Bowie T.C.J.:
1 The sole issue in these appeals is whether or not the Appellant, in the taxation years 1990, 1991, and 1992, was a testamentary trust, as that expression was defined in subsection 108(1) of the Income Tax Act (the Act) at the relevant time. There is no doubt that the estate was a testamentary trust prior to February 22, 1983. On that date Lawrence Greenberg made a payment to the estate, and it is the nature of that payment that is in dispute. The outcome of these appeals depends on whether or not that payment was ‘property ... contributed to the trust...’, as that expression is used in subparagraph 108(1)(i)(iii) of the Act, the relevant part of which reads as follows:
108(1)(i) “Testamentary trust” in a taxation year means a trust or estate that arose upon and in consequence of the death of an individual (including a trust referred to in subsection 70(6.1)), other than
(iii) a trust created before November 13, 1981 if
2 Louis Greenberg died in May 1974, leaving two sons, David and Lawrence. They were named executors of the will, and trustees of the estate. There was provision in the will for one of the brothers of the deceased to be an executor and trustee, but by the time probate was applied for only one of the brothers was alive, and he renounced his right to probate. Letters Probate were therefore granted to David and Lawrence on February 22, 1988. The will made provision for a number of specific bequests, which were paid. David and Lawrence were the residual beneficiaries of the estate, in equal shares. After payment of the specific bequests, and some other distributions of liquid assets, there remained in the estate one very valuable asset, an 18.75% share of a partnership known as “Greenberg Brothers A” (the partnership). There was evidence of other assets in the estate, but they are not material to the resolution of the issue giving rise to these appeals.
3 The partnership owned and operated a considerable number of residential rental properties in the city of Ottawa. In addition to the Louis Greenberg Estate, ten other members of the Greenberg family held interests, in varying proportions, in this partnership. The financial statements for the year ended April 30, 1983 show that the balance of the capital account of the partnership stood at $4,310,343, and that the net partnership income for the year was $964,638. The will of Louis Greenberg made the residual bequest to David and Lawrence conditional upon them entering into an agreement with the other co-owners of the partnership ‘...whereby the management and operation of the properties will remain subject to the same control as is presently exercised’.
4 Lawrence Greenberg was the only witness at the trial. He testified that he and his brother both drew income from the estate from time to time following the death of their father, but that he drew more than his brother. At some time in 1983, the exact date is not clear, Irving Greenberg, a brother of Louis and a partner in Greenberg Brothers A, told Lawrence and David that the capital account of the estate in the partnership was deficient to the extent of $230,000, and that they would have to make up this amount. It was decided between the brothers that because Lawrence had drawn this amount more from the estate than David had, he should provide the $230,000 required to make up the estate's capital shortfall in the partnership. Lawrence did not have the required cash immediately available, so he obtained a bank loan in the amount of $230,000, the proceeds of which he paid into the estate, and the estate in turn paid into the partnership. The Statement of Capital of the partnership for the year ended April 30, 1983 shows this contribution in the amount of $230,000 to the credit of the estate's capital account. It is the character of this payment by Lawrence to the estate that is in issue here.
5 Lawrence Greenberg tried in his evidence to characterize this payment as a loan to the estate. His evidence was both unclear and inconsistent on this point. At one point he said that he made the payment to the estate to equalize the estate capital as between him and his brother David, and that if he did not make up his excess drawings then he would receive less income in future than his brother. Elsewhere he characterized the payment as an investment in the estate, or a loan to the estate, although it is clear that there was no agreement to pay interest, nor any specific agreement as to terms of repayment of the principal. No books of account or financial statements for the estate were introduced, and when I commented on the absence of any such records I was advised by counsel for the Appellant that his instructions were that none existed. It seems remarkable to me that this estate has been in existence since 1974, and that the will has been admitted to probate for almost nine years, without there being any financial records that would indicate how the payment was treated by the estate when received.
