Minister of National Revenue v. Helene Lemieux-Fournier, [1971] CTC 592, 71 DTC 5325

Noël, J.:—The appeal is from a decision of the Tax Appeal Board, reported [1969] Tax A.B.C. 97, allowing in part an appeal by respondent against an assessment by the Minister under the Estate Tax Act, by which he levied a tax in the amount of $5,688.64 in respect of the estate of Mrs. Rose-Anna Tardif-Lemieux, the mother of the respondent, Mrs. Hélène Lemieux-Fournier.

Under the will of her father, who died in 1941, respondent recived a one-fourth usufruct in his property, and her mother three-fourths. The will also stated: ‘‘as to the bare ownership of said property, I give and bequeath it to be disposed of by my wife in her will, and in this connection I wish to recall my great love and affection for Hélène. In the event of my wife’s failing to do this, the said ownership shall revert to Hélène. ’ ’

It was because of this stipulation that the Minister decided that respondent’s mother was competent to dispose of the bare ownership of the property under Sections 3(1) (a), 3(2) (a) and 58(1) (i) of the Estate Tax Act. Accordingly, when respondent’s mother died in 1964, constituting respondent her residuary legatee and sole executrix, all the property was taxed as issuing from the mother’s estate. Respondent, on the other hand, contends that the property issuing from her father’s estate devolved to her from her father and not from her mother.

The Minister thus set the net value of respondent’s mother’s estate at $105,351.25, while respondent alleged that the maximum amount the notice of assessment should show as the net value was $21,480.83.

The appeal from this assessment to the Tax Appeal Board was allowed in part by Mr. Boisvert. In fact, this learned member of the Board held that since the father had not disposed of the bare ownership of his property in 1941, two-thirds of the property devolved on respondent and one-third on her mother, as heirs ab intestato of the father. He therefore deducted from the aggregate net value of the mother’s estate two-thirds of the value of the property from the father’s estate, and referred the matter back to the Minister for reconsideration and re-assessment.

In the present appeal the Minister challenges the decision of the Tax Appeal Board, alleging as follows:

(a) respondent’s mother, Rose-Anna Tardif-Lemieux, was, immediately prior to her death, competent to dispose of the property referred to in the testamentary provision of respondent’s father, Henri Lemieux ;

(b) she had an estate or interest or general power regarding the property covered by this provision which made her competent to dispose of it;

(c) she had the capacity or authorization enabling her to dispose of the property covered by this provision by will as she saw fit;

(d) the property covered by this provision passed to respondent on her mother’s death.

As we have seen, appellant bases his case on Sections 3(1), 3(1)(a), 3(2) (a) and 58(1) (i) of the Estate Tax Act, which read as follows:

3. (1) There shall be included in computing the aggregate net value passing on the death of a person the value of all such property, wherever situated, passing on the death of such person, including, without restricting the generality of the foregoing,

(a) all property of which the decreased was, immediately prior to his death, competent to dispose;

(2) For the purposes of this section,

(a) a person shall be deemed to have been competent to dispose of any property if he had such an estate or interest therein or such general power as would, if he were sui juris, have enabled him to dispose of that property;

58. (1) In this Act,

(i) “general power” includes any power or authority enabling the donee or other holder thereof to appoint, appropriate or dispose of property as he sees fit, whether exercisable by instrument inter vivos or by will, or both, but does not include any power exercisable in a fiduciary capacity under a disposition not made by him, or exercisable as a mortgagee;

Appellant contends that by the testamentary provision in question respondent’s father, Henri Lemieux, created a substitution as to the property covered by the said provision, and conferred on the institute, respondent’s mother Rose-Anna Tardif- Lemieux, a power or right of appointment, to be exercised by will, which contained no restriction or limitation as to the choice of substitute. Appellant submits that in computing the aggregate net value of the property passing on the death of Rose-Anna Tardif-Lemieux, the value of property covered by the provision had to be included, in accordance with the provisions of Section 3(1) (a) of the Estate Tax Act, since the deceased was immediately prior to her death competent to dispose of it within the meaning of Section 3(1) (a), and possessed an estate or interest or general power with respect to the property within the meaning of Section 3(2)(a). Further, according to appellant’s submission, she had, immediately prior to her death, the power or authority to dispose by will of the property covered by this provision as she saw fit, within the meaning of Section 58(1) (i) of the Estate Tax Act, and was, accordingly, competent to dispose of the said property within the meaning of Sections 3(1) (a) and 3(2) (a) of the Act. Finally, appellant submits that the property covered by the testamentary provision passed on the death of respondent’s mother within the meaning of the introductory part of Section 3(1) of the Estate Tax Act.

