Ginsburg v. MNR, 92 DTC 1774, [1992] 2 CTC 2152 (TCC)

Christie, A.C.J.T.C.C.:—These appeals pertain to reassessments by the respondent regarding the appellant's 1984 and 1985 taxation years. In reassessing he added $76,723 to income for 1984 and $85,056 for 1985.

The appellant's late husband, Israel Ginsburg, died on November 15, 1980. His last will and testament is dated November 7, 1973. Only these portions of that document were referred or alluded to at trial.

ll. I NOMINATE, CONSTITUTE AND APPOINT my wife, MILDRED GINSBURG and my daughters, RUTH SCHACTER and MARGARET WAYNE to be the Executrices and Trustees of this my Will and I hereinafter refer to them and to the Executrices and Trustees for the time being of my said Will as "my Trustees".

III. I GIVE, DEVISE AND BEQUEATH the whole of my property, both real and personal of every nature and kind and wheresoever situate, including any property over which I have any power of appointment to my Trustees upon the following trusts, namely:

(6) To stand possessed of the residue of my estate upon trust to pay to my wife so long as she lives, the net income derived therefrom, provided that should such income be less than sufficient to provide my wife with an income of Two thousand dollars ($2,000) per month, I DIRECT my Trustees to encroach on the capital of my estate for any such deficiency so that my wife shall receive at least Two thousand dollars ($2,000) per month so long as sne lives, with power to my Trustees to pay to my wife out of the capital of my estate such additional sum or sums from time to time as a majority of my Trustees may consider necessary or advisable in their absolute discretion for the maintenance, comfort or benefit of my wife and without limiting the generality of the foregoing, the same shall also include such sums as may be needed for medical, surgical, nursing and hospitalization expenses.

(7) Upon the death of my said wife, Mildred, or upon my death if my said wife should predecease me, to divide all the remainder of the rest and residue of my estate as follows:

(a) to transfer and pay one-half of the said remainder to my daughter, RUTH SCHACTER, provided that if she is not then living her said one-half share shall be transferred and paid to constitute part of her estate and be dealt with accordingly;

(b) If my daughter, MARGARET WAYNE, is then living to transfer and pay:

(i) One-quarter of the remaining one-half of said remainder to my said daughter, MARGARET WAYNE ;

(ii) One-half of the said remaining one-half of the said remainder to my grandson, DAVID WAYNE, and

(iii) One-quarter of the said remaining one-half of the said remainder to my granddaughter, ANDREA WAYNE.

IX. l APPOINT LEO E. SCHACTER, as solicitor of my Estate and of my trust property.

The two witnesses who testified at trial did so on behalf of the appellant. The evidence of Leo E. Schacter is quite brief. He is the appellants son-in-law having married her daughter Ruth. Mr. Stephen Pasquale, C.A., has since Mr. Ginsburg's death prepared trust information returns and income tax returns regarding the estate. He also acted for the appellant and prepared her returns of income in those years. The appellant is 89 years old and for reasons of ill health was precluded from testifying.

Pursuant to paragraph IX of the will, Mr. Schacter acted as solicitor for the estate. He said that in 1988 the appellant suffered a stroke. Prior to this, and in particular in 1984 and 1985, she was" in quite good health” and" in command of her faculties”. The residue of the estate was primarily invested in stocks and its income was largely dividends from those investments. The appellant had income independent of the estate and "didn't need or want the income from the estate”. She made this known shortly after her husband's death. There is in evidence a document dated September 3, 1987. It is signed by the appellant and reads:

WAIVER

Re: Estate of Israel Ginsburg

I the Undersigned Mildred Ginsburg the widow of the late Israel Ginsburg hereby confirm that I did in the year 1984 waive my entitlement to receive the net income of the residue of his estate for the year 1984.

