Supreme Court of Canada

Covert et al. v. Minister of Finance of Nova Scotia, 1980 CanLII 229 (SCC), [1980] 2 SCR 774

Date: 1980-07-18

Frank M. Covert, Q.C., John S. Jodrey and The Canada Permanent Trust Company, Executors under the Will of the late Roy A. Jodrey (Plaintiffs) Appellants;

and

The Minister of Finance of the Province of Nova Scotia (Defendant) Respondent;

and

The Attorney General of British Columbia and the Attorney General of Quebec Interveners.

1979: November 22; 1980: July 18.

Present: Martland, Ritchie, Pigeon, Dickson, Beetz, McIntyre and Chouinard JJ.

ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA, APPEAL DIVISION

Taxation—Constitutional law—Succession duties—Non-resident corporation—“Beneficially entitled”—Whether resident shareholders of non-resident parent company assessable on estate bequeathed to non-resident subsidiary—In personam tax on resident successor—Legislation intra vires of Provincial Legislature—An Act Respecting Succession Duties, 1972 (N.S.).c. 17, ss. 1(ae), 2(5), 8, 9.

The deceased, Roy A. Jodrey, was resident and domiciled in Nova Scotia at the time of his death. He had twelve grandchildren, all of whom were then resident in Nova Scotia. In view of An Act Respecting Succession Duties, 1972 (N.S.), c. 17, which imposed succession duties on all property of a deceased situated within the province at the time of his death, as well as on property situated outside the province, passing to resident “successors”, it became apparent that, unless something was done, Mr. Jodrey’s grandchildren, heirs of his estate under his will, would be liable to succession duties. Accordingly, a rather elaborate scheme was devised, by which it was hoped to escape the imposition of duty in Nova Scotia on the estate then valued at some $3,500,000.

The scheme involved three main moves: (1) The incorporation of three companies in Alberta: (i) J.B.H. Investments Ltd., the parent company which issued to each of the grandchildren 100 common shares at a price of $1 per share paid by the grandchildren; (ii) J.G.C. Investments Ltd., the subsidiary company which issued 100 common shares, all of which were beneficially

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owned by the parent company; (iii) White Rock Investments Ltd., which issued two common shares, each beneficially owned by Mr. Jodrey.

(2) A transaction whereby Mr. Jodrey agreed to sell to White Rock, 4,600 shares of R.A. Jodrey Investments Ltd., a Nova Scotia corporation owned and controlled by Mr. Jodrey, for a consideration of $3,735,200, payable at the office of White Rock in Edmonton by a demand promissory note for that amount, without interest.

(3) A codicil to his will, whereby Mr. Jodrey revoked the bequest to his grandchildren and substituted a bequest to the subsidiary company, including the note of White Rock.

The net result of these various incorporations and transactions was that, at the time of Mr. Jodrey’s death, the 4,600 shares of R.A. Jodrey Investments Ltd., formerly owned by the deceased, were the property of White Rock, all of the shares of which were beneficially owned by the deceased and would become a part of his estate. The note given by White Rock on the acquisition of the securities was bequeathed to the subsidiary company, together with all the residue of the estate. All of the shares of the parent company were beneficially owned by Mr. Jodrey’s twelve grandchildren.

When Mr. Jodrey died, duty was assessed against the grandchildren on the basis that they were successors to the rest and residue of the deceased’s estate under subs. 2(5)(b) of the Nova Scotia Act. The executors filed a notice of objection to the assessment. The respondent confirmed the assessment. His decision was confirmed by the Supreme Court of Nova Scotia and an appeal from that decision was dismissed by a unanimous judgment of the Court of Appeal.

Held (Ritchie, Dickson and McIntyre JJ. dissenting): The appeal should be dismissed.

Per Martland, Pigeon, Beetz and Chouinard JJ.: Two issues were to be determined in this appeal: (1) Does the application of subs. 2(5)¹ of the Act result in the grandchildren being deemed to be successors in respect of the residue of the estate? (2) Is subs. 2(5) ultra vires of the Legislature of Nova Scotia?

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(1) The case rested on the meaning to be attributed to the words “beneficially entitled” in subs. 2(5). The contention of the appellants that the meaning to be attributed to these words should be that which has been given by courts of equity, that the word “entitled” requires the existence of a right enforceable by a court of law or equity and “beneficially” is used to distinguish an equitable right or interest from a legal right or interest was not accepted. This Court should not feel itself rigidly bound, in interpreting the words “beneficially entitled”, by rules of equity evolved in the courts of chancery in connection with trusts. In the circumstances of this case, the parent company was beneficially entitled to the residue of the estate within the meaning of subs. 2(5). The fact that it was not made a beneficiary under the will did not preclude this finding in view of the fact that it had complete and absolute control of the named beneficiary, the subsidiary company, and had the legal capacity to compel that company to turn over to it the share of the estate bequeathed to it. This conclusion was fortified by the fact that it was the obvious purpose of the scheme adopted by the testator that the subsidiary company should turn over to the parent company the residue of the estate so that it could, in turn, divide the residue among its shareholders, i.e., the grandchildren of the deceased.

This was eminently a case in which the Court should examine the realities of the situation and conclude that the subsidiary company was bound hand and foot to the parent company and had to do whatever its parent said. It was a mere conduit pipe linking the parent company to the estate.

(2) Subsection 2(5) was intra vires of the Legislature of Nova Scotia to enact. Subsection 2(5), coupled with subs. 8(2), merely imposes upon resident shareholder successors the same obligation imposed upon resident successors by subs. 8(2). They do not succeed to property of the deceased directly, but the property ultimately devolves upon them by reason of his death through their ownership of shares in a non-resident corporation which becomes beneficially entitled to property of the deceased.

The tax which is imposed upon the grandchildren of the deceased by the combined effect of subs. 8(2) and subs. 2(5) is a tax imposed upon residents of Nova

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Scotia measured by their succession to the estate of a resident of Nova Scotia, whose will was made and probated in Nova Scotia. This is a tax upon residents in the province and so is taxation within the province. The tax is not a tax property outside the province. It is a tax upon persons within the province measured by the benefits which they derive as a result of the bequest made to a non-resident corporation of which they are the shareholders. It is clearly imposed upon the very persons who were intended to pay it, and so it cannot be regarded as an indirect tax and thus not within s. 92(2) of the British North America Act.

Per Ritchie, Dickson and McIntyre JJ., dissenting: In order to sustain the assessment, the respondent had to establish that the parent company became “beneficially entitled” to property of the deceased. The meanings of these words are almost invariably drawn from cases concerned with the construction of wills or succession duty statutes which are found in the jurisprudence built up by the courts of chancery. The nub of the problem in this case is that the draftsman of the statute selected a phrase well known to the courts. In the absence of earlier authority and in a context other than one related to estates and succession duties, a court might construe “beneficially entitled” according to what could be regarded as the popular usage of the language employed. But that was not the case here, and in the light of the interpretation given to these words by courts of chancery and of equity, the parent company cannot be said to be “beneficially entitled” for it has no standing or capacity to “sue for and recover” the estate assets. It perhaps has the power, through its share control, to compel the subsidiary company to take steps against the trustees but it has no independent claim and no claim to beneficial entitlement which it can assert. There is nothing in the particular statute or in any rule of statutory construction that permits one to climb up the corporate hierarchical ladder by applying s. 2(5) time and again. That is the very gap in the legislation of which the testator took advantage.

It is proper for the Court to look not only at principles of trust law, but to those of corporate law to determine whether, by virtue of its ownership of all the outstanding shares of the subsidiary company, the parent company can be said to be “beneficially entitled” to the assets of its subsidiary. The general principle is that a company is not the beneficial owner of the assets of its own subsidiary and that a shareholder has no proprietary interest in the assets of a company in which he holds shares,

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otherwise than upon a winding-up. In the absence of fraud or improper conduct the courts cannot disregard the separate existence of a corporate entity. No distinction can be made in principle between ownership of 100 shares in a major corporation and ownership of all the issued shares in a small company. In neither case does the shareholder own any asset other than shares.