Respondent, on the other hand, submits that the notice of assessment issued on February 8, 1965 is illegal, arbitrary and groundless in fact and in law. She admits that her mother, Rose-Anna Tardif-Lemieux, made her the sole executrix and legatee of the only property which said testatrix possessed in her own right, but denies that respondent’s father sought in his will to create a substitution; she adds, however, that even if the will had created a substitution in respondent’s favour, the assessment issued and the amended notice of appeal would still be arbitrary and ill-founded. She denies appellant’s allegation to the effect that the value of the property covered by her father’s testamentary provision had to be included in computing the aggregate net value of the property passing on the death of her mother as ill-founded even if the father’s will had created a conditional substitution under which Rose-Anna Tardif-Lemieux was made the institute. She adds that if a conditional substitution had been created by the testator, her father, it would have been carried into effect retroactively to January 18, 1941.

Respondent alleges that she inherited directly from her father, Henri Lemieux, and none other, the property passed by Henri Lemieux, with the result that the value of the property passed in fact and in law by Rose-Anna Tardif-Lemieux was exempt from estate tax since it amounted to only $21,480.83. She claims that Sections 3(1) (a), 3(2) (a) and 58(1) (i) were not designed to cover either Henri Lemieux’s will or the property passed and devised by him. In particular she alleges that, in setting the aggregate taxable value of the estate in question, appellant unlawfully and without cause ignored the fact that Henri Lemieux bequeathed a one-fourth life interest in his estate to his daughter, the respondent, and that appellant should therefore have made allowance for the life expectancy of respondent, who was born on July 15, 1915, and deducted the present value of her life interest from the estate which he was arbitrarily and unlawfully seeking to tax. She contends that Rose-Anna Tardif-Lemieux disposed only of the property she inherited, as her will contained no reference to the will or estate of her husband, Henri Lemieux ; and that Henri Lemieux’s estate is governed only by his own will, that the resolutory condition imposed by him took place in fact and in law as of January 18, 1941 and that it actually took effect on his death. She adds that Rose-Anna Tardif-Lemieux never had the personal or fiduciary vesting of the capital assets of Henri Lemieux or the power to dispose of them, nor did she have any power of appropriation or disposition over her husband’s property. According to respondent’s submission, Rose- Anna Tardif-Lemieux had possession of her husband’s property only in her capacity as executrix.

At the hearing of the appeal respondent’s counsel contended that the Minister had erred in fact and in law when he added the value of the property comprising the father’s estate to that included in the estate of Rose-Anna Tardif-Lemieux, on the grounds that the father’s testamentary disposition gave no authority for such action. He submitted that even supposing Henri Lemieux’s testamentary provision included a power of disposition, or a bequest with the power of appointment, the said provision does not bring the property owned and passed by Lemieux within the scope of the federal statute. He pointed out that the provision in question places a conditional onus or obligation on the wife, Rose-Anna Tardif-Lemieux, to dispose of the bare ownership of the testator’s property in her will, and if she fails to do so this property is to go to his daughter Hélène. Respondent in fact regards this as a responsibility or obligation subject to a condition which is both suspensive and resolutory. As the mother did not dispose of the property by will, the resolutory provision applies and bare ownership vests in the daughter ; this goes back, according to respondent, to the date of her father’s death.

The learned counsel for the respondent further submits that since Henri Lemieux did not bequeath his property to his wife in his will, this property did not vest in her; in his view, this was a condition precedent to her being able to dispose of it. If the full vesting of the father’s property had been in the mother, she could have disposed of it; but in the present case, he submits, the power was ineffective, illusory and inoperative. Hence she did not have the right to dispose of the father’s property. Counsel for the respondent cited as his authority a passage from Halsbury’s Laws of England, 3rd. ed., vol. 30, page 215, No. 380:

. . . The creation of a power over property does not in any way vest the property in the donee, though the exercise of the power may do so; and it is often difficult to say whether the intention was to give property or only a power over property.