A similar document of the same date is also in evidence except that 1985 is substituted for 1984. Both were prepared by Leo Schacter and given to the appellant for signature by Ruth Schacter. On the same date like waivers were signed respecting 1981, 1982, 1983 and 1986. He explained the waivers thus: “At that time, the accountant for the Estate (Mr. Pasquale) informed me that he didn't have anything on file confirming Mrs. Ginsburg’s renunciation of the income and he wanted to complete his file by having something in writing in his file; and that’s as I recall it, your Honour.”

Stephen Pasquale said that he consulted with another chartered accountant in his firm, Mr. Bill Lawlor, and they came to this conclusion:

We felt that net income, (in paragraph 111(6) of the Will) having its everyday meaning, would be after-tax income, so that the income of the Trust would be taxed in the Trust and then an after-tax amount would be payable to Mrs. Ginsburg, and the after-tax amount would be paid out of capital of the Trust.

Financial statements, the trust information returns and income tax returns of the trust were prepared on this basis. [1] For example a statement of income and estate capital prepared by Mr. Pasquale for the year ended December 31, 1985, shows net income after taxes which is added to the capital at the beginning of the year and from this sum is subtracted $14,000 paid in 1985 to the appellant by the trustees and the remainder is stated to be the capital at the end of the year. The tax on the income from the assets of the trust was paid by the trust. The appellants income tax returns since her husband's death have reported no income from the trust. Her reported taxable income for 1984 is $86,431 and for 1985 $83,237. With respect to the $14,000 this exchange took place between counsel for the appellant and Mr. Pasquale.

Q. Then there's a distribution to a beneficiary of $14,000. Now, it is admitted in evidence or, for purposes of this appeal, it’s pleaded by us and admitted by the Minister that there was a payment of $14,000. Now, I'm curious to know why the payment of $14,000 is shown as a payment of capital rather than out of income. That amount of $14,000 was paid to Mrs. Ginsburg in 1984—I’m sorry, 1985?

A. Yes

Q. Can you tell his Honour why it was treated this way for accounting purposes?

A. Because we took the position that the net income became retained earnings and those amounts were paid to Mrs. Ginsburg.

In cross-examination it was established that in addition to the $14,000 the appellant received these amounts from the trust: 1981—$16,820; 1986—$22,925; 1987—$28,467; 1988—$28,600. They appear on a "Schedule of amounts paid to Mildred Ginsburg” that was prepared by the witness. All of these amounts were treated by him as having been paid out of capital.

In August, 1987 Mr. Anthony Ma, an auditor with Revenue Canada, communicated with Mr. Pasquale by telephone to say that consideration was being given to reassessing the appellant on the ground that the income received by the trust was payable to her and consequently taxable in her hands. Nothing was said to Mr. Ma about the appellant having disclaimed any interest she had in the estate. Nor is there any evidence of such information having been given to the taxing authorities prior to August, 1987 although there is evidence that Mr. Pasquale had had discussions with the Department of National Revenue some two years earlier about the will of the late Israel Ginsburg and the trust established under it. This evidence is in the form of a letter dated September T1, 1985, from Mr. Pasquale to Revenue Canada.

As already indicated all the waivers were signed by the appellant on September 3, 1987. They were sent to Mr. Ma by Mr. Pasquale under cover of a letter dated September 8, 1987. After reiterating the view that the payments to the appellant were an encroachment on capital the penultimate paragraph deals with the waivers in this way:

Enclosed please find confirmations for the years 1981 to 1986 inclusive that Mrs. Ginsburg has waived her entitlement to receive the net income of the residue of the Estate. As she has waived her entitlement to the net income, it follows that the payments made to her are out of the capital of the Estate.

It is apparent in a letter from Mr. Ma to Mr. Pasquale dated December 28, 1987, that regarding the waivers the latter was relying, inter alia, on Herman v. M.N.R. (1961), 28 Tax A.B.C. 145, 61 D.T.C. 700.

The witness agreed that it was “a fair assessment" to say that the signed waivers came into existence because of anticipated reassessments.