Finally, the legislation under consideration contained no provisions which introduce a statutory concept of sham, fraud, improper tax avoidance or illegal transactions, and it was also plain that the appellants did not fit the convention “sham” standard of a transaction purporting to create legal rights and obligations which are at variance with the legal relationships which in fact characterize the arrangement.

[Re Chodikoff, [1971] 1. O.R. 321, distinguished; In re Miller’s Agreement; Uniacke v. Attorney-General, [1947] Ch. 615; Montreal Trust Co. v. Minister of National Revenue, 1958 33 (SCC), [1958] S.C.R. 146; Rodwell Securities Ltd. v. Inland Revenue Commissioners, [1968] 1 All E.R. 257, considered; Littlewoods Mail Order Stores, Ltd. v. McGregor, [1969] 3 All E.R. 855; D.N.H. Food Distributors Ltd. v. Tower Hamlets London Borough Council, [1976] 1 W.L.R. 852; Minister of Revenue for Ontario v. McCreath, 1976 20 (SCC), [1977] 1 S.C.R. 2, applied; MacKeen Estate v. Minister of Finance of Nova Scotia (1977), 1977 1790 (NS SC), 36 A.P.R. 572; Macaura v. Northern Assurance Co., [1925] A.C. 619; Attorney General (B.C.) v. Canada Trust Co. and Ellett, 1980 221 (SCC), [1980] 2 S.C.R. 466, referred to.]

APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division², dismissing an appeal from a judgment of Hart J. Appeal dismissed, Ritchie, Dickson and McIntyre JJ. dissenting.

J.T. MacQuarrie, Q.C., R. TV. Pugsley, Q.C., and R. Jones, for the plaintiffs, appellants.

T.B. Smith, Q.C., J.W. Kavanagh, Q.C., and A.S. Butler, for the defendant, respondent.

H.L. Henderson and M.C. Nash, for the intervener, the Attorney General of British Columbia.

Henri Brun and Jean François Jobin, for the intervener, the Attorney General of Quebec.

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The judgment of Martland, Pigeon, Beetz and Chouinard JJ. was delivered by

Reasons for Judgment (Martland J.)

MARTLAND J.—The issue in this appeal is as to the validity of a notice of assessment dated August 8, 1975, addressed by the respondent to the appellants who are the executors of the estate of Roy A. Jodrey, deceased, which increased the total value of the estate by $3,784,273 and which assessed duty against the twelve grandchildren of the deceased.

The parties in these proceedings agreed to a statement of facts. The following are relevant to the issues in this appeal.

Roy A. Jodrey, who died on August 12, 1973, had lived at Hantsport, Nova Scotia, for approximately thirty years prior to that date. At the time of his death, he was resident and domiciled at Hantsport. He had twelve grandchildren, all of whom were then resident in Nova Scotia.

He executed a will on August 13, 1963. The will provided that the executors were to pay, out of the general capital of the estate, all just debts, funeral and testamentary expenses and all estate taxes, succession duties, inheritance and death taxes payable on the property passing under the will, with the intent that all bequests under the will would be free of such duties and taxes.

The will bequeathed all the estate of the deceased to the executors upon trust to pay certain bequests and to hold the rest and residue of the estate in trust, first to pay to the wife of the deceased $500 per month during her lifetime, unless she renounced all or part of such income, and, second, on her death, to divide the rest and residue of the estate among the grandchildren of the deceased.

On January 1, 1972, the federal government vacated the field of federal estate taxation. The Province of Nova Scotia, as well as five other provinces, enacted succession duty statutes. These provinces were reciprocating provinces and entered into agreements with the federal government to administer the legislation and to collect the succession duties. Alberta did not enact legislation for the imposition of succession duties.

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The Nova Scotia legislation, which is in issue here, is An Act Respecting Succession Duties, 1972 (N.S.), c. 17, enacted on May 15, 1972, hereinafter referred to as “the Act”. It was made effective from January 1, 1972. The provisions of that Act, relevant to this appeal, are as follows:

1. (ae) “successor” in relation to any property of the deceased includes any person who, at any time before or on or after the death of the deceased became or becomes beneficially entitled to any property of the deceased

(i) by virtue of, or conditionally or contingently on, the death of the deceased,

2. (5) Where a corporation which is not resident in the Province, other than a corporation without share capital, by reason of the death of a deceased acquires or becomes beneficially entitled to property of the deceased,

(a) the corporation shall be deemed not to be the successor of the property except to the extent that the value of the shares of the shareholders of the corporation is not increased in value by the corporation acquiring or becoming beneficially entitled to the property; and

(b) each of the shareholders of the corporation shall be deemed to be a successor of property of the deceased to the extent of the amount by which the value of his shares in the corporation is increased by the corporation acquiring or becoming beneficially entitled to the property.

8. (1) Subject as hereafter otherwise provided, duty shall be paid on all property of a deceased that is situated, at the time of the death of the deceased, with the Province.

(2) Subject as hereafter otherwise provided, where property of a deceased was situated outside the Province at the time of the death of a deceased and the successor to any of the property of the deceased was a resident at the time of the death of the deceased, duty shall be paid by the successor in respect of that property to which he is the successor.

9. Each successor to any property of a deceased on which duty is payable under subsection (1) of Section 8 and each successor liable to pay duty under subsection (2) of Section 8 shall pay the duty to the Minister for the raising of a revenue for provincial purposes.

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Following the enactment of this legislation, the following events occurred:

1. Solicitors on behalf of Mr. Jodrey incorporated three Alberta corporations:

(a) On September 13, 1972, J.B.H. Investments Limited (hereinafter referred to as “the parent company”) was incorporated with a capital stock of 20,000 shares, without nominal or par value. The two persons incorporating this company were a solicitor and an articled student in an Edmonton law firm. They became the directors and officers of the company. Each of Mr. Jodrey’s grandchildren came to hold 100 shares in the capital stock of the company.

(b) On September 13, 1972, J.G.C. Investments Limited (hereinafter referred to as “the subsidiary company”) was incorporated with a capital stock of 20,000 shares, without nominal or par value. The persons incorporating this company were the same as those who incorporated the parent company. Each held one share in the capital stock of the company and they became directors and officers of it. On the same date, 98 shares of the capital stock of the company were allotted to the parent company. Subsequently, the two incorporators of the company made declarations of trust in favour of the parent company in respect of the two shares held by them.

(c) White Rock Investments Limited (“White Rock”) was incorporated on September 13, 1972, with a capital stock of 20,000 shares, without nominal or par value, by the same two persons who had incorporated the other two companies. These persons became directors and officers of the company. Each held one share in the capital stock of the company. One of those shares was immediately transferred to the deceased, Roy A. Jodrey. The other share was the subject of a declaration of trust in favour of the deceased.

On September 22, 1972, an agreement was made between Roy A. Jodrey and White Rock whereby the former sold to White Rock 4,600 shares in the capital stock of R.A. Jodrey Investments Limited for a consideration of $3,735,200 payable by a demand promissory note for that

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amount, without interest, payable at the office of the company in Edmonton. R.A. Jodrey Investments Limited is a Nova Scotia corporation, with head office at Hantsport, Nova Scotia. Its authorized capital is $50,000 divided into 5,000 shares each with a par value of $10. Five thousand shares had been issued, of which 4,600 shares were owned by and registered in the name of Roy A. Jodrey prior to the September 22, 1972, agreement.

2. On October 5, 1972, Mr. Jodrey executed a codicil to his will whereby the provisions of the will respecting the division of the residue of the estate among his grandchildren were revoked and, instead, it was directed that such residue, including the note from White Rock, be given and bequeathed to the subsidiary company.

Mr. Jodrey’s wife survived him and on September 18, 1973, gave a written direction to the executors of the estate renouncing the income given to her under the provisions of the will.

