Supreme Court Judgments

Supreme Court of Canada

Minister of Revenue (Ontario) v. McCreath, [1977] 1 S.C.R. 2

Date: 1976-02-25

Minister of Revenue for the Province of Ontario (Plaintiff) Appellant;

and

James Scott McCreath, Michelle A. McCreath, Martin R. McCreath, Ralph Scott McCreath, Paul C. McCreath and Annie Franceschini (Defendants) Respondents.

1975: March 20, 21; 1976: February 25.

Present: Laskin C.J. and Martland, Judson, Spence and Dickson JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.

Taxation—Estate tax—Succession duties—Trusts—Property passing on death—Exemptions—Reservations of interest to settlor—Reservation of power to resettle—The Succession Duty Act, R.S.O. 1960, c. 386, ss. 1(p) (viii), 5(1) (g).

M died domiciled in Ontario and was survived by her husband and four young children. During her lifetime M established a trust the corpus of which at the date of her death had a value of $25,016,600. There was constituted only one trust fund, initially of a voting trust certificate for 99,986 common shares and thereafter such shares, securities or other assets as might be substituted. During the lifetime of M the trustee was required to pay or apply the whole net income of the trust fund to or for the benefit of M and her children or, in its discretion, to any one or more of the group. On the death of M the trustee was to dispose of the fund among M’s issue or such of them as she might by will direct and subject to such terms and conditions as she might by will direct. In default of such direction distribution was to be among her issue in equal shares per stirpes. M died without exercising her power of direction. The issues raised on appeal were, first, whether M reserved to herself an interest in the corpus of the trust so as to make it “property passing” on her death [s. 1 (p) (viii)] and, second, whether actual and bona fide possession and enjoyment of the property was assured and retained to the entire exclusion of M by her issue so as to exempt the property from tax [s. 5(1) (g)].

Held: The appeal should be allowed.

Per Laskin C.J. and Martland, Spence and Dickson JJ.: The property passing under the settlement was the

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equitable interest in the voting trust certificate representing the 99,986 common shares which were transferred by M to the trustee. “Interest” as used in s. 1(p) (viii) of the Act is to be given a meaning wider than that which it would have in a technical conveyancing context. Receipt of income from a trust fund pursuant to the terms of the trust would suggest such an interest, in the sense of a pecuniary stake, in the fund. The trial judge rightly held that s. 1(p) (viii) applied. The property was not however exempt under s. 5(1) (g). Section 5(1) (g) and s. 1(p) (viii) must be read in light of the policy of the Act viz. to tax all inter vivos gifts from which the donor failed to detach himself or herself; for these sections to work harmoniously within the total context of the Act, s. 5(1) (g) must be restricted to situations where the donor has totally excluded himself or herself from the subject property. Thus where the donor fails to divest total control or income benefits s. 5(1) (g) is inapplicable to exempt from tax, and the corpus and income cannot be severed for purposes of this section.

Per Judson J.: The reservation by M of a testamentary power of appointment of the corpus among her children brings the case within s. 1(p) (viii) as a reservation of a power to resettle. Moreover M, as a beneficiary under a discretionary trust, had clearly not entirely excluded herself from any benefit, as the wording of s. 5(1) (g) required.

[Attorney General v. Heywood (1887), 19 Q.B.D. 326; Attorney General v. Farrell, [1931] 1 K.B. 81; Gartside v. Inland Revenue Commissioners, [1968] A.C. 553; Re Weir’s Settlement, [1970] 1 All E.R. 297; Sainsbury v. Inland Revenue Commissioners, [1969] 3 All E.R. 919; In re Cochrane, [1905] 2 I.R. 626, aff’d. [1906] 2 I.R. 200; Commissioner for Stamp Duties of New South Wales v. Perpetual Trustee Co., [1943] A.C. 425; St.  Aubyn v. Attorney General, [1952] A.C. 15; Oakes v. Commissioner of Stamp Duties of New South Wales, [1954] A.C. 57; Minister of National Revenue v. National Trust Co., [1949] S.C.R. 127; Gorkin v. Minister of National Revenue, [1962] S.C.R. 363; Commissioner of Internal Revenue v. Estate of Church (1949), 335 U.S. 632 referred to.]

APPEAL from a judgment of the Court of Appeal for Ontario[1] dismissing an appeal from a judgment of Fraser J. allowing an appeal from

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statements of succession duty under The Succession Duty Act of Ontario. Appeal allowed.

Blemus Wright, and Graham Stoodley, for the appellant.

J.J. Robinette, Q.C., for the respondents.

E.M. Henry, Q.C., for Michelle McCreath.

