Estate of Myrtle Emeline McPherson v. Minister of National Revenue, [1974] CTC 2028, 74 DTC 1011

Roland St-Onge:—This is an appeal by the executors of the estate of Myrtle Emeline McPherson, deceased, from a reassessment of the said estate by the Minister of National Revenue pursuant to the provisions of the Estate Tax Act.

The late Mrs McPherson was predeceased by her husband, Clifford John Munce, who died on or about January 26, 1942. Mr Munce left a last will which provided in paragraph lll(d) that the residue of his estate was to be held and administered by his executors and trustees upon, inter alia, the following terms:

To invest and keep invested, in accordance with paragraph 10 hereof, the residue of my estate and to pay the net income derived therefrom to my wife during her lifetime with power to my Trustees at any time and from time to time during such time to pay or to use for the benefit of my wife or any of my children such amount or amounts out of the capital of such residue as in their uncontrolled discretion my Trustees may deem advisable.

By an order of the Supreme Court of Ontario made and dated February 24, 1967 a deed of arrangement was approved pursuant to which the said paragraph lll(d) of the will of the said Clifford John Munce was varied to provide as follows:

To Invest and keep invested in accordance with paragraph 10 hereof the residue of my estate and, subject as hereinafter provided, during the lifetime of my wife to pay or apply the net income derived therefrom or from the remainder thereof to or for the benefit of such one or more exclusive of the other or others of my daughters Audrey Margaret Hickling and Elaine Marjorie Reynolds, or the survivor of them, and their issue as my Trustees may from time to time select with absolute discretion to my Trustees to decide from time to time how much, if any, of such income Is to be paid or applied for the benefit of any of the said beneficiaries provided that in each year all of the said income shall be applied in their discretion to the benefit of or paid to the said beneficiaries or some one or more of them and provided further that in default of any such selection by my Trustees the net income shall be paid to my wife with power to my Trustees at any time and from time to time during such time to pay or to use for the benefit of my wife or my said daughters such amount or amounts out of the capital of such residue as in their uncontrolled discretion my Trustees may deem advisable.

By instrument dated October 26, 1967 the executrices of the estate of Clifford John Munce in their capacity of executrices in compliance with the terms of the trust determined to pay the net income of the residue of the estate for 1967 in equal shares to Audrey M Hickling and. Elaine M Reynolds.

The executrices of the estate of Clifford John Munce on October 26, 1967 were Audrey M Hickling, Elaine Reynolds and the deceased Myrtle Emeline McPherson.

The net income from the estate of Clifford John Munce in 1967 totalled $30,209.03 of which Audrey M Hickling received $15,104.52 and Elaine M Reynolds received $15,104.51.

In assessing the estate for estate tax purposes, the Minister of National Revenue included the said payments totalling $30,209.03 in the property of the estate as being gifts inter vivos to the deceased’s daughters in 1967.

Another adjustment to the reported net aggregate value of the estate of Mrs McPherson pertained to some gifts made by the deceased to her aforementioned daughters. Here follows a list of gifts made to the said daughters showing at the same time the taxable income of the deceased in the relevant years (the gifts shown in the aggregate amounts):

In assessing the estate for estate tax purposes the Minister of National Revenue has, pursuant to paragraph 3(1)(c) of the Estate Tax Act, included in the estate the gifts shown above as being made in the years 1965, 1966 and 1967 and has allowed a deduction of $4,000 under paragraph 7(1 )(e) of the Estate Tax Act.

Mrs Audrey M Hickling testified that her mother, who had a substantial income, decided to transfer the income from the C John Munce estate to her two daughters; that she herself, her sister, Mrs Elaine M Reynolds, and her mother, were shareholders of a personal investment company by the name of Myrcliffe Securities Limited (hereinafter known as “Myrcliffe”); that her mother, besides receiving money from “Myrcliffe” and the estate of C John Munce, was receiving monthly her old age pension, a salary of $200 from “Myrcliffe” and an annuity of $100; that she and her sister were also receiving monthly a salary of $200 from “Myrcliffe” and an annuity of $100.

In addition to the gifts to her two daughters as enumerated above, her mother used to make other gifts of $100 to each of her four grandchildren, of $1,000 to her brother and of 10% of her income to charitable institutions.

Mr Forrester, a chartered accountant, who was an acquaintance of the deceased and an auditor for “Myrcliffe” from 1963 to 1967, testified that the Clifford John Munce estate was the major shareholder of “Myrcliffe”; that the late Clifford John Munce, during his life a successful industrialist, had owned a company in Seattle and that all his interests had been held in his personal corporation “Myrcliffe”; that Mrs McPherson used to deposit her income from the Munce estate into “Myrcliffe” at an interest of 3%; that in 1967 “Myrcliffe” was wound up, its assets distributed to the shareholders and Mrs McPherson’s share in “Myrcliffe” was reinvested in the two companies of her daughters.