In the view of counsel for the respondent the mother would have required a general power of disposition; for example, the father would have had to tell her that she could dispose of the property without restriction or limitation, and this he did not do. Furthermore, since the mother did not dispose of the property in her will, she did not comply with this provision, and it therefore remained a dead letter. Finally, he adds that if this provision was to be regarded as a power enabling the donee, or other owner of property, to distribute, appropriate or dispose of it, this would mean that Henri Lemieux directed his wife to dispose of another person’s property, which is expressly forbidden by Article 756 of the Civil Code.* [1] Accordingly, in his view, the said provision is null and void.

The provision stipulates, however, that if the mother did not dispose of the father’s property by will, respondent would receive the bare ownership of this property, and he concludes that for all practical purposes Henri Lemieux’s property, at his wife’s death, devolved on the respondent by reason of her father’s will.

According to respondent, the mother thus never had title to the property left by Henri Lemieux, as she was given at most a limited and qualified power to dispose of it. In fact, she was given only three-fourths of the life interest, one-fourth going to respondent. She was not entitled to appropriate this property to her own use, and was only authorized to dispose of it by will, and in the event she did so, was required, as her husband recommended, to bear in mind his great love and affection for Hélène.

Respondent concludes that her mother consequently never had the power to dispose of the property as she ‘‘saw fit,’’ which is the requirement of Section 58(1) (i). She did not have free title to the property, nor did she have it as institute. The most that can be said, in her counsel’s opinion, is that the mother fell within the exception provided in Section 58(1) (i) of the Estate Tax Act, and that the only power exercised by her was in her capacity as trustee.

Counsel for the appellant, on the other hand, submits that respondent’s father created by the testamentary provision a genuine fiduciary substitution, and conferred on his wife the power of disposing of the property as well as the power of appointment. He contends that this right to dispose of the property by will, with the power of appointment, made her competent to dispose of the property under Sections 3(1) (a) and 3(2)(a) within the meaning cf Section 58(1) (i) of the Estate Tax Act, and thus, even if there was no substitution, the mother would, by the very terms of this provision, have an unlimited power to dispose of the property, which would then be deemed to form part of the mothers’ estate. On the other hand, he said, if this were a simple bequest of property to the mother with a one-fourth life interest to his daughter, the value of the property should nevertheless be included under Section 2 of the Act, since she would then have full title to it.

In the first place, I cannot accept the decision of the Tax Appeal Board to the effect that title has belonged, since the father’s death, one-third to the mother and two-thirds to the respondent, as heirs ab intestato of Henri Lemieux, under Article 712 of the Civil Code.* [2] Unquestionably a claim cannot be made under both the testamentary succession and intestate succession. The principle that an individual cannot be both legatee and heir (ab intestato) of the deceased admits of no exception, and applies to the universal as well as to the particular legatee.

It appears to me, on considering the provision in question, that Henri Lemieux sought to confer a benefit on his wife during her lifetime, as well as on his daughter Hélène, and also to give his wife the power of designating who would benefit from his property after her death. Further, the terms used indicate that we are dealing either with a usufruct or with a fiduciary substitution, and we must consider which of the two alternatives better fulfils the apparent intent of the testator. If we adopt the alternative of a usufruct, the question arises as to who was the owner during the 23 years which elapsed between the father’s death in 1941 and the mother’s in 1964, since the title to property does not remain in abeyance. This situation does not give rise to any very serious problem, however, since there were executors with administrative power who could very well attend to the property in question.

However, if a usufruct was created, the mother would be both usufructuary and owner, which is impossible. On the other hand, the daughter could not be the owner, since the provision stipulates that title might revert to her, but only on her mother’s death, and only if the mother decided not to dispose of it otherwise.

In interpreting a provision like the one in question, and before accepting a solution which would lead us to find either a usufruct, which, as we have seen, involves inconsistencies, or a disposition which does not settle the problem of title to the property, or vesting, and leads to intestate succession, or one which could entail unlawful delegation to his wife of the husband’s testamentary power, I feel we must consider whether, in spite of the language employed, it is possible to discover a meaningful disposition in this provision. Approached in this way, I feel that a valid disposition may be found. Further, we must not be misled by words. It is true that the testator used the word ‘‘usufruct’’, but the legislator himself warns us in Article 928 of the Civil Code* [3] that the right of the institute is often designated by the term usufruct. In short, it is more relevant to consider what the testator had in mind when he included this provision in his will. In my opinion the three essential elements of a substitution are to be found here, namely :

(a) two gifts (one to his wife and the other to his daughter, if the mother appoints her or does not make a disposition in favour of some other person whom she may appoint), (b) a successive order (two categories of individuals who inherit the property. belonging to the estate in succession), and (c) a time factor (one gift to take effect on the death of the father and the other on the death of the mother), which Roman law called the tractus temporis.