The judgment of Laskin C.J. and Martland, Spence and Dickson JJ. was delivered by

DICKSON J.—This case mirrors the ongoing struggle between taxing authorities, casting an ever wider net to garner succession duties or estate taxes, and taxpayers adopting ever more sophisticated means of escaping that net. One cannot reproach the taxpayer or his professional advisors for so arranging affairs as legitimately to minimize tax impact but there are times when the schemes devised introduce rather fine legal distinctions and the line determining tax liability becomes difficult to draw. The complexity is enhanced by the importation of concepts from traditional conveyancing law and the injection of fine subtleties from the law of trusts. The casuistry reaches its apogee in the case of inter vivos transactions in which the donor wants to retain effective, but unobtrusive, lifetime control of the property gifted and yet create the impression, through the language of the gifting instrument, that he or she has disposed wholly and irrevocably of the subject-matter of the gift.

Mrs. Myrtle Louise McCreath died domiciled in Ontario on May 21, 1968, survived by her husband and four young children. During her lifetime Mrs. McCreath established a trust (the 1948 Trust), the corpus of which, at the date of her death, had a value of $25,016,600. The indenture by which the Trust was created, so far as pertinent to the present appeal, reads:

THIS INDENTURE made this 29th day of November, 1948.

BETWEEN:

MYRTLE LOUISE McCREATH, of the City of Toronto, in the County of York, hereinafter called the ‘Settlor’

OF THE ONE PART

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—and—

NATIONAL TRUST COMPANY, LIMITED hereinafter called the ‘Trustee’

OF THE OTHER PART

WHEREAS the Settlor will be entitled to a voting trust certificate representing 99,986 common shares in the capital stock of Mount Royal Paving & Supplies Limited;

AND WHEREAS the Settlor desires to establish a trust respecting the said voting trust certificate as hereinafter set forth;

AND WHEREAS the foregoing recitals are made by the Settlor and not by the Trustee;

NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the sum of one dollar by each of the parties hereto to the other paid, the receipt whereof by each of the parties is hereby acknowledged, it is agreed by and between the parties hereto as follows:

1. The Settlor shall forthwith after the receipt thereof deliver to the Trustee a voting trust certificate representing 99,986 common shares in the capital stock of Mount Royal Paving & Supplies Limited and the Trustee shall receive such voting trust certificate to constitute a trust fund to be held, applied and dealt with by the Trustee upon the following trusts:

(a) During the lifetime of the Settlor to pay or apply the whole net income of the trust fund in each year to or for the benefit of the Settlor, and her issue from time to time alive or some one or more of the Settlor and her said issue as the Trustee may from time to time in its absolute discretion determine and if paid or applied to or for the benefit of more than one of them to pay or apply the same in such proportions as the Trustee may from time to time in its absolute discretion determine.

(b) On the death of the Settlor, if she shall die leaving issue her surviving, to hold the trust fund in trust for the issue of the Settlor or such one or more of them and in such proportions and subject to such terms and conditions as the Settlor may by will direct and in default of such direction or insofar as the same may be void or shall not extend or take effect to pay or transfer the trust fund to the issue of the Settlor who shall be living at her death and if more than one in equal shares per stirpes.

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(Paragraphs 1(c) and 1(d) relate to the eventuality of the Settlor dying without children.)

2. If any person should become entitled to any share in the capital of the trust fund before attaining the age of twenty-one years the share of such person shall be held and kept invested by the Trustee and the income and capital or so much thereof as the Trustee in its absolute discretion considers necessary or advisable shall be used for the benefit of such person until she or he attains the age of twenty-one years.

3. The Trustee may make any payments for any person under the age of twenty‑one years to the parent or guardian of any such person whose receipt shall be a sufficient discharge to the Trustee.

4. The Trustee and any successor trustee shall be entitled at any time to resign on thirty days’ notice in writing to the Settlor or upon such shorter notice as the Settlor may accept as sufficient. In the event of any such resignation, the Settlor shall by instrument in writing forthwith appoint another trustee to fill the vacancy resulting. At any time or from time to time the Settlor during her lifetime may remove the Trustee and appoint another trustee in its place. Such removal and appointment may be made by instrument in writing signed by the Settlor. The trustee hereunder shall at all times be a trust company having a paid up capital and surplus of not less than $5,000,000 and with an office in the City of Toronto.

5. The said voting trust certificate and all other securities or sums of money constituting the trust fund shall be registered or deposited in the name of the Trustee.

6. The Trustee shall be entitled to be reimbursed for all expenses incurred by it hereunder and shall be entitled to reasonable remuneration for its services under this agreement and as may from time to time be agreed upon with the Trustee by the Settlor. The Settlor agrees to pay such remuneration. Provided that after the death of the Settlor the remuneration payable to the Trustee shall be such remuneration as may be allowed by a Judge of the Surrogate Court of the County of York and shall be payable out of the income from the trust fund received by the Trustee.

7. Notwithstanding anything in this agreement contained, if under the provisions of the voting trust agreement the voting trust certificate constituting the trust fund becomes exchangeable for any shares, securities or other assets of any nature whatsoever, the Trustee shall be entitled to surrender the said voting trust certificate and to receive in exchange therefor such shares, securities or other assets which

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shall thereupon constitute the trust fund and may retain the same for such length of time as the Trustee in its absolute discretion shall decide, with power to the Trustee to sell such shares, securities or other assets and to reinvest the proceeds thereof in such investment as it considers advisable without being limited to investments authorized by law for trustees.