It can be concluded from what has been said hereinbefore that this appeal deals with two problems:

(1) Did the instrument dated October 26, 1967, signed by the executrices of the estate of Clifford John Munce in evidence of their decision to distribute the income from the Munce estate between Audrey M Hickling and Elaine M Reynolds, constitute a disposition by the deceased Mrs McPherson within the meaning of paragraph 3(1 )(c) of the Estate Tax Act?

(2) Were the gifts made by Mrs McPherson in the years 1966 and 1967 as related hereinbefore in accordance with the provisions of paragraph 7(1 )(e) of the said Act?

On the first issue counsel for the appellant argued that because the power to dispose of under paragraph 3(1 )(c) of the Act was and had to be exercised by the deceased jointly with her two daughters, it could not be said that the deceased, Mrs McPherson, had exercised her right as she saw fit; that the distribution of the income from the Munce estate in the amount of $30,209.03 in 1967 was not the equivalent of an extinguishment or forgiveness of a debt and that consequently the Board should not rely on the provisions of paragraphs 3(2)(b) and 3(3)(b) of the Act; that before the order of approval by the Supreme Court of Ontario, mentioned above, Mrs McPherson had a right of expectancy with regard to the income from the estate but that the chance to realize this expectancy had been lost as an indirect result of the said order because after January 1967 three trustees had jointly to decide to whom the income would be distributed.

Counsel for the Minister on the other hand contended that Mrs McPherson had never lost her vested interest in the estate even though two more trustees were added pursuant to the order of the Supreme Court of Ontario, approving the arrangement; that according to a decision of the Ontario Court of Appeal in Gibbs v McMahon, (1965) the applicable law in a situation like this was formulated as follows: “Where there is more than one trustee and there is nothing said in the deed of will, the decision of the trustees must be unanimous.” Consequently, the deceased could have vetoed the distribution decision and thus have retained her right to the income from the Munce estate for 1967. By not doing so, her acting or rather her non-acting squarely qualified under paragraphs 3(3)(b) and 3(2)(b) of the Act.

I would first like to deal with this issue. There is a marked difference between the civil law of Quebec and the common law in respect of succession. Under the civil law “The lawful heirs when they inherit, are seized by law alone of the property, rights and actions of the deceased” . . . etc (Article 607 CC). However, under the common law this is not so. Here one observes an intermediate stage during which the inheritance or estate is legally but in a fiduciary way owned by an executor or a government appointed administrator. A transfer by such a trustee to the beneficiary is necessary before the latter becomes the owner of his share in the estate. Having this in mind I agree with the appellant that Mrs McPherson did not have title to anything which still belonged to her late husband’s estate at the time the arrangement was approved and even more so since the income really was an expectancy which might or might not have materialized because the income had not been earned yet. So I am left with the question whether the instrument dated October 26, 1967 constituted a disposition. It appears to me that if the trustees had designated an outsider, third party as beneficiary, it would have been easier for me to find that the trustees in applying their discretion had disposed of property belonging to the Munce estate, in accordance with the terms of the trust deed. However, in this case they pursued their own interest, ie of the two daughters with the cooperation of Mrs McPherson, which cooperation was a sine qua non. Since everyone obviously tried to serve her own interest it is hard to justify from an impartial point of view why Mrs McPherson could have been expected to act differently without alleging an intention to positively benefit her daughters at her own cost, because she could have received the entire income by not doing anything, by virtue of the terms of the trust deed. Through her cooperation she indeed extinguished a right contingent on the disagreement between the three executrices and what could have been more easily achieved than that.

I therefore feel that the Minister of National Revenue was right in adding the amount of $30,209.03 back to the aggregate net value of the estate.

As to the second issue, the Act clearly excludes in paragraph 7(1)(e) gifts inter vivos which were “part of the ordinary and normal expenditure” of the deceased and were “reasonable having regard to the amount of the donor’s income and the circumstances under which the gift was made”. From 1954 on the deceased made annually a Christmas gift to each of her two daughters. Being a wealthy woman and rather advanced in age it is understandable that an amount of $1,000 to $2,000 as a gift for each of her daughters was not unreasonable. Her income certainly justified it while one can understand that her own financial needs were very limited. Until 1966 the amounts thus donated passed the test of reasonableness but in 1966 the situation suddenly changes. The deceased’s income reaches its top. She enjoys a taxable income of not less than almost $62,000, that is almost twice as much as at the time her Christmas gifts were not more than $2,000 to each of her daughters. This time, growing older and needing less and less material things, she donates at Christmas $10,000 to each one of her daughters. A big amount for most people but “having regard to her income and the circumstances under which the gift was made”, not unreasonable. !n 1967 her income is less than half that of the year before and yet she increases the Christmas gifts, the aggregate of which almost equals the amount of her income. l agree this time with the Minister of National Revenue that these gifts could for that year no longer qualify under paragraph 7(1)(e) of the Act.

In conclusion I therefore find that for the reasons set out hereinbefore the appeal is allowed in part, ie that the gifts for the year 1966, of $10,000 to each of the two daughters, should be considered deductible from the aggregate net value of the estate and that the assessment in all other respects should be confirmed.

The assessment is hereby referred back to the Minister of National Revenue for reassessment accordingly.

Appeal allowed in part.