Finding a substitution in this provision does not violate any of these elements; and the will, by determining who shall receive ownership of the property after death has occurred, settles the question of title. In fact, it simply gives his wife some advice, should she wish to dispose of the property by will, and in these circumstances this constitutes the first substitution. It then states that if she does not dispose of it by will, the property is to go to Hélene; this constitutes another substitution in which the substitute is Hélène Fournier.

Unquestionably, we have here all the elements of a substitution, as set out in M.N.R. v. E. H. Smith, [1960] 8.C.R. 478 at 482; [1960] C.T.C. 97 at 104, and there is no further difficulty in reconciling all these elements. Under Article 944 of the Civil Code,* [4] the mother, as institute, is owner of the property, since the article states that the institute holds the property as proprietor. There is also the obligation—another element of substitution—to ‘‘deliver over’’ the property, and it seems to me that this obligation is implicit, even if the father, in his will, gives his wife the power to dispose of it.

Furthermore, the power that the will confers upon the wife to dispose of the property and, consequently, to select or appoint the beneficiaries, is a right which is ordinarily associated with the rights of an institute, and is not, it seems to me, a right ordinarily attached to the rights of a usufructuary. The power of appointment, in fact, is part of the structure of a substitution, rather than of a usufructuary.

With an institution of this kind it is not necessary to consider further who owns the property or on whom it was conferred. In fact, before the substitution takes effect the institute is its owner; when it takes effect, the substitute is deemed to receive the property from the donor and not from the institute. In this connection, however, counsel for the respondent claims that the conditional substitution was fulfilled and that, by the interposition of the resolutory provision, respondent receives the property from her father retroactive to January 18, 1941. Relying on the decision in Montreal Trust Company et al. (R. N. Hickson Estate) v. M.N.R., [1964] S.C.R. 647; [1964] C.T.C. 367, counsel for the respondent contends that the latter received the property, not because of power given to her mother, but because her father had appointed her as substitute should her mother fail to make a contrary disposition.

It is true that the facts of the instant case closely resemble those in the above-mentioned one; there is, however, an important difference. In the Montreal Trust case (supra) Lady Hickson, the donor, foresaw the possibility that her son might die without issue and, accordingly, appointed his legal or testamentary heirs as substitutes. As Cartwright, J. states at page 652 [371], the effect of this provision was to remove from the institute any capacity to dispose of the money, as the donor had designated and limited the substitutes who were to receive it; thus, the money could not form part of the property making up the institute’s estate.

It must, indeed, be understood that when Lady Hickson appointed her son’s legal or testamentary heirs as substitutes, she left no doubt as to the class of heirs she had in mind. In fact, a substitution of property in favour of the heirs of an institute who leaves a will takes effect at his death in favour of his testamentary heir. By definition, the heir is the person who receives, either by operation of law or by human will, the property and the rights and obligations which may be passed by a deceased person; and in a testamentary succession this is the testator’s universal legatee. It follows that when a substitution is in favour of the institute’s testamentary heir, the substitute is In every case the universal legatee.

In the above-mentioned case, if Lady Hickson’s will had stated that her son, if he died without issue, would have the right or power to appoint the person or persons whom he might name to receive the property, he would have been able to appoint anyone to receive the property, and at the same time bequeath his own property to his wife. Because of the actual terms of Lady Hickson’s will, he could not do this. Indeed, if he designated a third person to receive his mother’s property, he would also have had to appoint the same person his universal legatee, failing which the disposition would be null and void. Once again, the heir is the person tc whom the law, or a will, passes the rights and obligations of a deceased person (cf. the Civil Code, Articles 596 and 597). In a testamentary succession, the testator’s heir is not a particular legatee (who receives the sum of $100 or a piece of furniture, for example), but the person to whom his rights and obligations pass (ef. Civil Code, Articles 735, 738, 873 and 880). In Allan v. Evans (1900), 30 8.C.R. 416, we find an interesting discussion of a testator’s universal legatee. It can thus be seen that Lady Hickson’s son was limited as to the power of appointing a substitute, or substitutes, to the property of his mother, and it was correctly held in that case that he could not dispose freely of the property. Moreover, as the Court concluded in the said case that there was a genuine substitution, and in such circumstances the substitutes receive the property from the donor and not the institute, it correctly came to the conclusion that the property did not form part of the son’s property, and accordingly could not be subject to succession duties.

