Executors and Trustees of the Estate of John Cyril Hewitt v. Minister of National Revenue, [1976] CTC 2067, 76 DTC 1065

A W Prociuk:—The executors and trustees of the estate of John Cyril Hewitt appeal from the respondent’s assessment dated January 11, 1974, wherein their claim for a total exemption of the aggregate net value of the estate in the sum of $1,793,215.05 pursuant to clause 7(1)(b)(i)(A) of the Estate Tax Act, SC 1958, c 29 and amendments thereto, was disallowed except for a sum of $225,000 calculated by the respondent pursuant to clause 7(1)(b)(i)(B), and the remainder of the aggregate net value was assessed, resulting in estate tax and interest thereon in the sum of $797,929.25.

The appellants claim that John Cyril Hewitt, deceased, who died testate on or about April 15, 1971, by his will created an absolute and indefeasible settlement, the income from which his surviving spouse, Gertrude Veronica Hewitt, was entitled to receive during her lifetime.

The respondent’s position is that any amount to which the widow was entitied over and above the periodic sums payable to her under clause 5 of the last will and testament of the said deceased, was discretionary on the part of the executors and trustees, and therefore the settlement was not absolute and indefeasible.

The parties filed an agreed statement of facts at the commencement of the hearing herein, which reads as follows:

1. The Appellants are Executors and Trustees of the Estate of John Cyril Hewitt pursuant to his Last Will and Testament with codicil dated December 23, 1969 and May 27, 1970 respectively. A copy of the said Last Will and Testament If [sic] filed as Exhibit “A”.

2. The late John Cyril Hewitt was resident of and domiciled in the Province of Manitoba as of the date of his death, April 15, 1971.

3. The Appellants were confirmed as Executors and Trustees under the Last Will and Testament of the late John Cyril Hewitt by Grant of Probate issued from the Surrogate Court of the Eastern Judicial District, Province of Manitoba and dated November 4, 1971.

4. Prior to his death John Cyril Hewitt was the President and the sole beneficial shareholder of J C Hewitt Ltd.

5. J C Hewitt Ltd beneficially owned all of the 2,000 issued and outstanding common shares of Burnaby Venetian Blinds Ltd, a company engaged in the manufacture, sale and installation of venetian blinds.

6. On February 22, 1970 J C Hewitt Ltd sold to Hunter Douglas Ltd all of the shares owned by it in Burnaby Venetian Blinds Ltd.

7. At all material times J C Hewitt Ltd also beneficially owned all of the issued and outstanding shares of Beach Attractions Ltd.

8. Beach Attractions Ltd sold its amusement park business in 1961 but thereafter has continued to earn income from investments.

9. In filing an Estate Tax Return in respect of John Cyril Hewitt, a copy of which is filed as Exhibit “B”, the Appellants claimed $1,793,215.05 as a deduction from the aggregate net value of the property passing on the death of John Cyril Hewitt.

10. On assessment, notice of which is dated January 11, 1974 the Minister of National Revenue disallowed the said deduction of $1,793,215.05 but allowed as a deduction the amount of $225,000.00 being the value, as prescribed by the Estate Tax Regulations, of the annuity provided for in clause 5 of the Last Will and Testament of John Cyril Hewitt. A copy of the said Notice of Assessment with attached forms ET85 and ET86A are filed as Exhibit "C”.

11. By Notice of Objection dated February 28, 1974, a copy of which Is filed as Exhibit "D”, the Appellants objected to the said Notice of Assessment.

12. By Notification dated April 15, 1975, a copy of which is filed as Exhibit “E” the Minister of National Revenue confirmed the said assessment.

The Appellants have, since the death of the deceased, paid to the spouse of the deceased all of the annual income of the estate, less the debts and the specific bequests referred to in the deceased’s will.

The pertinent clauses of the last will and testament herein are clauses 5 and 6 which read as follows:

(5) 1 DIRECT that in addition to any other payments required to be made to my wife by the provisions of this my Will, that my Trustees shall pay to my wife the sum of SEVEN HUNDRED AND FIFTY DOLLARS ($750.00) for each and every month of her natural life; Provided Always that such monthly Installments are based upon the purchasing power of money on July 1st, 1969, according to the Index of The Dominion Bureau of Statistics; in the event such purchasing power decreases by ten per cent (10%) or more from the value thereof as at July 1st, 1969, then and in such event I AUTHORIZE AND DIRECT my Trustees to increase said monthly installments to an equivalent purchasing power as shown by the then Index in comparison with the Index of July 1st, 1969; I FURTHER DIRECT that my Trustees shall pay to my wife or on her behalf (as the case may be) any sum or sums incurred for by her for medical or hospital expense and being in excess of those sums presently provided by any governmental or regulatory authority for such eventuality.

