Minister of National Revenue v. Smith, [1975] C.T.C. 335, 75 D.T.C. 6291, 75 D.T.C. 5242

Urie, J (concurred in by MacKay, DJ):

1 This is an appeal by the Minister of National Revenue from the judgment of the Trial Division delivered on April 26, 1974, allowing with costs an appeal by the respondents from an assessment by the Minister dated January 15, 1971, wherein tax was levied under the Estate Tax Act[FN1: <p>The<em>Estate Tax Act</em>involved in this case is the<em>Estate Tax Act</em>, SC 1958, c 29. References in these reasons to the<em>Estate Tax Act</em>are to this statute.</p>] in the sum of $112,419.58 and interest in the amount of $2,563.93 in respect of the Estate of Miriam Irene Smith, deceased. The judgment referred the matter back for reassessment in a manner not inconsistent with the reasons for judgment.

2 At the trial certain facts were agreed to the relevant portions of which are as follows:

AGREED STATEMENT OF FACTS

The Appellant and Respondent agree to admit the following facts:

1. Miriam Irene Smith (herein called “the Deceased”) died at the City of Toronto in the County of York (as it then was) on February 12th, 1969 and at the time of her death was domiciled in the Province of Ontario.

2. Probate of the Deceased's will was granted by the Surrogate Court of the County of York (as it then was) on the 3rd day of June, 1969 to James Desmond Smith (herein called “James”), Stephen George Smith (herein called “Stephen”), John Houston Milne and Canada Permanent Trust Company as executors thereof (herein collectively called “the Executors”).

3. At the time of her death, the Deceased owned beneficially 2,000 Class B shares of the par value of $1.00 each in the capital stock of Wenonah Investments Limited (herein called “Wenonah”), which shares were issued to the Deceased as fully paid and non-assessable.

4. Wenonah was incorporated as a private company under the Companies Act RSC 1952 c 53 by Letters Patent dated March 15th, 1961 with powers appropriate only to an investment holding company and with an authorized capital dividend into 10,000 Class A shares and 40,000 Class B shares all of the par value of $1.00 each. The provisions attaching to the Class A and Class B shares as set out in the Letters Patent of Wenonah confer a 5% preferential dividend on the Class A shares and limit the rights of the Class B shareholders on a dissolution or winding up of Wenonah to receive the par value of the Class B shares and no more. Clause (3) of the said provisions deals with the dividend rights of the Class B shares and reads as follows:

“(3) After payment of the said fixed cumulative preferential dividend on the Class “A” shares, the holders of the Class “B” shares shall be entitled to all the net earnings of the Company arising from income received by it declared as dividends, but no dividend shall be declared or paid in respect of the Class “B” shares of the Company until payment in full has been made of all dividends due upon the said Class “A” shares as above set forth and no dividend shall be declared or paid in respect of the Class “B” shares except out of the net earnings of the Company arising from income received by it and particularly no such dividend shall be paid out of profits or gains arising through the sale of investments or other capital assets of the Company.”

5. Supplementary Letters Patent dated October 17th, 1966 were issued to Wenonah by adding to the statement of the preferences priorities, rights, privileges, limitations and conditions attaching to the Class “A” and Class “B” shares of the capital of the Company the following provision:

“(7) Subject to confirmation by supplementary letters patent the directors of the Company may at any time or times or from time to time pass a by-law or by-laws whereby the terms hereof and of the foregoing paragraphs may be altered, amended or repealed or the application thereof suspended in any particular case and changes made in rights, privileges, restrictions and qualifications attaching to the said Class “B” shares, but no such by-law shall have any force or effect until after it has been sanctioned by the vote of the holders of at least two-thirds (2/3) of the said Class “B” shares then outstanding and of at least two-thirds (2/3) of the Class “A” shares then outstanding, at a meeting specially called for the purpose.”

6. The Deceased was the beneficial owner of the three Class B shares of Wenonah subscribed for by the applicants for incorporation of Wenonah and on March 15th, 1961, she subscribed for 1997 Class B shares for which she paid the allotment price of $1,997.00. While the Deceased since such date beneficially owned 2,000 Class B shares of Wenonah as hereinbefore stated, 1,998 thereof were registered in her name and 2 thereof were registered, from time to time, in the name of nominees who held such shares for the purpose of qualification as directors of Wenonah.

