corp (Ontario) Ltd was also valued by the Department at cost because it was not completed at the time of the death of the deceased. Mr Louis Landsman said he was obliged to sell the prop- erty to avoid bankruptcy and that there was nothing left after payment of the bank and other creditors.

The Crown contended, laying stress on the words in paragraph 58(1 )(s) of the Act “without regard to any increase or decrease in such value after that date for any reason”, that the terms on which the properties of the operating companies were sold or otherwise disposed of after the death of the deceased could not be taken into consideration as evidence of their value at the time of death. In my opinion this is not sound. What paragraph 58(l)(s) rules out is the consideration of any increase or decrease in the value of the property occurring after death which may serve to indicate the value of the property at the time of death. The Crown contended that the circumstances which forced the operating companies to dispose of their properties for considerably less than the value placed on them by the Department arose from the death of the deceased, and therefore reflected a decrease in value occurring after death. I do not think the evidence supports that contention. It is clearly not true of Hamilton House, which was sold pursuant to an agreement for sale entered into before the death of the deceased. The evidence also supports the conclusion, in my opinion, that the circumstances which forced the disposition of the other properties of the operating companies prevailed at the time of death. The value of the shares and the debts owing to the deceased depended on the financial state of the companies, which depended in turn on what could be realized on the properties. In my view, the evidence shows that the Department placed too high a value on these properties, having regard to the circumstances in which the operating companies found themselves at the time of death.

The Trial Division found that in valuing the shares of the deceased the Minister failed to take into consideration all the relevant factors, including the high cost of money and the threat of bankruptcy, but there was insufficient evidence to permit a determination of the precise effect of these factors on the value of the shares in each of the companies. For these reasons the Trial Judge allowed the appeal on this issue, but referred the matter back to the Minister for reconsideration of the fair market value of the shares. In view of the long lapse of time that has occurred in this case and the death of Mr Louis Landsman I believe that the issue of the value of the shares should be finally disposed of, one way or another, on the basis of the evidence in the Trial Division. Given the fact that the values placed by the Department on the properties of the operating companies are clearly not supported by the evidence, I think we should accept the testimony of Mr Raphael that in view of the amounts realizable on these properties the shares of the deceased were worthless. It was proper, in my opinion, to consider this issue on the assumption that the deceased and his associates were entitled, if possible, to attempt to avoid bankruptcy, and that this would involve payment of the other creditors in full before any payment of the lending companies or the deceased. I find, therefore, that the shares of the deceased in the above mentioned companies had at the time of death the value placed on them in the estate tax return.

The Trial Division dismissed the appeal of the estate in respect of the debts owing to the deceased, holding that by virtue of the terms of section 29 of the Estate Tax Act such debts could only have one value. That provision reads as follows:

29.(1) Where, immediately prior to the death of a deceased, there remained outstanding a debt owing to the deceased

(a) by any person connected with him by blood relationship, marriage or adoption, or

(b) by any corporation that, at that time, was controlled, whether directly or indirectly and whether through holding a majority of the shares of the corporation or of any other corporation or in any other manner whatever, by the deceased, by one or more persons connected with him by blood relationship, marriage or adoption, by the deceased and such one or more other persons or by any other person on his or their behalf,

the value of the debt shall, unless it is established that at the time of the creation of the debt the deceased and such other debtor were persons dealing with each other at arm’s length, be determined for the purposes of this Part as though the amount thereof outstanding immediately prior to the death of the deceased had, at that time, become due and payable to him.

(2) In this section, “debt” means a debt of any kind whatever, whether secured or unsecured and whether under seal or otherwise, and includes a bill of exchange or promissory note, whether negotiable or otherwise.

In my opinion the Trial Division erred in its construction and application of the concluding words of subsection 29(1). Those words mean, in my view, that the debt is to be valued as if it were due and payable — that is exigible — at the time of death and not that it is necessarily to be valued at its face value. This view was in fact conceded by counsel for the Crown in the course of argument.

As to the value which should be placed on the debts owing to the deceased, I am of the opinion, for reasons similar to those with respect to the shares, that we should accept the clear implication of the evidence given by Mr Louis Landsman and Mr Raphael that if there was not money to repay the loans from the lending companies there was not money to pay the debts owing to the deceased. It is to be noted that of $67,066.44, the total amount of this indebtedness, $58,161.08 was owed by two of the operating companies, Manhattan Development Corporation and Wentworth Development Corporation. I would find that the debts owing to the deceased by the various companies listed above had no value at the time of death.

The final issue to be considered is the deductibility of a debt owed by the deceased to a bank. The declaration alleges that at the time of his death the deceased owed the amount of $51,605.89 to the Bank of Montreal. The estate contends that this amount should be deducted in computing the net aggregate value of the property passing on death in accordance with paragraph 5(1 )(a) of the Estate Tax Act, which provides:

5. (1) There may be deducted in computing the aggregate net value of the property passing on the death of a person

(a) the value of

(i) any debts incurred by the deceased, and

(ii) any encumbrances created by him,

bona fide and for full consideration paid or agreed to be paid to the deceased for his own use or benefit, to the extent that such debts and encumbrances were outstanding immediately prior to his death;

In its defence the Crown pleaded that the deduction was barred by paragraph 6(f) of the Act because the debt had become unenforceable by operation of the law limiting the time for bringing action thereon. Paragraph 6(f) is as follows:

6. Notwithstanding section 5, no deduction may be made under that section

(f) for any debt incurred that became unenforceable either before or after the death of the deceased as a result of the operation of any statute of law limiting the time for bringing action thereon, and that has not been actually and bona fide paid.