By the terms of the indenture there was only one trust fund constituted, comprising initially a voting trust certificate representing 99,986 common shares in the capital stock of Mount Royal Paving & Supplies Limited and thereafter such shares, securities or other assets as might be substituted pursuant to para. 7. During the lifetime of Mrs. McCreath the primary trust to which the trustee was subject was one requiring it to pay or apply the whole net income of the trust fund to or for the benefit of Mrs. McCreath and her children or, in its discretion, to any one or more of the group. (At the time of the creation of the trust Mrs. McCreath had only one child, six months of age.) By the terms of the 1948 Trust the trustee could, theoretically, in the exercise of its discretion, pay all the income to Mrs. McCreath or exclude her entirely. The record discloses that Mrs. McCreath received income from the 1948 Trust in 1966, 1967 and 1968 but it is silent as to distribution of income in prior years.

On the death of Mrs. McCreath the primary duty of the trustee was to dispose of the trust fund among the issue of Mrs. McCreath or such of them as she might by will direct and subject to such terms and conditions as she might by will direct. In default of such direction, the capital of the fund was to be distributed among her issue in equal shares per stirpes. Although Mrs. McCreath retained the power by will to choose which of her issue should be the object of her bounty, she died without exercising that power.

Thus there were many “strings” attached to the property of which Mrs. McCreath purported to dispose.

The appeal arises under The Succession Duty Act of Ontario R.S.O. 1960, c. 386, and the crucial questions to be answered are: (i) Did Mrs.

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McCreath, either expressly or by implication, reserve to herself an interest in the property passing under the trust so as to make it “property passing on the death of the deceased” as defined in s. 1(p) (viii) of the Act? (ii) Was actual and bona fide possession and enjoyment of the property assumed by the issue of Mrs. McCreath and retained to the entire exclusion of Mrs. McCreath so as to exempt the property from tax by the operation of s. 5(1) (g)? I would answer the first question in the affirmative, the second question in the negative and allow the appeal of the Minister.

In coming to these conclusions it is necessary to turn first to ss. 6 and 12 of The Succession Duty Act, for they establish the taxing scheme. Section 6 shows the incidence of taxation:

6. Subject to sections 4 and 5, on the death of any person whether he dies domiciled in Ontario or elsewhere,

(a) where any property situate in Ontario passes on his death, duty shall be levied on such property in accordance with the dutiable value thereof;

(b) where there is any transmission, duty shall be levied on the person to whom there is such transmission, with respect to such transmission, in accordance with the dutiable value thereof;

(c) where any disposition, other than of realty situate outside Ontario, is made in Ontario on or after the 1st day of July, 1892, to any person who is resident in Ontario at the date of death of the deceased, duty shall be levied on such person, with respect to such disposition, in accordance with the dutiable value thereof;

Section 12 is the section imposing liability:

12.—(1) Every person resident in Ontario at the date of death of the deceased to whom or for whose benefit any property situate in Ontario passes on the death of the deceased is liable for the duty levied on the proportion of such property that so passes to him or for his benefit, together with such interest as may be payable thereon.

Subject to ss. 4 and 5 of the Act, succession duty is payable on the death of any person domiciled in Ontario or elsewhere where any property situate in Ontario passes on his death. The Act is drafted so as to catch all forms of transactions which have

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the result of transferring property on death. Therefore “property passing on the death of the deceased” is broadly defined and is deemed to include, according to s. 1(p) (viii):

any property passing under any past or future settlement, including any trust, whether expressed in writing or otherwise and if contained in a deed or other instrument effecting the settlement, whether such deed or other instrument was made for valuable consideration or not, as between the settlor and any other person, made by deed or other instrument not taking effect as a will, whereby an interest in such property or the proceeds of sale thereof for life, or any other period determinable by reference to death, is reserved either expressly or by implication to the settlor, or whereby the settlor may have reserved to himself the right by the exercise of any power to restore to himself, or to reclaim the absolute interest in such property, or the proceeds of sale thereof, or to otherwise resettle the same or any part thereof,…

The Act also taxes certain recipients of “dispositions”, defined in s. 1(f), and “transmissions”, defined in s. 1(s). We are not concerned in this appeal with transmissions. Dispositions are defined in part as follows:

(f) “disposition” means:

(i) any means whereby any property passes or is agreed to be passed, directly or indirectly, from the deceased during his lifetime to any person,

(ii) any means whereby any person is benefited, directly or indirectly, by any act of the deceased during the lifetime of the deceased,

…

and such means includes,

…

(ix) any creation of trust,…

Section 5(1) (g) of the Act is of importance in exempting certain dispositions. It reads:

5.—(1) No duty shall be levied on any of the following property, nor on any person to whom there are any transmissions of any of the following property, with respect to such transmissions, nor on any person to whom any of the following dispositions are made, with respect to such dispositions, and such property and dispositions shall not be included in the aggregate value

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nor included for the purpose of determining any rate of duty,

…

(g) any disposition where actual and bona fide enjoyment and possession of the property, in respect of which the disposition is made, was assumed more than five years before the date of death of the deceased by the person to whom the disposition is made, or by a trustee for such person, and thenceforward retained to the entire exclusion of the deceased or of any benefit to him whether voluntary or by contract or otherwise;

Reservation of an interest under s. 1 (p)(viii)

It is essential, I think, to identify with some precision the “property” which can be said to have passed in the settlement of 1948. This question usually presents difficulty, especially in an Act such as the present one which provides no statutory definition. In the present case the question of definition is of particular importance because counsel for the respondents submits in effect that Mrs. McCreath made two gifts, one a gift of the equitable interests in the net income from the trust fund and the other a gift of the equitable remainder in the corpus of the fund. With respect, I do not agree with this reading of the indenture. In my view the “property passing” under the settlement was the equitable interest in a voting trust certificate representing 99,986 common shares in the capital stock of Mount Royal Paving & Supplies Limited which were transferred by Mrs. McCreath to the trustee.

If the “property” for purposes of s. 1(p)(viii) is such equitable interest, the next question is whether Mrs. McCreath retained an “interest” therein. In all the circumstances it seems to me difficult to say that she did not reserve an interest in the property, the subject-matter of the trust. Collectively she and her children were entitled to all of the income.

The word “interest” s capable of many meanings. In my opinion it is to be given in The Succession Duty Act a meaning wider than that which it would have in a technical conveyancing context. The trial judge, Fraser J., determined that

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the settlor did have an interest in the income from the 1948 Trust and s. 1(p)(viii) applied, and I think he was right. Receipt of income from a trust fund pursuant to the terms of the trust would suggest an interest, in the sense of a pecuniary stake, in the fund. Fraser J. held, however, that the 1948 Trust was exempt from taxation under s. 1(p)(viii) of the Act because its creation was a disposition exempt from taxation by virtue of s. 5(1)(g). The majority of the Court of Appeal (Evans and McGillivray JJ.A.) assumed, without deciding, that the corpus of the trust would attract succession duty under s. 6 of the Act as property falling within s. 1(p)(viii) but, in common with Mr. Justice Fraser, held that the corpus was exempt from succession duty by reason, of s. 5(1)(g) of the Act. In the view of Mr. Justice Jessup no interest in the corpus was reserved by the settlor and in any event s. 5(1)(g) applied.

There are no Canadian precedents to illuminate s. 1(p)(viii). Two English authorities construing tax legislation in almost identical wording may afford some guidance. In Attorney General v. Heywood[2], s. 38(2)(c) of the Customs and Inland Revenue Act, 1881 (U.K.) c. 12 was in issue. It taxed:

(c) Any property passing under any past or future voluntary settlement made by any person dying on or after such day [June 1, 1881] by deed or any other instrument not taking effect as a will, whereby an interest in such property for life, or any other period determinable by reference to death, is reserved either expressly or by implication to the settlor, or whereby the settlor may have reserved to himself the right, by the exercise of any power, to restore to himself, or to reclaim the absolute interest in such property.

In Heywood the settlor created a trust fund of £43,000 held on the following trusts: to pay income to such of the settlor, his wife and children for the settlor’s life as the trustee should choose and on the settlor’s death to hold the property in trust for

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the widow and children. It was argued that all that was reserved to the settlor was a mere possibility or contingency, and not an interest. Stephen J. held that the settlor had retained an interest for life within the terms of the statute and Wills J. stated, p. 331:

The application of the word “interest” is not confined to a vested or a necessarily contingent interest. The Act was meant to cast a wider net than such a construction would imply. The settlor here could only be deprived of the benefit he would otherwise get under the settlement by the exercise of the power of depriving him of such benefit which was vested in the trustees, and unless the trustees so deprived him he would necessarily get a benefit.

The same interpretation of “interest” was adopted in Attorney-General v. Farrell[3], where the settlor was also a discretionary object of income of a trust for his life with a gift over on his death and Lord Hanworth M.R. had this to say, p. 98:

However, even without the support which can be gathered from Drummond v. Collins, [1915] A.C. 1011, I think it is too late for us to reopen the question which was decided in Attorney-General v. Heywood; and I think that for the purposes of the interpretation of s. 38, sub-s. 2(c), it must be held that where there is a discretionary trust, a possible object of that trust holds an interest within sub-s. 2(c).