6 Lawrence Greenberg, of course, as one of the two residual beneficiaries of his father's estate, has a personal interest in the outcome of these appeals. The only other person who could be expected to have personal knowledge of the basis upon which the payment was made to the estate is David Greenberg. He did not give evidence at the trial, nor was any explanation offered for his failure to do so. Absent any corroboration in the form of financial records of the estate or the testimony of the other trustee and beneficiary, I do not accept the suggestion in the evidence of Lawrence Greenberg that the payment made by him to the estate was not a gift, but was in the nature of a loan or other form of investment, whatever the latter might mean. If in fact it was a loan, then it is most improbable that Lawrence Greenberg would borrow the money at the bank and then lend it to the estate without there being some definite terms agreed upon between him and his brother as to payment of interest and repayment of principal by the estate. I find that the payment made by Lawrence to the estate was not a loan. It was not suggested by him that it was the repayment of an amount overpaid to him in error. I conclude therefore that it was a payment made by him gratuitously to increase the capital fund of the estate, and that the payment was made by him alone because he had in the past received distributions from the estate in a considerably greater amount than had his brother.
7 Counsel for the Appellant placed a great deal of reliance on a document, called a Negotiated Settlement Report, which was created by an appeals officer of Revenue Canada for the purpose of recording the basis upon which Revenue Canada had decided to allow Lawrence Greenberg's objections to the assessments of his personal income tax for the taxation years 1989 to 1992 inclusive. At issue was his claim to deduct the interest which he paid in those years on the bank loan which was used to make the payment to the estate, and which enabled the estate to make its payment to the partnership. The assessments had been made on the basis that the bank loan was for personal rather than business purposes. It is expressed in these words in part of the Report:
It was believed that Lawrence Greenberg had exceeded his share of drawings and had taken the demand loan to repay the funds overdrawn.
8 The objections to the assessments were allowed, and the Report says this about the reasons for the objections and the decision to allow them:
3. Reason for objection:
The client objected to the reassessment as he felt that the Minister erred in its interpretation of the facts.
It was determined that the client was in fact entitled to all funds drawn from the trust during the period 1976 to 1983, and the payment of $230,000 in 1983 was in fact an investment and not a repayment of funds overdrawn.
5. Basis for negotiated settlement:
All carrying charges relating to the $230,000 loan is (sic) being allowed, having determined that the client did not use the $230,000 to repay funds overdrawn, but rather made an additional investment for which he fully intends to earn and report a return on his investment.
9 I do not find this document to be of any assistance in characterizing the payment. It was counsel's position that it was evidence that Revenue Canada had accepted on an earlier occasion that the payment was not a repayment of capital, but rather an investment. However, it is in conflict with the position advanced by counsel in argument that this payment was a loan to the estate at no interest. Clearly if that were the case then the interest on the bank loan could not be deductible, as an interest-free loan cannot produce income. I have, of course, no knowledge of the specific facts alleged by Lawrence Greenberg on that occasion, nor of the basis on which the appeals officer concluded, as he apparently did, that the payment to the estate would produce a return of income. It was not suggested that this document gives rise to an estoppel, nor could that be so. I find that it has no evidentiary value in this appeal.
10 I turn now to the meaning of the expression “...property has been contributed to the trust...” which is found in subparagraph 108(1)(i)(iii) of the Act. The word “contributed” in its plain meaning signifies a voluntary payment made to increase the capital of the estate.[FN1: <p>Oxford English Dictionary, 2nd Ed., Vol. 3 pp. 848-9.</p>] The purpose of the provision is clearly to ensure that while certain beneficial treatment in relation to income tax is accorded to trust funds established on the death of a testator, the same benefit is not made available to inter vivos additions to those funds. In my view the repayment of an accidental overpayment to a beneficiary of a testamentary trust would not fall within the meaning of the expression “property ... contributed to the trust”. It is a good deal less certain that the same could be said of an interest-free loan made to a trust, but in view of my conclusion as to the nature of the payment in this case I need not decide that question. I find the payment in question to be a voluntary payment into the estate, made for no consideration, and for the purpose of increasing the capital of the estate so that it could, in turn, increase its capital investment in the partnership. It is exactly that kind of payment into a testamentary trust that this legislative provision is aimed at, and I conclude accordingly that the estate ceased to be a testamentary trust on February 22, 1983.
11 The appeals are dismissed, with costs.
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