The net result of these various incorporations and transactions was that, at the time of Mr. Jodrey’s death, the 4,600 shares of R.A. Jodrey Investments Limited, formerly owned by the deceased, were the property of White Rock, all of the shares of which were beneficially owned by the deceased and would become a part of his estate. The note given by White Rock on the acquisition of the securities was bequeathed to the subsidiary company, together with all the residue of the estate. All of the shares of the subsidiary company were beneficially owned by the parent company. All of the shares of the parent company were beneficially owned by Mr. Jodrey’s twelve grandchildren.

Mr. Jodrey’s will and the codicil were duly proved by his executors in Nova Scotia and probate was granted by the Probate Court, Windsor, Nova Scotia, on September 28, 1973. The executors filed a succession duty return declaring the total value of the estate under the Act to be $162,009.50. By a notice of assessment dated August 8, 1975, the total value of the estate was increased by $3,784,273. By the notice, duty was assessed against the twelve grandchildren on the basis that they were successors to the rest and

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residue of the deceased’s estate under subs. 2(5)(b) of the Act. The executors filed a notice of objection to the assessment, based on two grounds, stated as follows:

1. The twelve grandchildren of the deceased assessed by the Notice of Assessment, are not successors within the meaning of the Succession Duty Act and therefore are not liable to pay any duty.

2. Section 2(5) of the Succession Duty Act is ultra vires the powers of the Nova Scotia Legislature.

The Minister of Finance of Nova Scotia confirmed the assessment. His decision was appealed by the appellants to the Supreme Court of Nova Scotia. The appeal was based upon the two grounds alleged in the notice of objection. The Court decided both the issues raised in favour of the respondent. The appellants’ appeal from that decision was dismissed by an unanimous judgment of the Court of Appeal.

With leave, an appeal was then brought to this Court.

There are two issues to be determined in this appeal:

1. Does the application of subs. 2(5) of the Act result in the grandchildren of the deceased being deemed to be successors in respect of the residue of his estate?

2. Is subs. 2(5) ultra vires of the Legislature of the Province of Nova Scotia to enact?

First Issue:

First Issue: Application of Subsection 2(5)

The Courts below have held that subs. 2(5) of the Act deems the grandchildren of the deceased to be successors in respect of the residue of the estate.

The contention of the appellants is that subs. 2(5) does not so operate because the corporation not resident in the province under the terms of the subsection was the subsidiary company to which the deceased bequeathed the residue of the estate. The grandchildren of the deceased were not shareholders of that company and so the provisions of

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para. (b) of the subsection did not operate to deem them to be successors in respect of the residue of the estate.

The Courts below were of the opinion that the parent company, which owned outright 98 of the 100 issued shares of the subsidiary company and beneficially owned the remaining two shares, was a non-resident corporation which became beneficially entitled to the residue of the estate of the deceased within the meaning of the opening words of the subsection and consequently para. (b) took effect to deem the shareholders of the parent company (i.e., the twelve grandchildren) to be successors in respect of the residue of the estate.

The Courts below considered the meaning of the words “beneficially entitled” as used in subs. 2(5). The reasoning of Hart J., in the Court of first instance, adopted the reasons he had given in a case heard immediately prior to the present case (the MacKeen case³), in which the same issues arose. He said, in that case:

It seems to me that the plain ordinary meaning of the expression “beneficial owner” is the real or true owner of the property. The property may be registered in another name or held in trust for the real owner, but the “beneficial owner” is the one who can ultimately exercise the rights of ownership in the property.

I believe that the other expression “beneficially entitled to” has a slightly different meaning from that of “beneficial owner”. The person beneficially entitled to property may be further removed from the exercise of ultimate ownership of the property than the “beneficial owner”, but as long as that person has the right to legally establish the exercise of the rights of ownership over the property then it may be said that he is beneficially entitled thereto. This distinction between the two expressions is, in my opinion, clearly shown by the judgments in the cases of Rodwell Securities ([1968] 1 All E.R. 257) and Montreal Trust [Torrance Estate] (1958 33 (SCC), [1958] S.C.R. 146). In the Rodwell Securities case the Court was dealing with the situation in which the appellant was required to establish beneficial ownership of the shares of two separate companies in one third company. It was found that the true real ownership of the shares was in a subsidiary company rather than its parent. In the other case the Supreme Court of Canada was considering the meaning of the expression “beneficially entitled to” where the Court found that it was sufficient

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if the property in question could be applied to one’s benefit by resort to an effective cause of payment.

In my opinion the Legislature of Nova Scotia in using the expression “Where a corporation … becomes beneficially entitled to property of the deceased” it was using it in the broad sense to cover the situation where the corporation is put in a position to ultimately exercise the rights of ownership over property of the deceased. It would be unnecessary to use additional words such as “directly or indirectly” or “is controlled by” to effect its purpose. “Becomes beneficially entitled to” is broad enough to cover situations in which the property is registered in another name or held in trust or placed in the form in which the corporation can legally recover the property for its own benefit.

The judgment of Hart J. was sustained on appeal. Chief Justice MacKeagan, who delivered the judgment of the Court of Appeal in the MacKeen (supra) case and in the present case, said in his reasons in the former case:

I agree that being “entitled” to property means being able to “legally recover” it, that is, in the present context, to have the right and power, by lawful means, to fully enjoy the property. The adverb “beneficially” indicates that the person entitled to enjoyment of the property may not have full legal title.

In the modern sense of the phrase, a person is “beneficially entitled” to property if he is the real or beneficial owner of it, even though it is in someone else’s name as nominal owner. The nominal owner of the property, whether real property, choses in action or other personal property, has legal title to it. The real owner, the person “beneficially entitled” to it, can require the nominal owner to let him use or have possession of the property, or to give him the income from it, or otherwise to let him have the benefit and enjoyment of it. He usually can require the nominal owner to convert the property into another form or to transfer the legal title to some other nominal owner. Above all, he is able, unless restricted by the terms of a specific trust, to call on the nominal owner to convey the property to him and to transfer its legal title to him, the real owner. If he does so, he will then fully acquire the property by achieving full ownership and will cease to be merely benefically entitled to it.

The contention of the appellants is that the meaning to be attributed to the words “beneficially entitled” should be that which has been given by

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courts of equity, that the word “entitled” requires the existence of a right enforceable by a court of law or equity and “beneficially” is used to distinguish an equitable right or interest from a legal right or interest. It is said that the parent company had no legal or equitable right to the residue of the estate enforceable against the executors of the estate and that the Court is not entitled to ignore the separate corporate existence of the subsidiary company.

The appellants rely upon the judgment of Wynn-Parry J. in In re Miller’s Agreement; Uniacke v. Attorney-General⁴. The question in that case was as to the liability of three daughters of the deceased, Thomas William Noad, for payment of succession duties. The deceased had been in partnership with two other partners. On his retirement from the partnership and its dissolution, it was agreed that the other two partners, after Noad’s death, would pay to his three daughters lifetime annuities. No trust in favour of the daughters was created.

It was held that the daughters were not liable to pay succession duties. They were not parties to the agreement made by Noad with his partners and the agreement did not confer any rights upon them enforceable at law or in equity. They were not, by virtue of the agreement, “beneficially entitled” to any property within the meaning of s. 2 of the Succession Duty Act, 1853.

Wynn-Parry J., at pp. 624-25, said:

It is clear that the annuities are property under s. 2, since they represent money payable under the engagement, namely, the deed. The material question, as it seems to me, is whether the plaintiffs became “beneficially entitled” to such property on the death of Mr. Noad. Nothing turns, to my mind, on the word “beneficially.” If they became “entitled” to the annuities, they became entitled to them beneficially. The crucial question, therefore, is, did they become “entitled” to the annuities on Mr. Noad’s death? The word “entitled,” as used in this section, appears to me necessarily to carry the implication that for a person to be entitled to property under this section it must be capable of being

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postulated of him that he has a right to sue for and recover such property.