It is the respondents’ contention that the term “interest” should have a more technical meaning than in Heywood. They rely on Gartside v. Inland Revenue Commissioners[4], where the discretionary object of a trust was held not to have an “interest in possession” for purposes of s. 43 of the Finance Act, 1940 (U.K.), c. 29. In that case, the terms of the trust gave the trustee the power to distribute all or part of the income among a class comprising the settlor’s son, wife and issue for the son’s life or to accumulate the income and provided for a gift over on the son’s death. Lord Reid (Lords Morris and Guest concurring) held at p. 607:

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…an examination of the relevant provisions of this legislation leads to the clear conclusion that objects of a discretionary trust do not have interests extending to the whole or any part of the income of the trust fund and it must follow that they do not have interests in the fund within the meaning of section 2(1) (b).

While this quotation would seem to support the respondents’ contention that the deceased did not have an interest here, in my opinion Gartside is inapplicable. The section of the statute in issue in Gartside is very different from s. 1(p)(viii). Section 43 of the Finance Act, 1940 (U.K.) read as follows:

43. (1) Subject to the provisions of this section, where an interest limited to cease on a death has been disposed of or has determined, whether by surrender, assurance, divesting, forfeiture or in any other manner (except by the expiration of a fixed period at the expiration of which the interest was limited to cease), whether wholly or partly, and whether for value or not, after becoming an interest in possession,…

(a) if, had there been no disposition or determination as aforesaid of that interest and no disposition of any interest expectant upon or subject to that interest, the property in which the interest subsisted would have passed on the death under section one of the Finance Act, 1894, that property shall be deemed by virtue of this section to be included as to the whole thereof in the property passing on the death; or

(b) if, had there been no disposition or determination as aforesaid of that interest and no disposition of any interest expectant upon or subject to that interest, the property in which the interest subsisted would have been deemed by virtue of paragraph (b) of subsection (1) of section two of the said Act to be included to a particular extent in the property passing on the death, the property in which the interest subsisted shall be deemed by virtue of this section to be included to that extent in the property passing on the death.

For a full understanding of Gartside’s case, s. 43 must be read in conjunction with s. 2(1)(b) and s. 7(7) of the Act which dealt with the extent and valuation of the interest. Section 43(1)(b), it will be observed, is concerned with life interests in possession and not interests simpliciter. The section deems certain life interests to be property passing on death. The English statute, which is an

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estate tax act, taxes life interests because their termination affects the value of the property and the benefit accruing from their cessation increases the property value on a death (not necessarily the death of the original donor). In Ontario there is no equivalent section for taxing a life interest, as the concern is with the change in ownership of property on death, and not with the increase in value of the estate by a death. The necessity of valuation of successive life interests under the English Act demands greater precision in the identification and quantification of an “interest”; otherwise, as a practical matter, computation of tax becomes virtually impossible in respect of discretionary income trusts. Such is not the case under the Ontario Act, where the concern is with the failure of a donor to disassociate himself totally from inter vivos gifts, thus retaining some interest in this subject-matter until death. The English section is different in orientation from s. 1(p)(viii) where the extent of the interest is of no consequence.

Lord Reid recognized such a distinction and expressly endorsed the finding of the Courts in Heywood and Farrell in words that are apposite here at p. 612:

It is always proper to construe an ambiguous word or phrase in light of the mischief which the provision is obviously designed to prevent, and in light of the reasonableness of the consequences which follow from giving it a particular construction.

Here (in Heywood), if “interest” were given a narrow or technical meaning, it would be very easy to defeat the obvious purpose of the provision by setting up a discretionary trust and choosing trustees who might be expected to exercise their discretion in favour of the settlor. And, on the other hand, no unreasonable consequences would follow if the word were given a wider meaning so as to include possible benefit that would come to the settlor in a certain event…

Lord Wilberforce spoke in similar words at p. 620:

For section 38(2)(c) is concerned, broadly, with the case of persons who settle their property, yet wish to benefit

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from it so long as they live. To tax them in such a case is perfectly understandable, however large or small the reserved benefit may be and whether it is defined in extent or undefined. No definition is necessary, because the measure of the charge is the whole value of the property. So naturally no reference is made to “extent”—the mere fact of reservation is enough. I think, therefore, that the decisions in principle are acceptable.

Fraser J. distinguished the finding in Gartside on the basis that there was in that case, unlike the present, a power to accumulate. In so doing, in my opinion, with respect, he erred as cases subsequent to Gartside rejected this as a basis for distinction (Re Weir’s Settlement[5], Sainsbury v. Inland Revenue Commissioners[6].

I conclude that Mrs. McCreath retained an interest in the settled property for purposes of s. 1(p) (viii) by making herself one of the possible objects of the discretionary trust. The primary objects of the donor’s bounty are “the Settlor and her issue from time to time alive”, and, in fact, the settlor did receive income pursuant to para. 1(a). Mrs. McCreath could apply to the Court to require the trustee to respect the terms of the trust if it refused to exercise its discretion. The fact that a discretionary object may have no interest in property law terms because she has no “right” to a definable amount of income is irrelevant. I do not believe that the niceties and arcana of ancient property law should be fastened upon with mechanical rigidity to determine the effect of a modern taxation statute whose purpose is plain.