The Trial Division allowed the appeal in respect of this amount but in its reasons did not address the issue raised by the defence. In this Court counsel for the Crown also invoked an “Admission” signed on November 6, 1978 by the attorneys who had appeared for the parties in the Trial Division wherein it was stated that leave had been sought and granted at trial to amend the declaration by reducing the amount claimed as a deduction to $25,000, and it was agreed that if the Crown failed on the other issues the appeal should be allowed in part and the judgment of the Trial Division varied by reducing the amount to be deducted in the computation of net aggregate value of the property passing on death to $25,000. At the hearing in this Court counsel for the estate said that neither he nor his client, Mrs Sharon Landsman, who was appointed as executrix after the “Admission” was signed, knew anything of the alleged amendment or of the agreement, to which they were not parties. He also observed that there was no indication of the amendment in the record and that the “Admission” did not form part of the case. In brief, he stood on the allegation in the declaration. I have been unable to find any reference to the amendment in the record of the Trial Division.

The evidence shows that the Bank of Montreal made a demand loan to the deceased on May 8, 1964 in the amount of $48,000 and that at the time of his death he owed the bank, in principal and interest on this loan, the sum of $51,235.05. He also had an overdraft which with interest amounted to $1,656.69. It appears that some $40,000 of the loan was first advanced to the deceased on September 4, 1962, but in its documents the bank treated May 8, 1964 as the date on which the total loan was made or renewed, and I think we may treat that as the relevant date for purposes of prescription. The evidence also shows that the deceased had pledged 1,500 shares of Salada Foods Ltd (Ont) as security for repayment of the loan, and that these shares were sold by the bank in 1969 for $25,365.55 in partial satisfaction of the loan. These shares were shown in the estate tax return as having the total value of $15,375 at the time of death. In the Minister’s reassessment they were shown as having the nominal value of $150. This may have been in recognition of the fact that at the time of death the shares were pledged to the bank and subject to realization in payment of the loan. By the same token the agreement to reduce the amount claimed as a deduction to $25,000 may have been in recognition that there had been a corresponding reduction by the Minister in the value which would otherwise have to be placed on the shares. be that as it may, I propose to treat the claim for deduction as one for $51,605.89, leaving whatever adjustment that may be necessary to offset the reduction in the value of the shares to further reassessment, if any.

The issue then is whether the deduction of this debt, or any part of it, is precluded because it became unenforceable before or after the death of the deceased by the operation of the law limiting the time for bringing action thereon and it was not actually and bona fide paid. In order for prescription to prevent the deduction of a debt, there must not have been payment notwithstanding the prescription. The applicable period of prescription is the 5 years provided by article 2260 of the Quebec Civil Code for promissory notes and “any claim of a commercial nature reckoning from maturity”. It may be assumed that the demand loan in the present case was evidenced by a promissory note, as is the general practice of banks. Where presentment is not necessary, and banks invariably require a waiver of this requirement, prescription runs from the date of a demand note. It may be inferred from the record that May 8, 1964 was the date of the last promissory note given by the deceased to evidence his loan with the bank. Prescription would, therefore, not run on the note until May 8, 1969, some two and one-half years after the death of the deceased. Paragraph 6(f) of the Act does not indicate how long after death a debt may be prescribed and still come under the bar of the section. Presumably the assessment may be reopened at any time if the debt has been allowed to be prescribed and has not been paid. In any event, the prescription in this case would have run before the reassessment was made on November 24, 1970, and surely by the terms of paragraph 6(f) could be taken into consideration in that reassessment. But the amount of $25,365.55 that was realized by the bank on the sale of the Salada Foods shares and applied in reduction of the debt must be deemed to have been actually and bona fide paid within the meaning of paragraph 6(f) and thus subject to deduction under section 5. As to the balance of the debt of $51,605.89, there is nothing in the evidence to suggest that prescription of it was interrupted. The realization by the bank of its security would not have that effect. The deduction of the balance of the debt is therefore barred by paragraph 6(f).

For the foregoing reasons I would dismiss the appeal and allow the crossappeal, vacate the reassessment and refer the matter back to the Minister for reassessment on the basis that

(a) the shares of the deceased in the companies listed above had at the time of the deceased’s death the value shown in the estate tax return;

(b) the debts owed to the deceased at the time of his death by the companies listed above had no value;

(c) there should be deduction of the amount of $25,365.55 for the debt owing by the deceased to the Bank of Montreal, with such adjustment as may be necessary for the fair market value of the shares owed by the deceased in Salada Foods Ltd (Ont) at the time of death.

There should be no costs.