This statement was relied upon by the taxpayers in this Court in Montreal Trust Company and Others v. Minister of National Revenue⁵. Succession duties were claimed in the following circumstances. A testator set up, out of the residue of his estate, a “Charities Fund” to be divided equally between two charitable institutions. This gift was exempt from succession duties. There were dutiable gifts to other beneficiaries. The gifts to the two institutions were made “absolutely conditional” upon payment by them, equally, of all duties payable on the estate. If they failed to pay such duties, the gifts to them were to lapse and the Charities Fund would be used by the trustees to pay the duties.

The question in issue was as to whether the beneficiaries whose succession duties were directed to be paid by the two institutions were subject to succession duties in respect of the amount of the duties to be paid on their behalf, i.e., whether the benefit to the legatees of the tax exoneration was itself a succession.

Section 2(m) of the Dominion Succession Duty Act defined “succession” in the following manner:

2(m) …every past or future disposition of property, by reason whereof any person has or shall become beneficially entitled to any property… upon the death of any deceased person, …either certainly or contingently,…

Rand J., with reference to the statement of Wynn-Parry J., said at p. 149:

Mr. Marler for the appellants urged as the test to determine whether a successor had become “beneficially entitled to any property” that formulated by Wynn-Parry J. in In Re Miller’s Agreement; Uniacke v. Attorney-General. The test was, that it must be “postulated of him [the successor] that he has a right to sue for and recover such property”. If the word “recover” extends to the application of money to one’s benefit, and “sue for” to an ultimate and alternative resort as the effective cause of payment, I am disposed to accept it.

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Locke J. said, at p. 147:

In my opinion, the legacies in question each included the amounts designed and, in addition, the right to have either the corpus of the Charities Fund or the moneys paid by the charities, pursuant to their respective agreements, if they elected to accept the legacy to them upon the terms of the will, applied in payment of the duties. As matters stand, the covenants of the charities to pay the duties are enforceable against them by the trustees. It is true that the legatees have no remedy directly against the charities, but they may each require the trustees under the will to enforce compliance with these covenants and, failing such compliance, to pay the succession and other duties out of the corpus of the Charities Fund, as directed by the will.

In the result, it was held that the duties were payable. The feature of this case which is relevant to the present appeal is that the beneficiaries had no enforceable rights as against the charitable institutions but they had an effective means to compel payment by seeking the intervention, on their behalf, of the trustees.

Another case cited by the appellants in support of their position is Re Chodikoff⁶. This case dealt with the application of the Ontario Succession Duty Act, R.S.O. 1960, c. 386. The question in issue was as to the proper rate of tax to be applied in respect of dispositions made by the deceased during his lifetime. The Minister contended that the dispositions were made to a “stranger”. The executors of the estate contended that the dispositions were for the benefit of the wife and children of the deceased and, accordingly, were taxable at a lower rate.

The deceased controlled two companies, one a realty company, the other, Bemar Investments Limited, at no time actively engaged in any business. Bemar had two classes of shares, Class A owned by trustees for the benefit of the wife and children of the deceased, and Class B owned by the deceased. The deceased transferred shares owned by him in the realty company to Bemar. He also caused Bemar to subscribe for shares in the

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realty company, and the realty company to issue them to Bemar. In each case the price was less than the real value. It was conceded that both transactions constituted “dispositions” under the Act.

Arnup J.A., delivering the judgment of the Court of Appeal, dealt with the contention of the executors as follows, at pp. 329-30:

Counsel for the respondent, on the other hand, again relies on the definition of s. 1 (f)(ii):

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

He says that the only persons who benefited by the transaction were the wife and children of the deceased, as the beneficiaries of the Marvin Chodikoff Number One Trust, that the “corporate veil” should be cut through or lifted by the Court, and the transaction should be regarded as in substance and in reality one by which the deceased benefited his wife and children. This submission makes it necessary to examine exactly what the legal position of those “beneficiaries” was at the time of the transaction. The trustees then held all of the issued Class A shares of Bemar; as previously pointed out, Class A shareholders were entitled ratably to the property of Bemar on its winding up, subject to prior payment of the principal and interest owing to Class B shareholders. Undoubtedly, the effect of the transaction was to increase the assets of Bemar, but the making of the disposition did not in itself, it seems to me, “benefit” the beneficiaries under the trust. Whether in the long run they would be better off by reason of the disposition depended on a number of factors which might occur in the future, including the winding up of Bemar, and the ownership by Bemar at that time of sufficient assets to pay off the Class B shareholders and have a surplus distributable to Class A shareholders.

Putting it in another way, on the date of the disposition the wife and children of the deceased were the cestuis que trustent of a trust, which owned some of the shares in Bemar. No property interest accrued to the trust, either at law or in equity, by reason of the disposition. The only effect was that in certain events an asset which it already held might become more valuable.

It is unnecessary to consider if this judgment is well founded. The facts in the present case are

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substantially different from those in Chodikoff. The subsidiary company to which the residue of the estate was bequeathed was wholly owned and controlled by the parent company. There were no other shareholders. The statutory provisions under consideration in Chodikoff were entirely different from those now under consideration.

The appellants also rely upon Rodwell Securities Ltd. v. Inland Revenue Commissioners⁷. This case involved a claim for exemption from payment of stamp duty in respect of a conveyance of land. The wholly-owned subsidiary of a parent company conveyed land to a company which was a wholly-owned subsidiary of another wholly-owned subsidiary of the parent company. An exemption from payment of stamp duty was permitted under subs. 42(2) of the Finance Act, 1930, which provided:

42(2) This section applies to any instrument as respects which it is shown to the satisfaction of the Commissioner of Inland Revenue (a) that the effect thereof is to convey or transfer a beneficial interest in property from one company with limited liability to another such company; and (b) that either—(i) one of the companies is beneficial owner of not less than ninety per cent of the issued share capital of the other company; or (ii) not less than ninety per cent of the issued share capital of each of the companies is in the beneficial ownership of a third company with limited liability.

Neither the transferor nor the transferee company had beneficial ownership of shares of the other company. The parent company wholly owned the transferor company, but the transferee company was not wholly owned by the parent company, but by a subsidiary of the parent company.

Pennycuick J. held that the exempting provision did not apply. He said, at p. 259:

In order to escape from that position, counsel for the Securities company has to get through the company structure and establish that the exempting provision covers the position where one company has the entire interest, to use a neutral term, in another company,

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through the medium of a subsidiary of the first company of which the second company is in itself in turn a subsidiary. That is a position which it seems to me is not covered by the wording of s. 42.

At p. 260, he said:

…According to the legal meaning of the words, a company is not the beneficial owner of the assets of its own subsidiary. The legal meaning of the words takes account of the company structure and the fact that each company is a separate legal person.

It should be noted that that case was concerned with the meaning of the words “beneficial owner” and not with the words “beneficially entitled” and I agree with Hart J. that there is a distinction. Further, Pennycuick J. was careful to distinguish the ownership of the shares as contrasted with a controlling interest in the company.

The judgment of the Court of Appeal in Littlewoods Mail Order Stores, Ltd. v. McGregor⁸, is, in my opinion, much more relevant to the circumstances of this appeal. It dealt with a deduction claimed in computing income for income tax purposes. The taxpayer, which carried on business in London, leased its business premises under a 99-year lease, of which 88 years were unexpired. The annual rent was £23,444. Under an arrangement made with the freehold owner, the freehold title to the land was acquired by a wholly-owned subsidiary of the taxpayer, Fork Manufacturing Co., Ltd. Fork leased the premises to the former owner for 22 years and 10 days at a rent of £6 per year. The former owner then subleased the premises to the taxpayer for 22 years at an annual rent of £42,450. The taxpayer claimed that amount as a deduction for income tax purposes. The Inland Revenue Commissioners disallowed the difference between £42,450 and the rent of £23,444 previously being paid.