Exemption under s. 5(1)(g)

Since the trust property is property passing on death, it would seem that it should be subject to duty according to s. 6(a) of the Act. The respondents contend, however, that the corpus of the trust

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is exempted from tax by the operation of s. 5(1)(g) (supra) as a disposition made more than five years before death and held to the exclusion of the donor.

Counsel for the Minister argued that the respondents could not claim the benefit of s. 5(1)(g) if the trust property was “property passing upon death”. Section 5(1)(g) excludes from duty “any disposition” made by the deceased where the property disposed of was assumed to the entire exclusion of the deceased more than five years before his death. It is the contention of the Minister that the exception given by this clause is, by its very words, restricted to what the Act treats as a “disposition”. It is then urged that when the Legislature made s. 6 of the Act subject to ss. 4 and 5, it meant no more than to exempt those things that were taxed as dispositions if, as dispositions, they were exempt under ss. 4 or 5.

Since the Minister claimed to tax here under s. 1(p)(viii) and s. 6(a) rather than s. 1(f)(i) and s. 6(c), it is argued that s. 5(1)(g) cannot aid the respondents. With all due respect, I cannot read ss. 5 and 6 in these terms. The opening words of s. 6 are “Subject to ss. 4 and 5”. These words apply to all the subsections in which tax liability is stated in s. 6, and not just to specific ones in ss. 5 and 6 with corresponding words. It appears that a given piece of property can be both a “property passing on death” and a “disposition” and, in either case, s. 5(1)(g) can take effect.

It has been suggested that a restrictive approach to the term “disposition” is justified by the legislative history of ss. 5 and 6. The concept of a “disposition” and the provision for exempting certain dispositions from duty were introduced as part of a legislative package amending The Succession Duty Act in 1937. However, I am not convinced that the method of enacting the statutory provisions related to dispositions shows that the word “disposition” in ss. 5 (1)(g) and 6(c) is to be inter-

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preted to exclude items that are also “property passing on death.”

Counsel for the Minister also argued that the result reached by the trial judge was never intended by the Legislature. According to the holding, s. 5(1)(g) would exempt the corpus of a gift property, even if the settlor retained a life interest in the income. In the absence of s. 5(1)(g), such an interest would taint the gift and make the property subject to tax by the operation of s. 1(p)(viii). I do not think that any incompatibility between s. 1(p)(viii) and s. 5(1)(g) need necessarily result. The concern in s. 5(1)(g) is that the donor of a gift made more than five years before death be entirely excluded from the subject-matter of the gift or any benefit from the gift. In deciding what constitutes exclusion or retention of benefit, the courts have used complex and often convoluted reasoning. The test adopted is best explained in Green’s Death Duties, 7th ed. (1971), at p. 143:

If it is found that the deceased, instead of reserving an interest in the property given, has retained and excluded from the gift some beneficial interest, the interest which he has retained is not a reservation in relation to the interest which he has given: it is simply something which was not included in the gift. The principle is that what a donor keeps back is no gift.

See also 15 Halsbury’s (3d) at p. 21.

There are several English cases which elaborate and apply this test. In In re Cochrane[7], the deceased settled a mortgage with the annual income up to the value of £575 to his daughter and any excess income to him for his daughter’s life; the corpus to his daughter on settlor’s death if she survived him; the reversion to him if she predeceased him. It was held that only the capitalized value of the excess income and the capitalized value of the contingent reversion were taxable on settlor’s death. Similar results were achieved in Commissioner for Stamp Duties of New South

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Wales v. Perpetual Trustee Co.[8], and St. Aubyn v. Attorney-General[9], where Lord Radcliffe stated at p. 49:

All these decisions proceed upon a common principle, namely, that it is the possession and enjoyment of the actual property given that has to be taken account of, and that if that property is, as it may be, a limited equitable interest or an equitable interest distinct from another such interest which is not given or an interest in property subject to an interest that is retained, it is of no consequence for this purpose that the retained interest remains in the beneficial enjoyment of the person who provides the gift.

In Commissioner for Stamp Duties, New South Wales v. Perpetual Trustee Co., supra, Lord Russell of Killowen, delivering the judgment of the Board, said in a passage at pp. 445-446 which is cited with approval in St. Aubyn’s case and in Oakes v. Commissioner of Stamp Duties of New South Wales[10]:

There is nothing laid down as law in that case which conflicts with the view that the entire exclusion of the donor from possession and enjoyment which is contemplated by s. II, sub-s.I of the Act of 1889 [the forerunner of section 43 of the Finance Act, 1940] is entire exclusion from possession and enjoyment of the beneficial interest in property which has been given by the gift, and that possession and enjoyment by the donor of some beneficial interest therein which he has not included in the gift is not inconsistent with the entire exclusion from possession and enjoyment which the sub-section requires.