7. On March 15th, 1961, James and Maurice Hamilton Fyfe (herein called “Fyfe”) as trustee for the Stephen Smith Trust Number One each subscribed for 12 Class A shares of Wenonah for which they each paid the allotment price of $12.00. 12 Class A shares of Wenonah were on March 15, 1961 issued to each of James and Fyfe as Trustees for the Stephen Smith Trust Number One as fully paid and non-assessable.

8. By indenture dated April 17, 1961 F.yfe transferred to The Toronto General Trusts Corporation (of which the successors were respectively Canada Permanent Toronto General Trust Company, and Canada Permanent Trust Company), (which trust company or its successors is herein called “the Trustees”) the assets of the Stephen Smith Trust Number One and the burden of the said Trust.

9. No other shares of Wenonah were issued before the death of the Deceased. On October 30th, 1968 the Trustee transferred the 12 Class A shares of Wenonah held by it in the Stephen Smith Trust Number One to Stephen in accordance with the terms of the Trust.

10. On the date of the Deceased's death the issued shares of Wenonah were beneficially owned as follows:

The Deceased      2,000 Class B shares
                  James                12 Class A shares
                  Stephen              12 Class A shares

11. James and Fyfe subscribed for the Class A shares of Wenonah, as stated in paragraph 7 hereof, on the faith of verbal representations by the Deceased that she would do all things necessary to insure that upon her death Wenonah would, if it had not done so at an earlier date, distribute its assets rateably among its shareholders in accordance with their respective interests and surrender its charter.

12. By agreement dated February 5th, 1963, James, Fyfe, the Trustee and the Deceased (therein referred to as “Miriam”) confirmed the matters set out in paragraph 11 hereof which agreement contained the following provision:

“Miriam covenants and agrees with James and the Trustee that the Company shall, as soon as conveniently may be after her death, pay its debts, distribute its assets rateably amongst its shareholders according to their interests in such assets and surrender its charter, and that she, the said Miriam, will do all things necessary to implement this covenant, and without limiting the generality of the foregoing, will maintain in her Last Will and Testament a direction to her executors and testamentary trustees to do and perform all acts and things which may be necessary for this purpose.”

13. The said agreement dated February 5th, 1963 recited that the Deceased by her then Last Will and Testament dated the 10th of April, 1961 directed her trustees as follows:

“I DIRECT my Trustees as soon as conveniently may be after my death to exercise their powers as shareholders of Wenonah Investments Limited to pay the debts of the said Company, distribute its assets rateably amongst its shareholders and surrender its charter.”

14. The Deceased subsequently executed a new Will as of the 9th day of July, 1968, and a codicil thereto dated the 15th day of October, 1968, neither of which contained a direction in form similar to that set out in paragraph 13 hereof.

15. Immediately after the death of the Deceased the directors of Wenonah were the Deceased, James and John Houston Milne.

16. At the date of the Deceased's death, there were no dividends declared but unpaid.

17. The financial statements of Wenonah as at February 12th, 1969 prepared by Messrs. Price, Waterhouse & Co., Chartered Accountants disclosed that after paying the liabilities of Wenonah (including a debt of $367,858.10 owing to the deceased) there were available for distribution to the shareholders on the dissolution of Wenonah assets having a market value of $117,977.71 (which calculation is based on the valuation of a residential property owned by Wenonah at $102,000.00 being the appraised value of such property in 1967 when Wenonah acquired the said property), of which pursuant to the Letters Patent of Wenonah the estate of the Deceased as the beneficial owner of 2,000 Class B shares was entitled to receive $2,000.00 and the holders of the Class A shares were entitled to receive the balance of $115,977.71.

18. At the date hereof, no proceedings have been taken to wind up Wenonah.

19. The value of the 2,000 Class B shares as declared by the Executors in their ET 60 Return dated April 14th, 1969 was based on the par value thereof, $1.00 each which value aggregated $2,000.00.

20. By Notice of Assessment dated January 15th, 1971 the Minister of National Revenue (hereinafter called “the Minister”) increased the value of the 2,000 Class B shares from $2,000.00 to $100,000.00 and indicated the particulars of such valuation as follows:

“2,000 “B” shares Wenonah Investments Limited Value of rights or property comprised in the disposition or settlement contemplated by the Agreement of February 8, 1963, and included in the Aggregate Net Value of the property passing on the death of the deceased by virtue of Section 3(1)(d) or Section 3(1)(e) or alternatively by virtue of Section 3(1)(i) of the Act.”