The claim of the taxpayer was that Fork was a separate and independent entity and must be treated in the same way as if its shares were held by someone other than the taxpayer. The freehold title would be acquired by Fork and the taxpayer, as a result of the transaction, would acquire no capital asset at all.

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This submission was dealt with by Lord Denning M.R., at p. 860, as follows:

I cannot accept this argument. I decline to treat the Fork company as a separate and independent entity. The doctrine laid down in Salomon v. Salomon & Co., Ltd. ([1897] A.C. 22; [1895-99] All E.R. Rep. 33) has to be watched very carefully. It has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see. But that is not true. The courts can and often do draw aside the veil. They can, and often do, pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest. And the courts should follow suit. I think that we should look at the Fork company and see it as it really is—the wholly-owned subsidiary of the taxpayers. It is the creature, the puppet, of the taxpayers in point of fact; and it should be so regarded in point of law. The basic fact here is that the taxpayers, through their wholly-owned subsidiary, have acquired a capital asset—the freehold of Jubilee House; and they have acquired it by paying an extra £19,006 a year. So regarded, the case is indistinguishable from the Land Securities case ([1969] 2 All E.R. 430; [1969] 1 W.L.R. 604). The taxpayers are not entitled to deduct this extra £19,006 in computing their profits.

Karminski L.J., after referring to the submission of counsel for the taxpayer that the taxpayer and Fork were two separate entities in law, went on to say, at p. 862:

…There is no doubt as to the correctness of that submission, based as it is on the rule in Salomon v. Salomon & Co., Ltd. ([1897] A.C. 22; [1895-99] All E.R. Rep. 33) of many years standing. But it is necessary here, as I think, to look at what I believe to be the realities of this situation. The taxpayers are, as we have heard, a large and important trading company. The Fork company is shown by its balance sheet, which we have seen, to be not only a separate entity, but one which is a creation of, or at any rate, completely dependent on the taxpayers. I say that for this reason: we have the balance sheets for a number of years, beginning with the year ending December 1959, and finishing with the balance sheet for the year ending December 1962. The authorised capital of the Fork company was 20,000 shares of £1 each. The issued capital was more modest, being two shares of £1 each fully paid. Otherwise the only assets, apart from that modest paid-up capital, was freehold land and buildings

[Page 793]

valued by the directors in 1959 at £20,000. By the time of the December 1962 balance sheet that valuation had gone up, no doubt perfectly rightly, to £86,202; but the rest of the balance sheet remained remarkably unchanged. It is true that the cash in hand in 1958 was £2; but so it was in 1962. But meanwhile the cash at the bank had increased from nothing to £13 7s. Those figures, not perhaps very illuminating in themselves, have at any rate convinced me that the only object of the Fork company in 1958 was to hold this very valuable property, which Lord Denning, M.R., has described in detail, for the taxpayers. It is necessary I think to ask myself, after that examination of the details, who really benefited from getting hold of the freehold. To that in my view there can be only one answer, i.e., the taxpayers, and not the Fork company.

Another instance of the so-called lifting of the corporate veil is to be found in another judgment of the Court of Appeal in D.H.N. Food Distributors Ltd. v. Tower Hamlets London Borough Council⁹, in which Lord Denning, at p. 860, speaking of the wholly-owned subsidiaries in that case and of the parent company said: “These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says”. Goff L.J., at p. 861, referred to the fact that, in that case, “the two subsidiaries were both wholly owned, further they had no separate business operations whatsoever”.

I do not think that in order to support the judgments below it is really necessary to “lift the corporate veil”. Subsection 2(5) comes into operation not only when a corporation “acquires” property of the deceased but also when it “becomes beneficially entitled” thereto. This last expression, coming as it does after the word “acquires”, clearly contemplates that the property has gone to another person for the benefit of the corporation. It would undoubtedly cover the case of property bequeathed to a trustee for the benefit of the corporation. It cannot be denied that in this situation the corporation would become “beneficially entitled” to the property. However the statute does not restrict the application of the provision to such a case. In my view, the corporation is no less “beneficially entitled” when the property is held

[Page 794]

by its wholly-owned subsidiary as when it is held in trust for it. Its legal entitlement is even more immediate as it does not have to call upon a third party to perform its obligation as trustee. It only has to exercise its rights as sole shareholder of its subsidiary. Nothing in the context of subs. 2(5) justifies giving a restricted meaning to the expression “beneficially entitled” which ought to be read according to the meaning of the words in ordinary language. I cannot find that it has acquired a technical meaning to which it must be restricted in this statute.

In my opinion, in considering the application of subs. 2(5) to the unusual facts of this case, this Court should not feel itself rigidly bound, in interpreting the words “beneficially entitled” by rules of equity evolved in the courts of chancery in connection with trusts. This approach was manifested by this Court in Minister of Revenue for the Province of Ontario v. McCreath et al.¹⁰

During her lifetime, Mrs. McCreath established a trust in respect of certain property. The trust provided that, during her lifetime, the trustee was required to pay or apply the whole net income from 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. On her death, the trustee was to dispose of the fund among her issue or such of them as she might by will direct. In default of such direction, there was to be an equal division.

The taxing statute in question was drafted so as to catch all forms of transactions which had the result of transferring property on death. Therefore, “property passing on the death of a deceased” was broadly defined and was 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,

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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 question was as to whether, under the trust, Mrs. McCreath had reserved to herself “an interest” in the property expressly or by implication. It was contended on behalf of the respondents that no interest had been reserved. The distribution of the annual income as among Mrs. McCreath and her children was entirely at the discretion of the trustee among one or more of the group. Mrs. McCreath had no enforceable right to obtain any part of the income.

This submission was rejected in the judgment of the majority of the Court (the other member of the Court reached the same result on other grounds). The reasons for the rejection were stated at p. 15 as follows:

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.

In my opinion, the parent company, in the circumstances of this case, did have beneficial entitlement to the residue of the estate within the meaning of subs. 2(5). The fact that it was not made a beneficiary under the will does not preclude this finding in view of the fact that it had complete and absolute control of the named beneficiary, the subsidiary company, and had the legal capacity to compel that company to turn over to it the share of

[Page 796]

the estate bequeathed to it. This conclusion is fortified by the fact that it was the obvious purpose of the scheme adopted by the testator that the subsidiary company should turn over to the parent company the residue of the estate so that it could, in turn, divide the residue among its shareholders, i.e., the twelve grandchildren of the deceased. His intention was manifested in the will as it was first drawn. The clear intention of the testator was to divide the residue of his estate among his grandchildren. The codicil, plus the scheme of corporate arrangement with the parent company owning all the shares of the subsidiary company, accomplished the same result, but involved the residue passing through the hands of two corporations before finally reaching the intended beneficiaries.

Both companies were incorporated on the same day in the same office by the same lawyers. Neither the parent company nor the subsidiary company engaged in any business activity between their dates of incorporation and the date of Mr. Jodrey’s death. Neither of them had any creditors. Both of them had the same directors. Both had the same officers.

This is eminently a case in which the Court should examine the realities of the situation and conclude that the subsidiary company was bound hand and foot to the parent company and had to do whatever its parent said. It was a mere conduit pipe linking the parent company to the estate.

In the circumstances, it is my view that the parent company was beneficially entitled to the residue of the estate within the meaning of subs. 2(5). Although it is not a named beneficiary under the will, the corporate scheme evolved by the deceased has clothed it with total control over the named beneficiary, the subsidiary company, and has enabled it legally to compel the subsidiary company to turn over the residue of the estate to it. The reality of the situation is that the parent company is the beneficial owner of the residue of the estate and that this was not only known to the deceased when he executed the codicil to his will, but was intended by him. He knew that the codicil bequeathed the residue of his estate to a company which, under the arrangement evolved for him, was wholly owned by the parent company whose

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shareholders, his grandchildren, were the intended recipients of his bounty. To use the words of Rand J. in the Montreal Trust Company (supra) case, the parent company, though having no right as a beneficiary of the will to sue the executors directly, had “an ultimate and alternative resort as the effective cause of payment”.

