Walmsley Estate v. R., [1999] 2 CTC 2956, 99 DTC 594

Beaubier 7.C.J.:

These appeals pursuant to the General Procedure were heard at Victoria, British Columbia on February 17, 1999. Mark Walmsley, son of the deceased and Executor and Trustee of his estate, testified as did Peter Yuile and Revenue Canada’s auditor, Calvin Poon, C.G.A.

Sholto Walmsley died at Vancouver, British Columbia on December 2, 1986. He left his estate to Mark to hold in trust for the benefit of his widow, Margery. Upon her death the estate remaining was distributed to his three children in equal shares. The executor applied for probate on April 14, 1987, at which time the gross value of the estate was $710,430.84.

On May 31, 1988 the residuary beneficiaries agreed in writing to the following compensation to be paid to Mark as Executor and Trustee of Sholto’s estate:

What we agreed would be your monetary compensation is the following:

• A payment of 5% of the amount that father’s estate value has increased at each year-end versus the value from the previous year-end.

• A payment of 0.4% of father’s estate value at year-end.

• A payment of 3% of father’s estate value at the time your duties were satisfactorily concluded.

° A payment of 2% of the combined estate value when mom’s estate and father’s estate needs to be settled (again) at the time of mom’s death (assuming that you are the executor of her estate).

As we discussed, you can take some or all of these monies at this time. If you prefer, you can take some or all of the them at a future date of your choosing. You could also take pieces of them at regular or irregular intervals. All that we ask, is that you acknowledge that these payments are reasonable and that you accept them.

Please let us know what monies are due to you. I think that a statement very similar to the one in your letter, but more formal and covering year-end 1987, the 3% closing payment, and any other monies due to you as of June 1, 1988 would be appropriate. This statement would then serve as a record for our reference in the future. A statement on or about year-end 1988 and future year-ends would also be suitable for subsequent years.

(Exhibits A-1 and A-2)

Sholto’s widow, Margery, was supported by his estate. Taxes and fees were also paid from Sholto’s estate. Mark reported to the beneficiaries two to four times per year and administered the estate, according to his Notice of Appeal, by doing the following as set out in paragraph 7:

7. The Executor performed the following functions:

(i) determination of Estate’s assets and liabilities at time of death;

(11) search of all banks, trusts and other institutions who may have been involved with the Estate;

(iii) continuous work with the Estate’s lawyer to ensure all aspects of the Will were understood and adhered to, followed and implemented (e.g. death benefit, life insurance, etc.);

(iv) communicated with and obtained input from the Beneficiaries of the Estate, both of which were outside the local jurisdiction and took care of the Estate on a daily basis;

(v) ensured that the Testator’s surviving spouse, who was also a Beneficiary of the Estate, was taken care of financially and budgeted for and worked with the other beneficiaries on a constant basis to understand the financial and other needs to be provided by the Estate to the Testator’s surviving spouse including setting up financial mechanisms in order to provide sufficient financial support and included the setting up of housing, health and other care for the surviving spouse;

(vi) kept constant analysis of the financial status of the Estate as well as making day to day decisions regarding the nature of investment risks involved and investments to invest in and included written accounts of these decisions to the other Beneficiaries on a consistent basis;

(vii) maintained a system of filing and record keeping with respect to these investments as well as the other assets and decisions made in the Estate by the Executor;

(viii) worked with mutual fund trust manager to ensure that investments were

performing well and made decisions with respect to these mutual fund investments (i.e. when to sell, when to buy, etc.);

(ix) established a system to provide loans to Beneficiaries which was consistent with instructions in the Will and recorded and accounted for these loans;

(x) worked with the Estate’s accountant to gather the materials relating to the preparation of financial statements, prepare same and provide the Respondent with the appropriate income tax filings;

(xi) set up and maintained a system of paying the Estate’s bills on an ongoing basis, including all necessary banking;

(xii) maintained an Estate current account and savings account;

(xiii) established and implemented the means of appropriate liquidation and

dissolution of the Estate when the surviving spouse died, and then distributed these assets in an appropriate manner to the Beneficiaries of the Will in accordance with the guidance of the Will; and

(xiv) was involved in and dealt with an audit by the Respondent of the Estate.

Margery died in 1994, at which time the fair market value of the remaining estate assets was $1,313,928. Paragraphs 8 to 10 of the Notice of Appeal list the fees that the estate paid Mark from 1986 to 1994 and the deductions made by the estate respecting those fees. They read:

8. The following compensation was provided during the respective years by the Appellant to the Executor:

1986 1987 1988 1989 1990 1991 1992 1993 1994

$NIL $NIL $6,510 $5,900 $6,000 $6,106 $7,011 $5,960 $82,025

9. The Appellant claimed a deduction equal to the amounts and in the years provided in Paragraph 8 above, respecting the Executor’s compensation.