21. On February 17th, 1971, the Executors filed a Notice of Objection to the assessment referred to in paragraph 20.

22. On November 29th, 1971, the Executors received a Notification by the Minister dated the 26th day of November, 1971, wherein the Minister confirmed the said Assessment and stated the ground upon which such confirmation was based as follows:

“The Honourable the Minister of National Revenue having duly considered the facts and reasons set forth in the Notice of Objection and matters thereto relating hereby confirms the said assessment as having been made in accordance with the provisions of the Act and in particular on the grounds that the value of 2,000 Class B shares of Wenonah Investments Limited were correctly determined having regard to the value of rights or property comprised in the disposition or settlement contemplated by the Agreement of February 5, 1963, by virtue of the provisions of paragraph (d) or paragraph (e) of subsection (1) of Section 3 of the Act or alternatively by virtue of the provisions of paragraph (i) of subsection (1) of Section 3 of the Act.”

3 In addition to the agreed facts, additional facts are set out in the appellant's memorandum of fact and law and are not disputed by the respondents:

6. On 15 March 1961, the deceased entered into an agreement wherein she transferred to Wenonah Investments Ltd., marketable securities having a fair market value of $213,471 for the sum of $213,471, which was to be:

• satisfied by payment to be made to the deceased ... on demand without interest before demand for payment is made but with interest at the rate of five per cent (5%) per annum in respect of any portion of the said indebtedness for which payment has been demanded from the date upon which payment is demanded until the date upon which payment is made.

8. On 24 March 1961, the deceased transferred further marketable securities having a value of $119,405 to Wenonah Investments Ltd., on the same terms and conditions set out in the Agreement of 15 March 1961, including the condition that the purchase price would not be payable until demanded, and that until a demand had been made, the unpaid purchase price would not carry interest.

12. Wenonah Investments Ltd., on 16 December 1966, acquired from the deceased further marketable securities having a value of $31,595, on the basis that:

• The purchase price for same to be shown as an open book debt without interest.

The open account was reduced on 2 F.ebruary 1967 by $34,000.

13. It was agreed on 25 April 1967 that:

• (i) the summer cottage and certain contents owned by the deceased were to be transferred to Wenonah Investments Ltd for $17,000; and

• (ii) the deceased's residence at 501 Russell Hill Road, without any contents was to be transferred for $85,000;

and that the:

• consideration for cottage $17,000 to be shown of an open account due [deceased] by the company and for the house $85,000 similarly to be shown as owed by the company ...

4 Following is an extract from the minutes of the board of directors of Wenonah Investments Limited held on June 19, 1967:

ON MOTION, duly seconded and carried, the following purchases from, and lease to, Miriam I Smith and consideration as hereinafter set forth were duly approved, namely:

1. Summer cottage and contents, save as specified in Lease, $17,000.

2. 501 Russell Hill Road $85,000, no contents.

3. Lease to Miriam I Smith as approved by the Company's solicitors.

4. Consideration for cottage $17,000 to be shown on an open account due Mrs Smith by the Company, and for the house $85,000 similarly to be shown as owed by the Company to Mrs Smith who declared her interest and refrained from voting.

5 It should be noted that the factual situation leading to the reassessment attacked is almost identical with that in the case of The Estate of Arthur Warwick Beament v Minister of National Revenue, [1970] S.C.R. 680, [1970] C.T.C. 193, 70 D.T.C. 6130. The issues to be decided in this case were those upon which the Supreme Court of Canada found it unnecessary to express an opinion in that appeal because those issues did not arise on the pleadings due to the fact that the Minister had not based his reassessment in that case on paragraph 3(1)(d), (e) or (i) of the Estate Tax Act (hereinafter called “the Act”) as he did in the reassessment which is the subject matter of this appeal. Those paragraphs read as follows:

3. (1) ...