(6) l-F in any year the net income derived from my general estate shall be more than sufficient to provide for the installments and payments required to be made to my wife then I DIRECT that my Trustees shall pay to my wife such amount of said surplus income as my Trustees in their absolute discretion are of opinion can be made after having regard—

Firstly, to maintaining my wife with a standard of living equal to that which she enjoys at the date of my death;

Secondly, to expansion of any business beneficially owned or controlled by my estate at the time of my death, and

Thirdly, to not impairing the capital structure of any of the business owned or controlled by my estate at the time of my death.

For the purpose of convenience, subparagraphs 7(1)(b)(i) and (ii) are reproduced hereunder:

7. {1) For the purpose of computing the aggregate taxable value of the property passing on the death of a person, there may be deducted from the aggregate net value of that property computed in accordance with Division B such of the following amounts as are applicable:

(b) the value of any gift made by the deceased whether during his lifetime or by his will that can, within six months after the death of the deceased or such longer period as may be reasonable in the circumstances, be established to be absolute and indefeasible and that was made by him by the creation of a settlement under which

i) the spouse of the deceased is entitled to receive

(A) all of the income of the settlement that arises after the death of the deceased and before the death of such spouse, or

(B) periodic payments in ascertained amounts or limited to ascertained maximum amounts, to be made at intervals not greater than twelve months, out of the income of the settlement that arises after the death of the deceased and before the death of such spouse, or, if that income is completely exhausted by those payments, out of the income and capital of the settlement, and

(ii) no person except such spouse may receive or otherwise obtain, after the death of the deceased and before the death of such spouse, any of the capital of the settlement or any use thereof, or any of the income of the settlement to which such spouse is entitled or any use thereof,

or by the transfer of property to a trust that at the time of the transfer was a settlement to which subparagraphs (i) and (ii) apply, the creation of which constituted a gift inter vivos by him to his spouse that was exempt from tax under Part IV of the Income Tax Act by virtue of paragraph (e) of subsection (1) of section 112 thereof;

it will be observed that the issue herein is whether or not, having regard to the nature of the assets of the deceased at the time of his death, the trustees had any discretion as stipulated in clause 6, to withhold any amount of the net income from the widow.

The deceased made his last will and testament on December 23, 1969. According to the evidence of J A Mace, CA, one of the executors herein and a former employee of the deceased .(and, later, of one of the deceased’s companies) from 1947 to 1970, the testator incorporated J C Hewitt Ltd in 1954, of which he was the president and the sole beneficial shareholder during his lifetime. This company owned Beach Attractions Ltd and Burnaby Venetian Blinds Ltd.

As of December 13, 1969 the deceased, through J C Hewitt Ltd, controlled one business, namely, Burnaby Venetian Blinds Ltd, which was a viable economic enterprise having at least five substantial business locations in Canada.

The deceased had declined in health. He had had several heart attacks in previous years and phlebitis in 1969. He was not recovering satisfactorily from this last illness, and this factor undoubtedly led to. the sale of the Burnaby Venetian Blinds Ltd business on February 20, 1970 to Hunter, Douglas (Canada) Ltd. Mr Mace is now employed by this company.

The sale was not finalized until June 5, 1970. On May 30, 1970 the deceased appointed his solicitor, D A Bowles, Esq, (by power of attorney of the same date filed as Exhibit A-2), to finalize the said sale. From that date to the date of his death, John Cyril Hewitt was fully retired, as he neither directly nor indirectly operated or controlled any business.

The trustees are charged with administration of such assets of the estate of the deceased as are established and determined as of the date of his death.

The assets clearly do not include any business operated or controlled by the trustees, as the business had been disposed of by the deceased in his lifetime.

Accordingly, the trustees at no time were or are obliged to consider the second and third conditions mentioned in clause 6 of the deceased’s last will and testament in determining what amount of the surplus net income they could, or can justifiably allocate to the widow. In the circumstances, they concluded that they were obliged to turn over the entire net income to her, which they did.

_:1 do not think It can be seriously argued that the trustees could withhold any portion of the said income on the ground that it would be in excess of the standard of living the widow enjoyed at the time of her husband’s death, since the other two “having-regard-to” contingencies are non-existent.

In my humble opinion, the respondent erred in his assessment of this estate on the assumption that, in the special circumstances of this case, the trustees still had a discretionary power to determine what portion of the net income could be paid to the widow.

The appeal is therefore allowed and the matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.