This conclusion does not involve any conflict with the principle stated in cases such as Macaura v. Northern Assurance Company, Limited and others¹¹, that a corporate shareholder does not have a right to the corporate assets of a corporation. The point in issue in this appeal is that by virtue of its total control over the subsidiary company, the parent company is in a legal position to compel it to deal with its assets in the manner dictated by the parent company.

In my opinion, the appeal on the first issue fails.

Second Issue:

Second Issue: Constitutionality of Subsection 2(5)

The appellants contend that subs. 2(5) of the Act is ultra vires of the Legislature of Nova Scotia. It is said that subs. 2(5) of the Act requires an application of the charging provisions of subs. 8(2) of the Act, which results in taxation that is not “within the Province” and is indirect and thus not within s. 92(2) of the British North America Act.

For purposes of convenience, s. 8 of the Act is repeated here:

8(1) Subject as hereafter otherwise provided, duty shall be paid on all property of a deceased that is situated, at the time of the death of the deceased, within the Province.

(2) Subject as hereafter otherwise provided, where property of a deceased was situated outside the Province at the time of the death of a deceased and the successor to any of the property of the deceased was a resident at the time of the death of the deceased, duty shall be paid by the successor in respect of that property to which he is the successor.

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It is submitted by the appellants that the proper categorization of the tax imposed by subs. 8(2) of the Act is that it is a succession duty and that the subject-matter of the tax is the transmission of property.

The appellants relied, in support of their contention, upon the judgment of the Court of Appeal of British Columbia in Attorney General of British Columbia v. Canada Trust Company and Ellett¹², which held that s. 6A of the Succession Duty Act, R.S.B.C. 1960, c. 372, as amended by 1972 (B.C.), c. 59, s. 14, was invalid.

Subsection (1) of s. 6A is substantially the same as subs. 8(2) of the Nova Scotia Act. Section 6A provides as follows:

6A. (1) Where property of a deceased was situated outside the Province at the time of the death of the deceased, and the beneficiary of any of the property of the deceased was a resident at the time of the death of the deceased, duty under this Act shall be paid by the beneficiary in respect of that property of which he is the beneficiary.

(2) The beneficiary of the property of the deceased referred to in subsection (1) shall, except as provided in section 5, pay the duty in respect of that property calculated on the dutiable value thereof at the rate prescribed in the Table of Rates in Schedule C, as ascertained according to the following method:

In a judgment of this Court, recently delivered, an appeal from the judgment of the British Columbia Court of Appeal was allowed and s. 6A was held to be intra vires of the Legislature of British Columbia. It was held that s. 6A “imposes an in personam tax on a resident beneficiary”.

It must therefore be taken as settled law that subs. 8(2) of the Act is valid legislation and that the tax imposed by it is an in personam tax on a resident successor.

Subsection (5) of s. 2, coupled with subs. 8(2), merely imposes upon resident shareholder successors the same obligation imposed upon resident successors by subs. 8(2). They do not succeed to property of the deceased directly, but the property

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ultimately devolves upon them by reason of his death through their ownership of shares in a non-resident corporation which becomes beneficially entitled to property of the deceased.

The tax which is imposed upon the grandchildren of the deceased by the combined effect of subs. 8(2) and subs. 2(5) is a tax imposed upon residents of Nova Scotia measured by their succession to the estate of a resident of Nova Scotia, whose will was made and probated in Nova Scotia. This is a tax upon residents in the province and so is taxation within the province. The tax is not a tax upon property outside the province. It is a tax upon persons within the province measured by the benefits which they derive as a result of the bequest made to a non-resident corporation of which they are the shareholders. It is clearly imposed upon the very persons who were intended to pay it, and so it cannot be regarded as an indirect tax.

In my opinion, subs. 2(5) was intra vires of the Legislature of Nova Scotia to enact.

I would dismiss the appeal with costs.

The reasons of Ritchie, Dickson and McIntyre JJ. were delivered by

Dissenting Reasons (Dickson J.)

DICKSON J. (dissenting)—In this appeal the Court is asked to draw the line between acceptable estate tax planning and unacceptable tax evasion. In broad and general terms, the issue is this: where a testator or taxpayer has studied the relevant legislation and ordered his affairs in such a manner as to avoid the apparent reach of the measure, and where there is no statutory definition of improper tax avoidance, in what circumstances will a court strike down his acts? There is, I think, a distinction to be made between cases in which: (a) tax consequences are clearly delineated in the statute, and, cognizant that he falls squarely within its ambit, the taxpayer sets out to disguise or alter the character of his income; and, (b) those in which a taxpayer finds a lacuna or way in which he can validly take his income wholly outside the express wording of the statute. The taxpayer does

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not falsely represent his position to the taxing authorities; he merely re-arranges his affairs in a legal manner so as to minimize tax liability.

The decision as to whether his acts constitute (a) reprehensible tax evasion or (b) legitimate tax planning, will depend upon the jurisprudence as applied to the facts of the particular case.

I propose to deal with this question under the following heads:

I Facts

II Interpretation of Fiscal Legislation

III “Beneficially Entitled”

IV Lifting the Corporate Veil V Sham

VI Conclusion

I

THE FACTS

I. The Facts

Roy A. Jodrey, for thirty years a resident of Hantsport, Nova Scotia, died there on August 12, 1973. By his will, executed on August 13, 1963, he had given his executors, the appellants in the present case, the usual directions as to payment of debts, funeral and testamentary expenses, estate taxes and succession duties. Then, after making charitable and other bequests, he had directed that, on the death of his wife, the rest and residue be divided equally among his grandchildren.

Following execution of the will, and during the lifetime of Mr. Jodrey, the federal government, on January 1, 1972, vacated the estate tax field. The Province of Nova Scotia, in common with a number of other provinces, moved with alacrity to fill the void, and passed An Act Respecting Succession Duties, 1972 (N.S.), c. 17, deemed to have been in force in January 1, 1972. The Act imposed succession duties on all property of a deceased situated within the province at the time of his death, as well as on property situated outside the province, passing to resident “successors”.

It became apparent that, unless something were done, Mr. Jodrey’s twelve grandchildren, all of

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whom were resident in Nova Scotia, would be liable, as “successors”, to succession duties. Accordingly, a rather elaborate scheme was devised, and implemented, by which it was hoped to escape the imposition of duty in Nova Scotia on the estate then valued at some $3,500,000.

The scheme involved three main moves:

1. The incorporations—On September 13, 1972, Mr. Jodrey caused to be incorporated in Alberta, then the only province free of succession duties, three companies:

(a) J.B.H. Investments Ltd.—the parent company which issued to each of Mr. Jodrey’s twelve grandchildren, 100 common shares at a price of $1 per share, paid by the grandchilren.

(b) J.G.C. Investments Ltd.—the subsidiary company which issued 100 common shares, all of which were beneficially owned by the parent company.

(c) White Rock Investments Ltd.—which issued two common shares, each beneficially owned by Mr. Jodrey.

Each of the companies became a registered Alberta corporation. None carried on busines in Nova Scotia. The head office, share transfer register and certificates for issued shares of each was located in Alberta. The officers and directors of each were residents of Alberta.

2. The White Rock Transaction

On September 22, 1972, Mr. Jodrey entered into an agreement whereby he agreed to sell and White Rock Investments agreed to purchase, 4,600 shares of R.A. Jodrey Investments Limited, a Nova Scotia corporation owned and controlled by Mr. Jodrey, for a consideration of $3,735,200. White Rock gave Mr. Jodrey a promissory note in that amount, payable without interest upon presentation at the registered office of White Rock in the Province of Alberta. On July 3, 1973, White Rock paid $105,800 on account of the note, leaving a balance owing at the date of Mr. Jodrey’s death, of $3,629,400. The promissory note was situate in Alberta at that date.