• (d) property disposed of by the deceased under a disposition whenever made, of which actual and bona fide possession and enjoyment was not, at least three years prior to the death of the deceased,

  • (i) assumed by the person to whom the disposition was made or by a trustee or agent for that person, and

  • (ii) thereafter retained to the entire exclusion of the deceased and to the entire exclusion of any benefit to him, whether by contract or otherwise;

• (e) property comprised in a settlement whenever made, whether by deed or any other instrument not taking effect as a will, whereby any interest in or income from such property for life or any other period determinable by reference to death is reserved either expressly or by implication to the deceased has reserved to himself the right, by the exercise of any power, to restore to himself or to reclaim the absolute interest in such property;

• (i) property transferred to or acquired by a purchaser or transferee under the terms of an agreement made by the deceased at any time providing for the transfer or acquisition or such property on or after his death, to the extent that the value of such property exceeds the value of the consideration, if any, in money or money's worth paid to the deceased thereunder at any time prior to his death;

6 I agree with the view of the learned trial judge that all sales of securities and real property made by the deceased in this case to Wenonah Investments Limited (hereinafter called “Wenonah”) were bona fide within the meaning of subsection 4(1), which subsection reads as follows:

4. (1) Notwithstanding section 3, there shall not be included in computing the aggregate net value of the property passing on the death of a person the value of any such property acquired pursuant to a bona fide purchase made from the deceased for a consideration in money or money's worth paid or agreed to be paid to the deceased for his own use or benefit, unless such purchase was made otherwise than for full consideration in money or money's worth paid or agreed to be paid as hereinbefore described, in which case there shall be included in computing the aggregate net value of the property passing on the death of the deceased in respect of the property so acquired only the amount by which the value of the property so acquired computed as of the date of its acquisition exceeds the amount of the consideration actually so paid or agreed to be paid.

7 The conditions attaching to the class B shares of the company in its letters patent of incorporation entitled the holders of the class B shares to receive payment for their shares in full at par, but no more, on any dissolution or winding-up of the company or liquidation of its business and assets or on any division of its capital among its shareholders. They were entitled to no further participation in such distribution. Therefore, the learned trial judge was clearly right when he found that the only “property” which could be brought into the estate of the deceased arising by reason of her ownership of the class B shares was the sum of $2,000 being the par value of her share holdings. The only other question to be answered, therefore, is whether as alleged by the appellant, there was any other “property” which ought to have been included in the estate for tax purposes.

8 There are several reasons for supporting the learned trial judge's conclusion that the transactions between the deceased and Wenonah were bona fide within the meaning of subsection 4(1) of the Act.

9 1. Full market value was paid both for the securities and for the real property sold and transferred to Wenonah. While no immediate payments were made in reduction of the promissory notes given by the company on the sales or against the “open accounts” carried in the company's books in respect of other sales, all of which totalled well over $530,000, at the date of death of the deceased, the amount due her was declared to be $367,858.10, the same sum shown on Wenonah's financial statements as due her on February 12, 1969. It is thus clear that the company paid substantial sums in partial liquidation of its indebtedness prior to Mrs Smith's death. After her death the balance of the outstanding indebtedness was paid or is to be paid and, of course, the indebtedness was in any event an asset of the deceased's estate. Such payments in themselves provide cogent evidence of the bona fides of the transaction.

10 2. Following the purchases of the assets from time to time, Wenonah became their sole owner to the entire exclusion of the deceased in her personal capacity. The company, through its board of directors, had complete control over the assets following their acquisition. As one of the officers and directors of the company Mrs Smith participated in the decision making in respect of the portfolio created by their acquisition but she was only one of three engaged in this process.

11 3. As the learned trial judge found, the deceased could not, at any time after the sales were made and prior to her death, have caused any corporate action to be taken by Wenonah, such as issuing further class A shares, which could have resulted in any capital gains arising from trading in securities to have become her personal property either by way of dividend or by distribution on the winding up of the company. Neither could her executors and trustees have done so after her death.

12 4. The deceased during her lifetime by the exercise of her majority voting control could not have changed the preferences, priorities, rights, privileges, limitations and conditions attaching to either class of Wenonah shares without the concurrence of the holders of the other class. Supplementary letters patent issued on October 17, 1966 ensured that such would be the case by requiring that any by-law attempting to do so prior to confirmation by supplementary letters patent, required the sanction of a two-thirds vote of both class A and class B shareholders. The fact that these were obtained within three years of the death of the deceased is irrelevant in that nothing of this nature in fact happened prior thereto.

13 (See also Canada Corporations Act, 1952, c 53, section 48 as amended by section 20 of Statutes of Canada, 1964–65, c 52.)

14 The respondent argued that the bona fides of the transaction was destroyed, or at least was open to serious question, by reason of the following:

15 1. Wenonah, the owner of the assets, was controlled by the deceased by virtue of her ownership of 2,000 class B shares.

