Her Majesty the Queen v. The Royal Trust Company and Dame Gisèle Hoffman Hawey, Co-Executors and Trustees of The, [1974] CTC 881, 75 DTC 5001

Lacroix, DJ:—On July 15, 1971 an assessment, No 43991, was made against defendants, claiming from them tax amounting to $50,943 under the Estate Tax Act, on the taxable value of the estate of the late Honoré Hawey, who died on April 11, 1970.

As co-executors, defendants objected to this assessment, ‘which was subsequently corrected on June 15, 1972 and. made in the lesser amount of $48,970.60. An appeal was lodged against this second assessment on July 18, 1972, before the Tax Review Board, and it was heard’ by Mr Lucien Cardin on December 8. 1972. A decision on this appeal was handed down on April 9, 1973.

The Tax Review Board allowed the appeal and refused to include in the computation of the aggregate net value of the estate the proceeds of life insurance policies totalling $70,000, listed on page 2 of the statement. This decision by the Tax Review Board is now appealed to this Court.

In making the assessment appealed to the Tax Review Board the Department of National Revenue allegedly applied the provisions of paragraphs 3(1 )(m) and 3(9)(a) of the Estate Tax Act (RSC 1970, c E-9). The decision of the Tax Review Board dated April 9, 1973 rejected the proposition of law: of the Department of National Revenue, and held that the above-mentioned sections did not apply to the case at bar.

The Court must now briefly examine the facts as they stood prior to the death of Honoré Hawey, and at ‘the: time of his death, namely April 11, 1970.

“Honoré Hawey and his brother René Hawey, on May 30, 1967 and up to the date of Honoré Hawey’s death, each held 202 ordinary shares of the capital stock of Cantin & Fils Limitée, at a par value of $100 each, and 5 /2 ordinary shares at a par value of $100 each of the capital stock of Les Immeubles RE-HO Inc, all issued, current and fully paid up. On May 30, 1967 the two brothers decided to put into effect a plan-which had been suggested to them and which they had thought over carefully, as a means of insuring the value of their estate and making certain the business: would continue. ‘Clearly, this was a family enterprise; it was difficult. to. ensure that the shares in the business would be bought on the open market, and so give the heirs of whichever brother should die an income, or the necessary funds to obtain an adequate income, on the one hand, and on the other hand ensure that the business would continue. To get around these risks and uncertainties, according to the testimony of Jacques Taschereau, notary, they adopted a procedure which is quite often used in such situations, and consists of a deed of mutually , agreed purchase. and sale between the partners. Each brother undertook. to purchase, on the death of the first deceased, 40% of the shares of Cantin & Fils Limitée held by the deceased, and all the shares of RE-HO Inc, at a price fixed by the Estate Branch of the Department of Revenue of the province of Quebec.

As Jacques Taschereau explained in his testimony, an agreement of this nature has two purposes, namely:

(1) obtaining liquid funds for the estate of the deceased;

(2) giving the surviving partner the financial capacity to continue in operation by acquiring control of the business.

As Jacques. Taschereau goes on to say in his testimony, ‘ ‘ is the ideal means of securing this. objective”. In other words, once the agreement has been concluded, the party who has undertaken to purchase the share of the other party, who has undertaken to sell it to him, insures the life of the other in order to realize on this insurance at his death and, with the money, provide liquid funds for the estate, namely the price of the shares, and himself obtain at the same time the control needed to continue operation of the business. This is clearly what the two brothers, Honoré and René Hawey, did on May 30, 1967, when two identical agreements were concluded before Mr Jacques Taschereau, copies of which are. contained in Exhibit P-1, at pp 60-63 and at pp 64-68. . - .

Honoré Hawey’s. life was. insured by policies listed and described on p 3 of the statement, for a total amount of $195,000; René Hawey’s life was insured by two insurance. policies amounting to $200,000, which are described at the bottom of p 4 of the statement. According to undisputed evidence all these policies were placed in the custody of Mr Jacques Taschereau, who kept them until the death of Honoré Hawey, in order to give effect to the agreements concluded between the two brothers.

In the agreements referred to above, dated May 30, 1967, by which each brother assumed an obligation to buy and sell, the Royal Trust Company was appointed trustee for the purpose of executing these agreements..

It is clear that the gist of this matter lies in the interpretation of the agreements concluded between the two. brothers on May 30, 1967, in the light of paragraphs 3(1)(m) and 3(9)(a) of the Estate Tax Act. The Court must therefore examine the legal purport of the agreements to determine what were the rights and powers of the two contracting parties with respect to the insurance policies and the shares held by each of them in the companies.

We must also consider what were the rights, powers and obligations of the trustee, Royal Trust Company, regarding the insurance policies, their proceeds and the use it was to make of them.