10. The Respondent denied the Appellant’s claim for a deduction for the Executor’s compensation in the 1992 and 1994 taxation years.

The audit disallowed the following expenses claimed for trustee fees in 1992 and 1994:

Paragraphs 8 to 14 inclusive of the Reply to the Notice of Appeal detail the bases for the disallowance. They read:

8. In so assessing the Appellant, the Minister relied, on, inter alia, the following assumptions:

a) the facts stated and admitted herein;

b) trustee fee expenses in excess of the amount allowed by the Minister were not incurred for the purpose of gaining or producing income from a business or property;

C) trustee fee expenses in excess of the amount allowed by the Minister were not current expenses, but were expenses that were capital in nature;

d) trustee fee expenses in excess of the amount allowed by the Minister were not expenses that were reasonable in the circumstances;

e) the trustee fees paid by the Appellant in the 1992 and 1994 taxation years were not paid to a person whose principal business is advising others as to the advisability of purchasing or selling specific shares or securities;

f) the trustee fees paid by the Appellant in the 1992 and 1994 taxation years were not paid to a person whose principal business includes the provision of services in respect of the administration or management of shares or securities.

B. Issue to be Decided

9. The issue is whether the Minister properly disallowed expenses for trustee fees claimed by the Appellant in the amounts of $916.00 and $69,892.00 in the 1992 and 1994 taxation years, respectively.

C. Statutory Provisions Relied on

10. He relies on sections 3, 9 and 67, subsection 20(1) and paragraphs 18( 1 )(a), 18(1)(b) and 18( 1 )(h) of the Income Tax Act, R.S.C. 1985, c. I (5 Supp.), as amended (the “Act”).

D. Grounds Relied on and Relief Sought

11. He respectfully submits that the disallowed trustee fee expenses were not incurred for the purpose of gaining or producing income from a business or property Within the meaning of paragraph 18(1 )(a) of the Act but were expenses that were capital in nature within the meaning of paragraph 18( 1 )(b) of the Act.

12. He respectfully submits that the trustee fee expenses disallowed by the Minister were not expenses that were reasonable in the circumstances within the meaning of section 67 of the Act.

13. He respectfully submits that the trustee fees paid by the Appellant in the 1992 and 1994 taxation years were not paid to a person whose principal business is advising others as to the advisability of purchasing or selling specific shares or securities pursuant to subparagraph 20( 1 )(bb)(iii) of the Act.

14. He respectfully submits that the trustee fees paid by the Appellant in the 1992 and 1994 taxation years were not paid to a person whose principal business includes the provision of services in respect of the administration or management of shares or securities pursuant to subparagraph 20(1)(bb)(iv) of the Act.

Paragraphs 13 and 14 of the Reply are correct. Mark’s occupation did not fall within subparagraphs 20( 1 )(/?/?)(iii) or (iv) of the Act.

The Appellant called Mr. Yuile of Victoria who testified as to fees he charges for professional investment advice. Essentially he charges an annual fee based on the total value of assets administered. It is 1% of the first $250,000, 74 of 1 % of the second $250,000; /2 of 1 % of the third $250,000 and /4 of 1% thereafter. In Vancouver and in the investment advisor indus- try the fees generally range from 1% to 2% per annum based on the value of the financial assets administered.

Mark Walmsley did not break down his services or fees among the portions spent attending to Margery Walmsley’s needs, the portion spent on income matters, on capital matters or on administrative or any other matter or matters. Essentially he simply charged his fees based upon the terms of Exhibits A-l and A-2 which are quoted on a gross basis.

Mark did not give any detail respecting his fees to the auditor when he was asked for detail. As a result, the auditor calculated the fees he allowed based upon the Ontario tariff of fees allowed for executors and administrators, based upon the income of the estate and the taxable capital gains of the estate. Although Mr. Poon’s calculations based upon taxable capital gains may be questionable, the Appellant did not present detailed evidence in support of an alternative method of calculating the fees related to income or other gains earned by the estate. The rationale presented by the Appellant was that the estate increased remarkably in value and therefore the fees are deductible. The failure in this rationale is that the trustee had to administer the care of Margery and administer the estate generally (and wind it up) in addition to attempting to earn income and to retaining or increasing the value of the estate assets. He performed a mixture of duties, only some of which were related to earning income. But he did not give any evidence which broke down the fees he charged for activities performed in order to earn income for the estate.

For this reason, the Appellant failed to refute assumptions 8(b), (c), (d), (e) and (f).

Therefore, the appeal is dismissed. The Respondent is awarded party and party costs respecting the appeal.

Appeals dismissed.