16 2. No interest was payable on the balance of the unpaid purchase price until demand for payment of the principal outstanding was made.

17 3. The deceased, the transferor of the assets, was entitled to the net income earned by the company, by the declaration of dividends, after payment of the preferential dividends on the class A shares, by virtue of the conditions attaching to the class B shares as set out in the letters patent.

18 4. The letters patent provided that the class B shares constituted a lien on the assets of the company to the extent of their par value in priority to any claim on such assets by the class A shareholders on a winding-up, dissolution, liquidation or division of the company's assets among its shareholders.

19 5. There was evidence that following the sale of both the Toronto residence and the cottage property the deceased, by virtue of leases, the details of which are not in evidence, but the bona fides of which were not challenged, retained possession until her death.

20 It was the appellant's first contention that the “bona fide purchase” referred to in subsection 4(1) is referable only to a purchase in a business and commercial matter, not one arising in the course of creating an “estate freeze” plan as it was acknowledged in evidence this was.

21 I can find nothing in the Act which gives the slightest support to such a view. To give the phrase such a narrow interpretation requires the Court to add words to the section which Parliament excluded therefrom. Appellant's counsel was unable to refer the Court to any Canadian cases to support his proposition although he did cite some English authorities in which, in the context of the statutes there under consideration, “bona fide purchases” was interpreted to mean commercial or business transactions. In my opinion these decisions do not have any application to this case or to the Estate Tax Act.

22 There are persuasive additional arguments for not adopting the appellant's position. In interpreting this section it must be noted that the words “bona fide” qualify the word “purchase”. Unless they are interpreted as indicating the kind of purchase to which the subsection applies, they become mere surplusage. Obviously such a result is as undesirable as reading into the section words that are not there. Whether a “purchase” is “bona fide” it seems to me, requires a determination of the purchaser's intentions as disclosed by its actions. Otherwise the word “purchase” would bear only its ordinary meaning and would not require the qualification provided by the words “bona fide”.

23 It is apparent that the learned trial judge considered the oral evidence adduced before him, the various agreements, the minutes of meetings of the directors and shareholders of the company and the letters patent and supplementary letters patent in coming to the conclusion that “the intent of these transactions was to ‘freeze’ for estate tax purposes the estate of the deceased”. He then found that all of the transactions were bona fide. I take it that this means that the transactions were entered into in good faith for the purpose of the company acquiring title to the assets sold to it to the complete exclusion of the transferor. Title to each of the assets was in fact transferred. However, since the transferor was the owner of the class B shares to which certain rights attached by virtue of the documents of incorporation, appellant's counsel contended that the bona fides of the purchase was destroyed. I do not share his opinion.

24 In my view the right to have the net earnings of the company declared as dividends, the limited right to participate in the distribution of assets on a winding-up, dissolution or other distribution, and the existence of the leases on the real estate back to the transferor have no effect on the bona fides of the purchase. None of them in any way abrogated or abridged any of the rights to the assets obtained by the purchasing company, or, to put it another way, derogated from the transferor's grant to the purchaser. They were merely valid encumbrances on the shares of Wenonah and binding on the holders thereof regardless of whether any purchases of property of the deceased had been made or not.

25 Moreover, the deceased's voting control of the company did not permit her to take any action in respect of the distribution of the assets of the company or capital gains made by it, because of the enactment of section 20 of the Statutes of Canada, 1964–65, c 52, amending the Canada Corporations Act. This enactment appears to have precluded the passage of a by-law changing the capital structure of a federal company including, it would seem, changes in the conditions attaching to shares, without the affirmative vote of at least two-thirds of the holders of each class of shares. As earlier noted the supplementary letters patent of the company confirmed the necessity of such a vote for this company.

26 Appellant counsel's other allegation that the lack of interest payable on the unpaid purchase price was another indication that the de ceased did not relinquish control of her assets in my opinion has no validity. Wenonah was a personal corporation under the Income Tax Act as it then stood. Mrs Smith thus was required during her lifetime to pay tax on its income. No purpose would therefore have been served in charging it interest on the unpaid loans which too would have been income in her hands, although probably deductible as an expense to the company. Even if this were not so, the failure to charge interest on the unpaid balance of a purchase price never has, at least of itself, cast doubt on the bona fides of a transaction.