It is worth pointing out here that there is in fact an important distinction between the holder of a general power of appoint- ment under the common law and the institute who has a general power of appointment. The person giving such a power under the common law does not renounce ownership of the property, but gives the donee of the power the right to dispose of it on his behalf, and the exercise of this power is thus a disposition of the property; hence the person who has it is competent to dispose of it. In the case of the power of appointment allowed by the Civil Code, the originator of this right has already disposed of his title, and the person appointed does not do so. Indeed, there is no provision in the Civil Code enabling any person to dispose of another’s property. This difference sometimes creates difficulties when, for instance, dealing with a statute such as the Estate Tax Act. However, under Section 3(2) (a) of the Estate Tax Act, ‘‘a person shall be deemed to have been competent to dispose of any property if he had such an estate or interest therein or such general power as would, if he were sui juris, have enabled him to dispose of that property”. In effect, it is by means of this legal fiction that it is possible to include within the framework of the federal statute property which cannot be disposed of by the holder under the Civil Code.

However, such is not the case here. There is in fact no limit to the mother’s power of appointment and disposal conferred on her by the father in his will. She is, indeed, permitted to dispose of the property by will, which is not the same thing as requiring her to appoint her legal or testamentary heirs as substitutes. In the present case, as a matter of fact, the mother could, immediately prior to her death, have appointed a third person as substitute and her daughter Hélène as her residuary legatee. The power of appointment here conferred by the testator on his wife, as dealt with in Sections 3(2) (a) and 58(1) (i) of the statute, in my opinion constitutes a general power of disposition within the meaning of the said statute.

This power is regarded as general if no limit is placed on the person exercising it. Even though the person holding the power can only dispose of the property by will, as in the case here, it is still general. Cf. James on Canadian Estate Tax, at page 121:

A donor, in creating a power, may state that the power may be exercised by will or by deed inter vivos, but the exercise of a power by will is none the less general with that limitation, for although the donee is unable to bring the property into his own possession during his lifetime he has complete power to dispose of it upon his death. In Prov. Sec.-Treas. of N.B. v. Schoefield, a testator devised property to his sister for life and after her death to such person or persons as she should by will appoint. It was held that the sister had a general power of appointment as the objects of the power derived their benefit from the sister and not from the testator and, consequently, they were taxable in the sister’s estate.

As we have seen, there is in the instant case no limit imposed on the wife regarding the appointment of the substitute or substitutes; at most, there is just a simple recommendation to her in connection with their daughter, leaving the wife entirely free to dispose of the property to whomever she wishes.

This power of appointment being thus a general power as mentioned in Sections 3(2) (a) and 58(1) (i) of the Act, the wife is deemed to have been competent to dispose of her property for the purposes of Section 3(1) (a), and all the property she was competent to dispose of must be included in her estate.

Indeed, a person who has such a general power over property is not necessarily the owner of the property, but for the purposes of the Estate Tax Act the statute states that the property is deemed to be his property, and is included in his estate even if in a substitution it is supposed to have been received from the donor and not the institute (Civil Code, Article 962).* [5]

Consequently, it does not much matter whether there was a substitution in the instant case or not, as the wording seems to me to be clear, and gives the mother an unqualified right to dispose of a property, a right which, it is true, she did not exercise, but which she nevertheless could have exercised, and which has the effect of bringing the property within the framework of the Estate Tax Act. In The Royal Trust Company et al. (A. H. Wilson Estate) v. M.N.R., [1965] Ex. C.R. 414; [1966] C.T.C. 662, Dumoulin, J. held, in a situation closely resembling the present case, that there was a general power of disposition, although he stated that there was no substitution in that case. This decision was, moreover, affirmed by the Supreme Court ([1968] S.C.R. 505; [1968] C.T.C. 224).

If, on the other hand, we had to conclude that there was no substitution here, and that we are dealing at most with a bequest of property to the mother with a one-fourth usufruct to the daughter, the value of the property should still be included in the estate, as she would in those circumstances have had full ownership.

The appeal is therefore allowed with costs, but the assessment will be referred back to the Minister for the present capital value of respondent’s life interest to be deducted from the value of the property comprising, or deemed to comprise, her mother’s estate.