In the two agreements contained in Exhibit P-1, at pp 60-63 and 64-68 of the certified transcript and the: evidence submitted by consent, one of the brothers, the “party of the second part”, formally undertakes to buy from his brother, who also formally undertakes to sell, 40% of the ordinary shares, issued and paid up, held by the first brother in Cantin & Fils Limitée at the time of his death, and all the shares held by the same “party of the first part” in Immeubles RE-HO Inc.

This agreement is a conditional sale, the condition in each case being the death of the party of the first part. The price of the shares is fixed in the agreement as indicated above, just as is the method of payment, using the net amount of insurance received by the trustee, Royal Trust Company. In. each agreement the insurances of the party of the first part are clearly listed, and it is clearly stated that as trustee the Royal Trust Company is authorized to collect the proceeds of these insurance policies. What is significant is that, by consent of both parties, this same trustee is required, on the death of the party of the first part, to apply the insurance indemnity (that is the proceeds of insurances on the life of the party of the first part collected by the Royal Trust Company) to the purchase price of the shares which by their agreement they undertook to buy.

This obligation is further, very clearly, reinforced in clause eight of each agreement, which reads as follows:

In the event of the death of the party of the first part, the trustee is authorized to withdraw and collect from any insurance company which shall have issued policies for the purposes of this agreement, the proceeds of the said insurance policies, to give a full release therefor, and to dispose of the same in accordance with the terms of this agreement, for the purchase of shares of the party of the first part, which shall be sold by his estate;

According to the undisputed evidence presented to this Court, in observance of the terms and the spirit of these agreements, all the insurance policies referred to in the two agreements were placed in the custody of the notary, Jacques Taschereau, custody which he retained at all times until the death of Honoré Hawey on April 11, 1970.

An exception must be made for the policy pledged to the Bank Canadian National to guarantee the Cantin & Fils Limitée line of credit, but the trustee obtained possession of this policy directly from the Bank Canadian National, after the latter was provided with a copy of the agreements concluded between the two brothers, and pursuant to the provisions of clause 5 of the said agreements.

The notary, Jacques Taschereau, held these policies for the purpose of delivering them to the executor-trustee, the Royal Trust Company, and that is exactly what he did when Honoré Hawey died. The insurance broker who had planned this arrangement between the two brothers changed his occupation shortly after the agreements were signed, and apparently left the country without having notified the Royal Trust Company, but we concur in the view of Mr Cardin that this can in no way affect the validity of the transfer and service, even if it was done after the death of Honoré Hawey. Moreover, this con- clusion seems amply supported by the representatives of insurance companies who were heard as witnesses.

The wording and clear meaning of these two agreements, which were drafted in the same terms, accordingly indicates that Honoré Hawey on the one hand, and his brother René Hawey on the other, had assumed a formal obligation, the one to sell and the other to buy, the interests of the other party in Cantin & Fils Limitée and Immeubles RE-HO Inc, and that to this end they had mutually relinquished all their rights and interests in the insurance policies in each other’s favour, and at the same time relinquished possession of these policies to permit the agreements to be put into effect.

It may be concluded that the only obligation with respect to the insurance policies encountered by the estate of Honoré Hawey on the latter’s death was to sell his shares and accept in return payment from the proceeds of the said insurance policies, for it is clearly established that prior to his death Honoré Hawey had handed over to the beneficiary-trustee, the Royal Trust Company, all rights and interests he might have in his insurance policies, as listed in this action.

As may be seen from the text of the agreements, these insurance policies were intended for a single purpose, to which the parties had freely consented, and which the Royal Trust Company as trustee and executor had agreed to respect, that is to use the proceeds of the insurance policies of the first brother to die solely for the purchase of his shares as provided in the text of the agreement.

Plaintiff-appellant maintained that at the time of his death Honoré Hawey still owned the insurance policies, and was still entitled to perform with respect to them the acts specified by paragraph 3(9)(a) of the Estate Tax Act.

Paragraph 3(1)(m), c E-9, may be first disposed of; that paragraph provides as follows:

(m) any amount payable under a policy of insurance effected on the life of the deceased (whether or not to a preferred beneficiary within the meaning of any statute or law relating to insurance applicable to such policy), where such policy was, immediately prior to the death of the deceased,

(i) owned, either alone or jointly or in common with any other person,

(A) by the deceased,

(B) by any person as a trustee under any trust, the terms of which trust were subject to alteration by the deceased . . .

As may be seen from the evidence, immediately prior to his death the deceased Honoré Hawey was definitely not the owner of the insurance policies, and even though the insurance policies were held by another person as trustee, the terms of the agreements (P-1) were not in any way subject to modification by the deceased. Further, if we examine subsection 3(9), that subsection, referring to the previous paragraph 3(1 )(m), deals with the case where the owner of an insurance policy is entitled to do the various things listed in the section, the relevant portion of which reads as follows:

(9) For the purposes. of paragraph (1)(m)

(a) a reference to a policy of insurance owned -by any person includes a reference to a policy of insurance in which that person had such an estate or interest or in relation to which he had such a general power as would, if he were sui juris, have enabled him either alone or in concert or by arrangement with any other person to do any one or more of the following things:

(i) change the beneficiary,

(ii) charge or pledge the policy as security for any purpose,

(iii) borrow from the insurer on the security of the policy,

(iv) cancel, surrender or otherwise terminate the policy, or

(v) assign the policy or revoke any assignment thereof . . .