27 On the basis of the above analysis, therefore, each of the purchases by Wenonah was bona fide notwithstanding the fact that they assisted the deceased in her estate planning.

28 The appellant argued, secondly, that because of the retention by the deceased of an interest in the income and principal of the assets sold to Wenonah, bona fide possession and enjoyment in those assets was not given to the company. That is, they were more than the mere encumbrances on the shares of Wenonah which I have above described. The transactions, therefore, he alleged were either dispositions within the meaning of paragraph 3(1)(d) or settlements within the meaning of paragraph 3(1)(e) of the Act. In my opinion, having found that Wenonah's purchases were bona fide within the meaning of subsection 4(1), neither paragraph 3(1)(d) or (e) can have any application. Further in my opinion, those paragraphs can only apply in the precise circumstances there envisaged. Thus if a purchase from a deceased meets the tests imposed by subsection 4(1), as Wenonah's purchases have done, the property included in the purchases cannot be included in calculating the aggregate net value of the deceased's estate for tax purposes.

29 Admittedly, what the taxpayer did was to indulge in estate planning to reduce the tax applying to her estate. It is trite law to say that every taxpayer is entitled to so manage his affairs as to minimize the incidence of tax payable. To apply to subsection 4(1) the strained interpretation suggested by the appellant in order to bring the transactions within the ambit of paragraph 3(1)(d) or (e) as dispositions or settlements covered thereby could, in my opinion, be permitted only if the words used were clear and unequivocal. As I have observed before there is nothing in subsection 4(1) confining the “bona fide purchase” to commercial or business transactions to the exclusion of transactions entered into for the purposes of estate planning. Purchases made for estate planning purposes can be just as bona fide as those made in commercial transactions. The trial judge having found on the facts, as he did, that the transactions were bona fide neither of the other sections can apply.

30 I am further of the opinion that paragraph 3(1)(i) can have no application in the case at bar. None of the agreements adduced in evidence transferred property on or after the death of the deceased within the meaning of that section. Moreover, all transfers were made for full consideration and all were made prior to the death of the de ceased. The conditions necessary for the application of that subsection are, therefore, not present here.

31 In my view of the case, it is unnecessary for me to deal in further depth with the appellant's submissions in respect to the application of subsection 3(1). Since there was no additional property which could be brought into the estate of the deceased, the learned trial judge was right in finding that the matter should be referred back to the appellant for reassessment in accordance with his reasons. The appeal should, therefore, be dismissed with costs.

Ryan, J:

32 The facts of this case are fully set out in the reasons for judgment of my brother Urie, J.

33 In considering this case, I was especially concerned over the question whether the “bona fide purchase made from the deceased for a consideration of money or money's worth paid or agreed to be paid to the deceased for his own use or benefit”, referred to in subsection 4(1) of the Estate Tax Act,[FN2: <p>The<em>Estate Tax Act</em>involved in this case is the<em>Estate Tax Act</em>, SC 1958, c 29. References in these reasons to the<em>Estate Tax Act</em>are to this statute.</p>] related to commercial transactions only and would not encompass a purchase serving as an element in an “estate freeze”. I agree with Mr Justice Urie that the meaning is not so limited, and that, in the circumstances of this case, subsection 4(1) is an answer to a claim for estate duty under either paragraph 3(1)(d) or (e) of the Act. I would merely add references to two cases, one in the House of Lords and the other in the English King's Bench Division, which I have found helpful on this point.

34 In re Baroness Bateman, [1925] 2 K.B. 429, was a case having to do with assessments for succession duty and estate duty. The estate duty point appears in this passage from the argument of counsel reported at page 432:

With regard to estate duty, s 3, sub-s 1, of the Finance Act, 1894, provides that “estate duty shall not be payable in respect of property passing on the death of the deceased by reason only of a bona fide purchase from the person under whose disposition the property passes ... where such purchase was made ... for full consideration in money or money's worth paid to the vendor or grantor for his own use or benefit.” ... If therefore full consideration was given for this reversion, estate duty is not payable. But if full consideration was not given for it, then s 3, sub-s 2, becomes applicable. That section provides that “where any such purchase was made ... for partial consideration in money or money's worth paid to the vendor or grantor for his own use or benefit ... the value of the consideration shall be allowed as a deduction from the value of the property for the purpose of estate duty.”

