Doris L. Reichenauer v. Minister of National Revenue, [1987] 1 CTC 2203, 87 DTC 131

Goetz, T.C.J.:—This is an appeal from a tax reassessment for the appel lant’s 1983 taxation year, whereby certain interest income accruing from a tax refund was allocated to the Canadian resident beneficiaries and none of it to a non-resident beneficiary.

Issue

The issue is whether payments to a non-resident beneficiary were out of estate capital or estate income.

It was agreed that the appeals of Irene E. Reichenauer (85-1408(IT)), Robert J. Reichenauer (85-1416(IT)), Karen J. Dedels (85-1417(IT) ) and Eleanor Stefner (85-1424(IT) ) would be heard on common evidence.

Facts

The parties agreed to the following facts as set out in the notice of appeal and the Minister’s reply to notice of appeal. Statements of facts in the notice of appeal read as follows:

Statement of Facts:

On December 16, 1983, Canada Permanent Trust Company, as executor of the Estate of Ellen Wilkinson, wrote a letter to Revenue Canada Taxation in Edmonton requesting that the June 29th, 1983 final T3 return for the Estate be amended to add $42,779.44 interest which was received from a refund of taxes to date of death (bringing the total T3 income to $48,387.20). This request asked that, in accordance with a September 20th, 1982 Agreement signed by all the beneficiaries of the Estate, $17,465.75 of this interest be added to the income previously allocated to Elizabeth Bueker (a non-resident of Canada) and that the remainder of the interest be added in the following manner:

/ to the income previously allocated to E Stefner

/8 to the income previously allocated to I Reichenauer

/8 to the income previously allocated to K Dedels

/ to the income previously allocated to D Reichenauer

/8 to the income previously allocated to R Reichenauer

Included with the request were amended supplementaries to take the foregoing into account.

Subparagraphs 4(a), (b), (d) and (e) of the reply to the notice of appeal read as follows: .

4. In reassessing the income tax of the appellant for her 1983 taxation year and, with respect to the matters in issue, he made, inter alia, the following assumptions of fact:

(a) The Appellant was a beneficiary under the Last Will and Testament of Ellen Wilkinson who passed away on June 29, 1981.

(b) During the Appellant’s 1983 taxation year the Trust of the Estate of Ellen Wilkinson received income of $48,387.20 of which $42,779.44 constituted interest received in respect of a refund of income tax.

(d) By way of an agreement between the beneficiaries of the Estate of Ellen Wilkinson, dated and effective September 20, 1982, Elizabeth Bueker, a resident of the United States, was to receive $350,000.00 of which $100,000.00 was to be paid upon completion of the said agreement by the beneficiaries and the balance to be payable at the rate of 10% per annum on the balance remaining due from time to time.

(e) During the taxation year in issue the Trust of the Estate of Ellen Wilkinson paid to Elizabeth Bueker $17,465.75 in respect of interest owing on the outstanding balance referred to in subparagraph 4(d), herein.

The Minister says the $17,465.75 was paid out of capital of the estate. The appellants together with Elizabeth Bueker, a non-resident, were beneficiaries under the Will of Ellen Wilkinson, deceased. The estate was composed mainly of real estate and a minimal amount of cash. Tax was paid to Revenue Canada and the executor awaited a substantial refund after filing a final T3 return for the estate.

An ancillary agreement was entered into for the purpose of facilitating the distribution of real estate to the beneficiaries and whereby Elizabeth Bueker was to receive $350,000.

Relevant clauses of the agreement are:

3. There will be paid to Elizabeth the sum of THREE HUNDRED AND FIFTY THOUSAND DOLLARS ($350,000.00) (Canadian) ONE HUNDRED THOUSAND DOLLARS ($100,000.00) to paid to her upon the completion of this Agreement by all parties hereto and the balance of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000.00) (Canadian) to be payable to her with interest at the rate of TEN PER CENT (10%) per annum on the balance remaining due from time to time, simple interest to be calculated from October 1st, 1982 until date of payment. 7. Elizabeth acknowledges, agrees and understands thatt amounts may be withheld from the interest payable to her under this Administration Agreement in order that the Executor may comply with the non-resident tax provisions of the Income Tax Act (Canada) and all payments so made on her account will be allowed as payments on the interest due to her under this Administration Agreement.

8. Elizabeth acknowledges that she is aware that a large portion of the THREE HUNDRED AND FIFTY THOUSAND DOLLARS ($350,000.00) to be paid to her will be obtained from an Income Tax Refund upon the Executor refiling an amended terminal income tax return for the deceased Ellen Wilkinson and that it will take some time for the return to be assessed and the refund processed and received by the Executor for payment to her and accordingly it is acknowledged by Elizabeth and the Executor that the balance owing to Elizabeth will not be payable on demand by her but will be payable upon receipt of funds by the Executor and that the debt and accrued interest will be a debt of the estate of Ellen Wilkinson and not of the Executor who shall be entitled to make the transfers of land contemplated by this Administration Agreement notwithstanding that they have not received payment of any refund from the Department of National Revenue at the time of making those transfers.

Elizabeth Bueker's beneficial interest arises under clause 3 and the source of payment was to arise under clause 8. Her entitlement under the agreement created a specific debt of the estate and she was aware that she was only going to be paid after the estate received its tax refund. The interest accruing on the refund was income to the estate thereby increasing its capital.

Elizabeth Bueker was a beneficiary of a fixed portion of capital of the estate — not as a residual beneficiary. Her interest in the estate was certain and definite, i.e. $350,000 plus ten per cent interest accruing on the $250,000 balance until paid. The interest income in the agreement of $48,387.20 was properly allocated pro rata according to the terms of the Will to the resident beneficiaries.

For these reasons, the appeal is dismissed.

Appeal dismissed.