The matter was further refined in Oakes’ case in the following passage from the judgment of Lord Reid, at p. 79:

The contrast is between reserving a beneficial interest and only giving such interests as remain on the one hand, and on the other hand reserving power to take benefit out of, or at the expense of, interests which are given…

A similar approach was adopted in the Canadian case of Minister of National Revenue v. National Trust Co.[11] A father settled shares with income to his daughter for life and corpus to her

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on his death if she survived him; otherwise reversion to the settlor. This Court held that the contingent reversion was not a reservation of benefit excluding him from the exemption of s. 7 of the Dominion Succession Duty Act, 1940-41 (Can.). As Kerwin J. stated at p. 132:

Supreme Court of CanadaIt logically follows from the principle set forth above, that is, that the reversion of the father is something not comprised in the gift to the daughter, that the former was excluded from any benefit in the subject matter of the gift.

Founding on the line of cases mentioned, the respondents argue that the corpus in the 1948 Trust was a disposition (s. 1(f)(i) or (ii)) from which the deceased was excluded from benefit. The retention of the income interest was something not given (i.e., reserved out of the gift) and not a benefit flowing from the gift.

One should not be too quick to adopt the holdings in these cases and find them applicable to s. 5(1)(g) of the Ontario Succession Duty Act. Our concern here is the interpretation of a statute, and such a task requires consideration of the total context in which a given word or section is found. There is a major structural difference between the English and, to a lesser extent, the Canadian Acts which were construed in the cases cited. The English statute contains provisions similar to both s. 1(p)(viii) and s. 5(1)(g), but both are phrased as “recapture” provisions. Thus, if a given scheme does not fall within one section for taxation purposes, it will be caught by the other. The Canadian Act had both a recapture and exemption scheme, found in ss. 3(1)(d) and 7(1)(g) (as amended by 1941-42 (Can.), c. 25, ss. 4, 6). Both provisions dealt with gifts with reservations of benefits in terms similar to s. 5(1)(g) of the Ontario Act. In contrast the Ontario statute is structured with a recapture section (s. 1(p)(viii) differing in form from its exemption section (s. 5(1)(g)). Whereas there is no difficulty in interpreting two recapture sections compatibly (as in the English experience), there is danger that an exempting section may be read incompatibly with a recapture section, if the

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two differ in wording, so as to free from tax in one part of the Act all those who have been caught by another provision. That is the concern in enterpreting the Ontario Act. Because of the recapture / exemption dichotomy unique to this Act, the English cases cannot bind the Court’s interpretation thereof, nor even provide much guidance. In the judgment of this Court in Gorkin (Adilman Estate) v. Minister of National Revenue[12], it was said, at p. 368 that when Parliament inserts a recapturing section in a Succession Duty Act:

It must be assumed that it was placed there so as to include, as a succession, a certain type of transaction which would not otherwise have been included under any of the other paragraphs.

…

We must read s. 5(1)(g) and s. 1(p)(viii) in light of the policy of the Act, which is to tax all inter vivos gifts from which the donor failed to detach himself. The repondents’ argument rests upon severance of income and corpus yet we have not been referred to any case, and I have been unable to find one, in which severability of beneficial interests in a gift of shares, between capital and income, has been recognized.

The United States Supreme Court dealt with the possibility of severing income and corpus in Commissioner of Internal Revenue v. Estate of Church[13], and rejected such a proposition. Mr. Justice Black stated, at p. 645:

Church did not even risk attaching an unbreakable cable to the most valuable property attribute of the stocks, their income. He simply retained this valuable property, the right to the income, for himself until death, when for

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the first time the stock with all its property attributes “passed” from Church to the trust beneficiaries.

…

...an estate tax cannot be avoided by any trust transfer except by a bona fide transfer in which the settlor, absolutely, unequivocally, irrevocably, and without possible reservations, parts with all of his title and all of his possession and all of his enjoyment of the transferred property.

On the wording of the trust document I can find no reason to regard the property which passed here as two separate and distinct dispositions, one of income and one of corpus. Essentially the subject-matter of the gift was a block of shares. In paragraph 1 of the indenture the trustee undertook to receive the voting trust certificate “to constitute a trust fund”. Thus, when Mrs. McCreath received income, the benefit came from property which she had purported fully to have given away, her interest in the shares of Mount Royal Paving & Supplies Limited. Although the trust indenture provides that the income from the trust fund is to be handled in one manner and the corpus in another, that does not have the effect of constituting two properties. The matters are dealt with in separate sub-paragraphs, it is true, but we do not stop at mere form in taxing matters. The substance of the matter in my view is that there was one gift, the subject-matter being 99,986 common shares in the capital stock of Mount Royal Paving & Supplies Limited. The income from the 1948 Trust was part of the gift and not something “not comprised in” the gift of corpus. If a father gives a parcel of revenue‑bearing real estate to his son and retains the income or a portion of the income from the real estate, it could not seriously be contended that the father had been entirely excluded from the property disposed of.