35 Speaking in relation to the transaction there in question, which was a sale by a mother to her son of certain furniture, she reserving a life interest, the purpose of the sale being to put her in funds to pay a debt, Rowlatt, J said at page 435:

The transaction here was induced of course by family considerations, but that does not conclude the matter. My attention has been drawn to observations in Lethbridge v. Attorney-General in the House of Lords, where it is pointed out that there might be a family arrangement co-existent with a purchase.

36 In Lethbridge v. Attorney-General, [1907] A.C. 19, a father who was life tenant and his son, the tenant in tail, had made an arrangement under which the estate was disentailed and resettled. The fee was mortgaged by the father and son to pay off the father's debts. Insurance policies that had earlier been taken out by the father on his own life were assigned to the son. The rents and profits of the estate were held in trust to pay the mortgage interest, the life insurance premiums, an annuity to the son, the residue to the father for life, with remainder to the son in fee. On the father's death the Crown claimed estate duty on the proceeds of the policies. Lord Loreburn said, at page 24:

The fact that the transaction was a family arrangement is not inconsistent with its being also a purchase for full consideration in money or money's worth. If I thought that the case fell within s 2, sub-s 1(d) (as I do not), I should still think that these policies were exempted from estate duty by virtue of s 3, sub-s 1, of the same Act, upon the ground that there had been a purchase for full value within the meaning of that section.

The appellant undoubtedly gave full value in money or money's worth for all the benefits he received. If Sir Wroth Acland Lethbridge and the appellant had been strangers to each other, or merely friends instead of father and son, it could not, I think, be contended that these policies were not purchased for “money or money's worth” within the meaning of the 3rd section of the Finance Act; but because filial affection or family pride, or a desire to relieve a father from embarrassment, may have induced the appellant to make this bargain and to pay an extravagant price for the benefits he received under it, the transaction, it is urged, is to be treated as a family arrangement and not a purchase at all.

I think that is to confound the motive which induces to a transaction with the transaction itself; and I utterly fail to see how a transaction which would be regarded as a purchase if it took place between strangers, and would therefore be outside the Act, is to be brought within the Act because the parties to it are members of the same family and the interests or honour of the family induced to or were promoted or protected by it.

37 It was also submitted that paragraph 3(1)(i) of the Estate Tax Act was applicable in this case and that accordingly there should be included in the computation of the aggregate net value of the property passing on the death of Mrs Smith the excess of the net value of the assets of Wenonah at the time of the death of Mrs Smith over the value of the consideration in money or money's worth paid to her under the contracts of purchase and sale prior to her death. I agree with Mr Justice Urie that the paragraph does not apply in this case.

38 Paragraph 3(1)(i) provides:

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

• (i) property transferred to or acquired by a purchaser or transferee under the terms of an agreement made by the deceased at any time providing for the transfer or acquisition of such property on or after his death, to the extent that the value of such property exceeds the value of the consideration, if any, in money or money's worth paid to the deceased thereunder at any time prior to his death;

39 It was argued that the securities of Mrs Smith and her real property, sold by her to Wenonah, were sold under an “agreement” which provided for “the transfer or acquisition of such property on or after” her death. The “agreement”, it was said, was a composite made up of the contracts of purchase and sale between Mrs Smith and Wenonah; the agreement dated February 5, 1963 between James, Fyfe, the trustee, and Mrs Smith; and the terms of the letters patent defining the rights and privileges of the class A and class B shareholders. I would find it artificial to tie together these separate documents so as to constitute an “agreement” for purposes of paragraph 3(1)(i). Even if there were such an agreement, it would not, in my view, be one providing for the transfer or acquisition, at Mrs Smith's death, of the securities, house and cottage sold by her to Wenonah. The property to be transferred or acquired under it would be the net assets of Wenonah which might or might not have included any of the assets sold by Mrs Smith to Wenonah. At any rate, it is reasonably clear that the agreement under which Wenonah acquired the securities, house and cottage was in each case the agreement of purchase and sale and nothing more.

40 It was also suggested in the alternative that, for purposes of paragraph 3(1)(i), the relevant agreement was the agreement of February 5, 1963, and the relevant property the chose in action created by the agreement, that is to say, the contractual right to have Wenonah wound up and its assets distributed on the death of Mrs Smith. The chose in action was not, however, property which was to be transferred or acquired on the contractor's death. Exercise of the right would no doubt cause the distribution of property in the form of assets of Wenonah, but that is another matter.

41 I would dismiss the appeal.