The first contention of the appellant is that she effectively disclaimed entitlement to income under the trust. The basic rules regarding disclaimer that are germane to this appeal, are in Williams, Mortimer and Sunnuks, Executors, Administrators and Probate, 16th (1982) ed. at page 845:

Finally a beneficiary can refuse or renounce the gift to him. "The law certainly is not so absurd as to force a man to take an estate against his will”: Townson v. Tickell (1819), 3 B. & Aid. 31 per Abbott C.J. at 36. There is no authority to the effect that the disclaimer must take place in a court of record; it may be made by deed, or even by conduct.

See also Halsbury's Laws of England, 4th ed. (1984), vol. 50, paragraph 339; Text, Commentary and Cases on Wills, 2nd ed. (1985) by A.H. Oosterhoff at page 114; Plaxton v. M.N.R. (1960), 23 Tax A.B.C. 257, 60 D.T.C. 38, at pages 259-61 (D.T.C. 40-41); Herman v. M.N.R., supra, at page 146 (D.T.C. 701); Wood v. M.N.R. (1964), 37 Tax A.B.C. 37, 64 D.T.C. 780, at pages 42-44 (D.T.C. 784-85).

Applying the balance of probability standard of proof to the evidence I am not persuaded that the appellant disclaimed her entitlement to income under the trust. The inferences that I draw from the evidence about what transpired is this. Shortly after the testator's death it became apparent to the trustees and their professional advisors that the income of the trust would attract much more tax if paid to the appellant than if the trust were treated as being liable in that regard. The appellant was well-to-do without that income. As previously mentioned in 1984 and 1985 she reported taxable income of $86,431 and $83,237 respectively. It was also determined by them that if for any reason some funds were paid to the appellant from time to time this would be regarded as an encroachment on capital [2] on the theory propounded by Mr. Pasquale that the income was retained earnings and consequently no tax would arise respecting these payments. Upon the appellant's death the undistributed income in the trust would go to her daughters Ruth and Margaret and the latter’s children David and Andrea.

I believe that what triggered the notion of a disclaimer by the appellant was the call to Mr. Pasquale by Mr. Ma in August, 1987 during which the possibility of reassessments was revealed. Resort was had to Herman for assistance in this regard. In that case Joseph Herman died on December 21, 1957. In his will he provided that the net income of the residue of the estate be paid to his wife, the appellant, during her lifetime. As the widow was financially independent apart from this income she signed a document on December 31, 1957 “ wherein she disclaimed, under seal, all interest in the rents, profits and income from the said estate for the period ending 31st March 1958”. The same occurred respecting the period ending March 31, 1959 and in respect of two subsequent periods. As a consequence she never derived any income from the estate. This was held to be sufficient evidence of renunciation in respect of the appellant's 1958 and 1959 taxation years.

The evidentiary picture in Herman is quite different from that in the case at hand. There was an unequivocal renunciation in writing ten days after the death of the testator that was repeated at subsequent intervals. Also the appellant received no payments from the estate. Here the first tangible evidence of disclaimer comes into being some six years and nine months after the death of Israel Ginsburg and the appellant has received five payments from 1981 to 1988 that total $110,812.

Finally on this argument it will be recalled that each waiver in writing, all of which were signed on September 3,1987, purports to"confirm that I did in the year (these run from 1981 to 1986) waive my entitlement to receive the net income of the residue of his estate "I have the gravest doubt that the appellant performed this ritual each year from 1981 to 1986 and, in particular, that in so doing she intended, as was said in argument, to draw a distinction between waiving her entitlement to income and receiving payments that constituted an encroachment on capital.

A second argument was made that relates to subsections 104(13) and (24) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). What is relevant to this appeal provides that the income of a trust for a taxation year that was payable in the year to a beneficiary shall be included in computing the income of the person to whom it so became payable whether or not it was paid to her in that year and shall not be included in computing her income for a subsequent year in which it was paid (subsection 104(13)). For that purpose an amount shall not be considered to be payable in a taxation year unless it was paid in the year to the person to whom it was payable or she was entitled in that year to enforce payment thereof (subsection 104(24)).