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3. The codicil

By a codicil to his will, executed October 5, 1972, Mr. Jodrey revoked the bequest to his grandchildren of the residue of his estate, and substituted therefor:

the rest and residue of my estate I give and bequeath to JGC Investments Limited, an Alberta company, including without limitation a note of White Rock Investments Limited.

The steps taken were not dissimilar to those which the author of a paper delivered at the Twenty-Third Tax Conference, 1971, of the Canadian Tax Foundation (Report of Proceedings, at p. 36) suggested might be taken by a father wishing legally to avoid succession duties. The author, under the rubric of “transmissions”, wrote:

It may be possible under present law for a father legally to avoid succession duties, even if his children are domiciled or resident in the father’s province of domicile. If, for example, a father domiciled in Ontario transferred all his assets, including those which are situated in Ontario, to an Alberta holding company, in return for shares of the Alberta company, and if his children then also incorporated a second Alberta holding company and by his will the father left his shares in the first company to the second company, it would seem that Ontario would not be in a position to levy any duty. In Re Chodikoff Estate, 1970 306 (ON CA), [1971] 1 O.R. 321, the Ontario Court of Appeal held that a disposition made by way of bargain sale by a father to his children’s holding company was a disposition to the holding company, and not to his children, and that it was therefore taxable at the rates of duty applicable to strangers, rather than those applicable to preferred beneficiaries. Applying this reasoning to our hypothetical case, it would seem that a bequest of the shares of the first Alberta company to the second Alberta company could not be considered a transmission to the testator’s children, who are resident in Ontario, merely because they were the shareholders of the second Alberta company.

The purpose of the two-tiered, parent-subsidiary relationship in the case at bar was to place the residue of the estate outside the taxing provisions of the newly enacted Nova Scotia statute, s. 1 (ae) of which reads:

(ae) “successor” in relation to any property of the deceased includes any person who, at any time before or on or after the death of the deceased became or becomes beneficially entitled to any property of the deceased

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(i) by virtue of, or conditionally or contingently on, the death of the deceased, or…

The Minister of Finance relied upon s. 2(5)(b) in seeking to tax the grandchildren:

2. (5) Where a corporation which is not resident in the Province, other than a corporation without share capital, by reason of the death of a deceased acquires or becomes beneficially entitled to property of the deceased,

(a) the corporation shall be deemed not to be the successor of the property except to the extent that the value of the shares of the shareholders of the corporation is not increased in value by the corporation acquiring or becoming beneficially entitled to the property; and

(b) each of the shareholders of the corporation shall be deemed to be a successor of property of the deceased to the extent of the amount by which the value of his shares in the corporation is increased by the corporation acquiring or becoming beneficially entitled to the property.

The charging provisions read:

8. (1) Subject as hereafter otherwise provided, duty shall be paid on all property of a deceased that is situated, at the time of the death of the deceased, within the Province.

(2) Subject as hereafter otherwise provided, where property of a deceased was situated outside the Province at the time of the death of a deceased and the successor to any of the property of the deceased was a resident at the time of the death of the deceased, duty shall be paid by the successor in respect of that property to which he is the successor.

9. Each successor to any property of a deceased on which duty is payable under subsection (1) of Section 8 and each successor liable to pay duty under subsection (2) of Section 8 shall pay the duty to the Minister for the raising of a revenue for provincial purposes.

Section 8(2) is concerned with property situate outside the Province, and successors resident within the Province. The legatee, an Alberta company, was not resident within the Province of Nova Scotia and therefore the bequest was outside s. 8(2), unless s. 2(5)(b) of the Act could be called in aid. That section addresses the situation where a corporation, such as J.G.C. Investments Ltd., not

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resident in Nova Scotia, becomes beneficially entitled to property by reason of the death of the deceased.

Section 2(5)(b) is clearly intended to reach resident-shareholders of non-resident legatee companies. If Mr. Jodrey had left the residue of his estate to an Alberta company in which his grandchildren held shares, I do not think there is any doubt (subject to any constitutional challenge) that the grandchildren would have been subject to tax. The scheme I have outlined, however, introduced a second Alberta company. The sole shareholder of the legatee corporation, J.G.C. Investments Ltd., is its parent, J.B.H. Investments Ltd. That corporation is not resident in Nova Scotia. Therefore, it is argued, that company and its shareholders, the grandchildren, fall outside the scope of the Act.

The draftsman of the Act envisaged the possibility of a non-resident corporate legatee with resident shareholders, and made provision for that eventuality. He overlooked the possibility of a legatee subsidiary company having a non-resident parent, controlled by resident shareholders. That lapse, it is said, relieves the grandchildren of tax in respect of the residue received by the subsidiary of the parent company in which they are sole shareholders. Is all this the legitimate arranging of one’s affairs so as to fall outside the language of the taxing statute or is it improper tax evasion? If the latter, on what legal basis is it to be so regarded? The views of the individual judge as to the propriety or impropriety of the conduct of the testator, and the desirability or undesirability of the result sought to be attained by the testator, do not furnish any guide to decision.

By Notice of Assessment dated August 8, 1975, addressed to the executors of the estate, the total value of the estate was increased by $3,784,273, of which $2,999,000 was attributable to “promissory note with situs in Alberta”; the applicable rate of duty was established to be 48.5 per cent; the duty was assessed in the amount of $1,534,421.96 and interest thereon at the rate of 8 per cent per annum. It is common ground that by the Notice of

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Assessment, duty was assessed against the twelve grandchildren on the basis they are successors to the residue of the estate. The executors filed a notice of objection. The Minister of Finance confirmed the assessment “as having been made in accordance with the provisions of the Act and in particular on the ground that the twelve grandchildren of the deceased, all residents in Nova Scotia at the time of death, are true and proper successors to the residue of the estate pursuant to paragraph (b) of subsection (5) of Section 2 of the Act”.

The Minister has accepted throughout that the grandchildren were not “successors” under s. 1(ae) of the Act but “deemed” to be successors under s. 2(5)(b), as shareholders of a corporation beneficially entitled. Mr. Justice Hart in the Court below noted this in his reasons for judgment in the MacKeen matter. Unsuccessful appeals in both estates were taken from the Minister’s decision to the Trial Division and, later, the Appeal Division of the Supreme Court of Nova Scotia. Argument proceeded before both Courts on an Agreed Statement of Facts and a book of Agreed Exhibits. The Agreed Statement of Facts sets out the two questions for decision at trial, and now before this Court:

(a) whether or not the twelve grandchildren of the deceased are or are not successors to the residue of the estate of the deceased within the meaning of section 2(5) of the Act; and

(b) if it is found that the twelve grandchildren of the deceased are successors to the residue of the estate of the deceased within the meaning of section 2(5) of the Act, whether or not section 2(5) is ultra vires the powers of the legislature of Nova Scotia.

Identical issues were before the Nova Scotia Courts in appeals respecting the Estate of John Crerar MacKeen and the reasons set out in the MacKeen case were adopted by the Court of Appeal in its reasons for decision in the case at bar. In this Court the Provinces of Quebec and British Columbia intervened in support of an affirmative answer to the following constitutional question:

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Are sub-sections 8(2) and 2(5) of the Succession Duty Act of the Province of Nova Scotia, S.N.S. 1972, c. 17, intra vires of the Legislature of that Province to enact?

II

INTERPRETATION OF FISCAL LEGISLATION

II. Interpretation of Fiscal Legislation

In all Courts the appellants advanced a number of propositions regarding principles of statutory construction of fiscal legislation, that require comment. It is said taxing statutes are to be strictly construed. The Court, it is contended, can only look to the express words of the statute and cannot explore and give effect to the intention or purpose of the Act. A passage from the judgment of Lord Halsbury in Tennant v. Smith¹³, at p. 154, is cited. Then it is said there is no equity in the Crown’s favour in a taxing statute. Reliance is placed on a passage from Attorney-General v. The Earl of Selborne¹⁴, in which Collins M.R. adopted this principle, at p. 396:

If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.