Once again the wording of the agreement concluded between the two brothers, and contained in the abovementioned Exhibit P-1, clearly indicates that neither of the parties to the contract had the power or estate sui juris to do any of the things referred to in paragraph 3(9)(a). That would have required consent by both parties, either by terminating the agreements or by amending them, and the evidence clearly established once again that this was not done prior to the death of Honoré Hawey.

In his brief counsel for the plaintiff refers (at p 5) to clauses 4, 5, 7 and 8 of the agreements, and suggests that Honoré Hawey had never transferred ownership of the insurance policies to the Royal Trust Company.

The French text of paragraph 3(1 )(m) and 3(9)(a) clearly refers to “possession” of the insurance policies, while the English text uses the verb “to own”. It was established that prior to his death Honoré Hawey definitely did not have possession of the insurance policies, and further, that he no longer had any right or interest in the said policies, having transferred them all to the Royal. Trust Company in implementation of the agreement with his brother René.

These terms. were agreed to by the two parties to the contract, and, with all due respect, we cannot accept the legal proposition. of plaintiff to the effect that Honoré Hawey still had the power to alter these terms, for such an alteration could not be done unilaterally, and in no way authorized him to perform any of the acts referred to in paragraph 3(9) (a) of the statute.

‘In Estate of Lazarus Kushner v MNR, 34 Tax ABC 89; 63 DTC 972, counsel for the appellant stressed the fact that in the case of a “‘buy- and-sell agreement” the terms could not be unilaterally altered, and we take from that decision, to which we were referred by plaintiff, the following passage:

Mr F J Newson, counsel for the appellant, submitted that the deceased, in his lifetime, could not have taken any of the five steps mentioned in subsection (5), but very soundly added: “at least without committing a breach of contract and rendering himself liable for damages or for an injunction to enjoin him from committing an anticipated breach.” This, I think, puts the position accurately, as it appears to me that the deceased was never without the right to take any one or more of these steps under the insurance policy held, if he had seen fit to do so.

When the Member stated: “This, I think, puts the position accurately, as it appears to me that the deceased was never without the right to take any one. or more of these steps under the insurance policy held, if he had seen fit to do so”, this appears to indicate that he recognized the insured might commit an illegal act, which .would be a breach of contract, and render him liable to damages .or to an injunction barring him from committing such a breach of contract.

That being the case, it amounts to saying that he could not take “one or more of these steps”, because in so doing, he would be acting in a prohibited manner.

The same situation arises in the case at bar. Thus, after transferring all his rights and interests in his insurance policies to his brother René Hawey through the intermediary of the beneficiary-trustee, Royal Trust Company, Honoré Hawey gave up the power or estate to do the things referred to in paragraph 3(9)(a), and I would even add that if he had wished to act contrary to his obligations as stated in the agreement, P-1, it would have been difficult for him to do so, since he no longer even had possession of the titles and insurance policies.

This was testified to by the notary, Jacques Taschereau, and his testimony corroborated that of René Hawey to the effect that the agreements remained unchanged up to the time of his brother’s death.

With regard to the other points raised by appellant, to the effect that the assignment of the insurances by Honoré Hawey was lacking in consideration, and concerning the lack of service, the Court feels that Mr Lucien Cardin, the Assistant Chairman, correctly disposed of these arguments.

On the whole the Court concludes that the reasons for judgment of the Assistant Chairman, Mr Lucien Cardin, provide a very clear and complete summary of the actual situation existing between the parties, and the true legal position of Honoré Hawey at the time of his death.

The Court wishes to note that the hearing of this case was held on April 9, 1974, but due to the transcribing of stenographer’s notes and filing of. briefs by the parties the record was not completed until July 10, 1974.

For these reasons, therefore:

The Court dismisses the action by plaintiff and dismisses the appeal by said plaintiff;

And the Court accordingly f finds that Honoré Hawey did not own the insurance policies listed on page 3 of the statement of claim immediately prior to his death within the meaning of the provisions of paragraph 3(1)(m) of the Estate Tax Act, since he had at that time no general power that would have enabled him to do one or more of the things referred to in paragraph 3(9)(a) of the said Act, as the “general power” is defined: in subsection 62(1); .

And orders the Minister of National Revenue to cause a new assessment to be made, deducting the sum of $70,000 from the aggregate net taxable value of the property of the estate of I H I Hawey as established by plaintiff.

The whole with costs against plaintiff. <