It is the submission of the appellant that the $76,723 added to her income for 1984 was not actually paid to her in 1984 nor was she entitled in that year to enforce payment thereof. The same is said about the $85,056 added to her income for 1985. The reason assigned to why she was not entitled to enforce payment in 1984 or 1985 is that as of December 31 in those years the precise amount of the net income from the residue of the estate was not ascertainable. This could only be done when certain information became available following the year-ends. The nature of the unavailable information as of year-end in 1984 and 1985 was said to be related to such things as the total dividend income, gain on the sale of securities, interest income, bank charges, management fees.

In my opinion the appellant was entitled to enforce payment of the amounts for which she has been assessed for 1984 and 1985 in those years within the meaning of subsection 104(24) of the Act. Under the will the appellant was entitled to net income from the residue of the estate which I understand to be the income from the assets in the hands of the trustees, net of necessary expenses. Her entitlement to that income and hence her entitlement to enforce payment arose as the funds generated by the assets of the trust became its property. The fact that for practical reasons such as the requirement for information might delay implementation of a mechanism for enforcement such as instituting judicial proceedings does not mean that the entitlement to enforce is in abeyance pending the receipt of the information. Entitlement to enforce payment and taking steps to enforce payment are not synonymous.

It is commonplace for the kind of information just referred to and other types of information that is necessary to determine income for a taxation year of a trust, a business or property, not to be available until after the end of the taxation year. Yet I believe that the respondent's entitlement to enforce payment of taxes for that taxation year would properly be regarded as having arisen in that year even though enforcement by way of assessment and what is related thereto did not occur until the following or later years. In Garland v. M.N.R., [1988] 1 C.T.C. 2398, 88 D.T.C. 1271, Sarchuk, T.C.J. said at page 2401 (D.T.C. 1273):

The liability of a taxpayer to pay tax under the Income Tax Act has been considered in a number of cases. The reasons of the Federal Court of Canada in The Queen v. Simard-Beaudry ([1971] F.C. 396, 71 D.T.C. 5511) are clear and unequivocal. Noël, A.C.J. concluded that tax liability exists as soon as income is earned. He stated at page 403 (D.T.C. 5515):

As to his second argument, namely that the debt arising from reassessment of the taxpayer dates only from the time that the taxpayer is assessed, and that it did not, accordingly, exist at the time the agreement was made, it seems to me that the answer to this is that the general scheme of the Income Tax Act indicates that the taxpayer's debt is created by his taxable income, not by an assessment or reassessment. In fact, the taxpayer's liability results from the Act and not from the assessment. In principle, the debt comes into existence the moment the income is earned and even if the assessment is made one or more years after the taxable income is earned the debt is supposed to originate at that point. Here the reassessments issued on August 14, 1969, for income earned in previous years seems to me to be at most a confirmation or acknowledgement of the amounts owing for these earlier years. Indeed in my opinion, the assessment does not create the debt, but is at most a confirmation of its existence.

[Emphasis added.]

In G.R. Block Research & Development (1981) Corporation and G.R. Block Research & Development Corporation v. M.N.R., [1987] 1 C.T.C. 253, 87 D.T.C. 5137, the Federal Court, considering a motion to quash an assessment, held that it could not entertain the application because the liability to pay tax arose before any assessment had been made.

In Oneil Lambert v. The Queen, [1976] C.T.C. 611, 76 D.T.C. 6373, the Federal Court of Appeal was called upon to consider whether a certificate of judgment for unpaid tax was nullified by a subsequent reassessment. In the course of its decision the Chief Justice stated, at page 614:

As appears from our review of the provisions of the Act, there is a difference between

(a) a liability under the Act to pay tax, and

(b) an "assessment" (including a reassessment or a further assessment), which is a determination or calculation of the tax liability.

The appeals are dismissed.

Appeals dismissed.