If, as I have found, an interest was reserved to Mrs. McCreath in the property passing, within the meaning of s. 1(p)(viii), it would follow that the disposition made by her was not such that the possession and enjoyment of the property by the persons to whom the disposition was made was retained to the entire exclusion of Mrs. McCreath,

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within the meaning of s. 5(1)(g). It seems to me that Mrs. McCreath, during her lifetime, remained effectively in control of that which she affected to dispose of, not only by the possible income interest, but also because of the right to designate by will which of her children should receive the corpus on her death and subject to what terms and conditions. One must look at the substance of the matter to see what the donor parted with and what she retained. Mrs. McCreath derived actual benefit from the voting trust certificates or the underlying shares or their dividends. The transfer of the shares of Mount Royal Paving & Supplies Limited to the trustee was, in my opinion, a colourable gift and not a bona fide disposition of the type which s. 5(1)(g) is intended to exempt. Section1 (p)(viii) and s. 5(1)(g) have a common purpose, taxation of those who purport to gift their property during life but, in reality, fail to do so. The sections should be complementary as in the English and Canadian Acts and not interpreted absurdly so as to catch the donor at one point and then free him at another. If s. 1 (p)(viii) and s. 5(1)(g) are to work harmoniously within the total context of the Act, s. 5(1)(g) must be restricted to situations where the donor totally excludes himself from the subject property.

I sum up these reasons with the following conclusions:

1. The corpus is “property passing on death” under s. 1(p)(viii) because an “interest” was retained for the settlor’s life;

2. The property is not exempted under s. 5(1)(g) even though it is a disposition made more than five years before death. Whenever the donor fails to divest himself or herself of control of or income benefits from the property, the section is inapplicable to exempt from tax, and the corpus and income cannot be severed for purposes of this section if the donor retains an income interest.

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I would accordingly allow the appeal with costs throughout and order that the statements of succession duty dated June 24, 1971 served on the respondents should include the value of the 1948 Trust.

JUDSON J.—The facts and the full terms of the trust are set out in the reasons of Dickson J. I will deal first with the question whether the subject-matter of the trust is property passing on death within the meaning of s. 1(p)(viii) of the Act, which reads:

1. (p) (viii) any property passing under any past or future settlement, including any trust, whether expressed in writing or otherwise and if contained in a deed or other instrument effecting the settlement, whether such deed or other instrument was made for valuable consideration or not, as between the settlor and any other person, made by deed or other instrument not taking effect as a will, whereby an interest in such property or the proceeds of sale thereof for life, or any other period determinable by reference to death, is reserved either expressly or by implication to the settlor, or whereby the settlor may have reserved to himself the right by the exercise of any power to restore to himself, or to reclaim the absolute interest in such property, or the proceeds of sale thereof, or to otherwise resettle the same or any part thereof,…

The trial judge held that it was property passing on death because Mrs. McCreath, as a potential beneficiary of the discretionary trust of income, had reserved an interest for life. I do not find it necessary to deal with this nor with the question whether we should decline to adopt the English authorities such as Gartside v. Inland Revenue Commissioners[14], and Re Weir’s Settlement[15], which held that such a beneficiary had no enforceable interest under the English legislation. I would bring this case within s. 1(p)(viii) because Mrs. McCreath reserved by s. 1(b) of the trust a testamentary power of appointment of the corpus of the trust among her children. My opinion is that this testamentary power of appointment was a reservation of a power to resettle the property and is squarely within the concluding words of s. 1(p)(viii).

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I am also of the opinion that this settlement is a disposition within s. 6(c) of the Act and that this disposition is not exempted by s. 5(1)(g). Section 6(c) of the Act reads:

6. Subject to sections 4 and 5, on the death of any person whether he dies domiciled in Ontario or elsewhere,

(c) where any disposition, other than of realty situate outside Ontario, is made in Ontario on or after the 1st day of July, 1892, to any person who is resident in Ontario at the date of death of the deceased, duty shall be levied on such person, with respect to such disposition, in accordance with the dutiable value thereof;…

The exempting section 5(1)(g) reads as follows:

5. (1) (g) any disposition where actual and bona fide enjoyment and possession of the property in respect of which the disposition is made, was assumed more than five years before the date of death of the deceased by the person to whom the disposition is made, or by a trustee for such person, and thenceforward retained to the entire exclusion of the deceased or of any benefit to him whether voluntary or by contract or otherwise;.

Whatever one may say about the meaning of the word “interest” under s. 1(p)(viii), it has no application to s. 5(1)(g). Section 5(1)(g) requires retention by the donee “to the entire exclusion of the deceased or of any benefit to him whether voluntary or by contract or otherwise.” Mrs. McCreath, as beneficiary under a discretionary trust is clearly within this wording.

I would allow the appeal with costs.

Appeal allowed with costs.

Solicitor for the appellant: F.W. Callaghan, Toronto.

Solicitors for the respondents: Ongley & Blair, Toronto.

Solicitor for the respondent, Michelle McCreath: E.M. Henry, Official Guardian, Toronto.