The appellants make reference to the “form versus substance” controversy. The Court, it is said, must examine the “legal effect” of the transaction and disregard, or at least greatly subordinate, the true substance of the matter. The appellants look to well-known passages found in Commissioners of Inland Revenue v. The Duke of Westminster¹⁵, at pp. 20, 25 and 31.

Finally, the appellants advance the proposition, not open to challenge, that a taxpayer may so order his affairs as to attract the least amount of tax, however “unappreciative” the taxing authori-

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ties as to his “ingenuity”, Duke of Westminster, supra, at p. 19.

If the submissions made on behalf of the appellants, as to the proper principles to be applied in constructing fiscal legislation, simply mean that it is impermissible to bring to the task of construing a fiscal statute a bias in favour of the Crown, then I am in entire accord. A court of justice must act as a neutral umpire, impartially and objectively, between the taxpayer and the taxing authority. Neither occupies a preferred position.

If, on the other hand, the submissions of the appellants mean that there are special principles of construction governing the interpretation of fiscal legislation, or that a court must uncritically and supinely accept the form of the transaction, blind as to what is actually happening, then, with respect, I disagree.

Fiscal legislation does not stand in a category by itself. Persons whose conduct a statute seeks to regulate should know in advance what it is that the statute prescribes. A court should ask—what would the words of the statute be reasonably understood to mean by those governed by the statute? Unnatural or artificial constructions are to be avoided.

The correct approach, applicable to statutory construction generally, is to construe the legislation with reasonable regard to its object and purpose and to give it such interpretation as best ensures the attainment of such object and purpose. The primary object of a succession duty statute, such as the legislation under consideration, is to capture such amounts for the fiscal coffers as the words of the statutory net can catch. No legislative intention can be assumed other than to collect such tax as the statute imposes, no more and no less.

Although a court is entitled, in the case of fiscal legislation as with other enactments, to look to the purpose of the Act as a whole, as well as the particular purpose of a given section, it must still respect the actual words which express the legislative intention. In Corporation of the City of

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Toronto v. Russell¹⁶, Lord Atkinson, delivering judgment for the Privy Council stated at p. 501:

Their Lordships are moreover of opinion that, since the main and obvious purpose and object of the Legislature in passing the Act 3 Edw. 7, c. 86, was to validate sales made for arrears of taxes… the statute should where its words permit, be construed so as to effect that purpose and attain that object. (Emphasis added.)

The following passage is found in the judgment of Brightman J. in the Chancery Division in Sansom et al. v. Peay¹⁷, at p. 379, concerning s. 29(9) of the Finance Act:

In my view s. 29(9) is capable of bearing either the strict construction for which counsel for the Crown has argued or the broader construction advocated by counsel for the trustees. Subsection (9) is an exempting subsection, and it is not of course my duty, even in the case if (sic) a taxing statute, to try to ensure that the exemption applies. But I think I am permitted to take into consideration one factor which must have been present to the mind of Parliament when enacting s. 29. The general scheme of s. 29 is to exempt from liability to capital gains tax the proceeds of sale of a person’s home. That was the broad conception… It would not therefore be surprising if Parliament formed the conclusion that, in such circumstances, it would be right to exempt the profit on the sale of the first home from the incidence of capital gains tax so that there was enough money to buy the new home. Nevertheless, it would not be permissible for me to construe sub‑s (9) in a manner which I thought was fair or reasonable unless the wording permits that construction. Nor do I intend to travel outside the facts of the particular case before me. (Emphasis added.)

III

BENEFICIALLY ENTITLED

III. Beneficially Entitled

I turn now to the question whether the transaction in the case at bar falls within the meaning of the words of s. 2(5) so as to deem the twelve grandchildren “successors”. I repeat s. 2(5)(b):

[Page 809]

Where a corporation which is not resident in the Province, other than a corporation without share capital, by reason of the death of a deceased acquires or becomes beneficially entitled to property of the deceased,

(a) …

(b) each of the shareholders of the corporation shall be deemed to be a successor of property of the deceased to the extent of the amount by which the value of his shares in the corporation is increased by the corporation acquiring or becoming beneficially entitled to the property.

If the “corporation which is not resident in the Province” and which “acquires or becomes beneficially entitled to property of the deceased” is identified as the subsidiary company, the direct object of the bequest, then it is clear, upon a plain reading, that the section does not reach the grandchildren as they are not shareholders of the legatee corporation. If the Minister is to sustain the assessment on the basis of s. 2(5)(b), he must establish that the parent company became “beneficially entitled” to property of the deceased.

If one resorts to legal dictionaries in search of the meaning to be attributed such words and phrases as “entitled”, “beneficial”, “beneficially entitled”, “beneficial interest”, and the like, it soon becomes apparent their meanings are almost invariably drawn from cases concerned with the construction of wills or succession duty statutes. The phrases naturally take their colour from the word “beneficiary” who is, after all, the target of the tax. Whether we like it or not, this takes us into that formidable body of jurisprudence built up by the courts of chancery. The Nova Scotia Act deals with a subject-matter formerly administered by the courts of equity and it uses phrases long familiar to those courts. At least in the pure wills or trust situations, “beneficially entitled” refers to an interest that would be recognized by, and enforceable in, a court of equity. See Waters, Law of Trusts in Canada (1974), at pp. 833-35.

The leading modern British authority is Uniacke v. Attorney-General (In re Miller’s Agreement)¹⁸, in which Wynn-Parry J. had to determine whether

[Page 810]

the plaintiffs were “beneficially entitled” to certain annuity payments which partners of the retiring (and since deceased) partner covenanted to pay the plaintiffs, family of the former partner.

In the clearest statement of the law on this point, the learned trial judge said (at p. 625):

The word “entitled”, as used in this section, appears to me necessarily to carry the implication that for a person to be entitled to property under this section it must be capable of being postulated of him that he has a right to sue for and recover such property.

This “sue for and recover” rule was followed in Re J. Bibby & Sons, Ltd. Pensions Trust Deed, Davies v. Inland Revenue Commissioners¹⁹. There, at p. 487, Harman J. held a widow not to be “beneficially entitled” to an income from a pension on the ground that she had not “such an interest in property as would be protected in a court of law or equity”.

There are Canadian cases which touch upon the subject. In Re Steed and Raeburn Estates; Minister of National Revenue v. Fitzgerald et al.²⁰, concerned whether or not the property in question was situated in Canada. Rand J. considered the nature of a beneficiary’s interest:

But in addition to his capacity of representing the deceased, the executor in equity is looked upon as quasi-trustee for the beneficiaries; and the beneficiary is entitled to resort to that court to have the duty of the executor enforced. The “interest” in property that is transmitted results from that right and becomes, therefore, an equitable interest, subject to the rules which underlie equitable administration, (at p. 461)

Locke J., in dissent, indicated he too would define a beneficiary as one who could compel the trustees properly to administer the estate.

Cossitt v. M.N.R.²¹ involved, in part, consideration of s. 2(m) of the Dominion Succession Duty

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Act, 1940-41 (Can.), c. 14, as amended by 1942-43, c. 25. The question faced by O’Connor J. was whether the general power given the beneficiary, to use all or any part of the capital, was “property” to which the beneficiary was “beneficially entitled”. O’Connor J. held at p. 708:

“Entitled” in s. 2(m), in my opinion, should be given the same meaning set out by Wynn‑Parry J. In re Miller’s Agreement, Uniacke v. Attorney-General, [1947] 2 All E.R. 78, in which after discussing the word “entitled” in s. 2 of the Succession Duty Act, 1853 (Imp.), c. 51, he said at p. 83: “The word ‘entitled’, as used in this section, appears to me necessarily to carry the implication that, for a person to be entitled to property under this section, it must be capable of being postulated of her that she has a right to sue for and recover such property.”

Until the appellant exercised the power in his own favour, he would not have the right to sue for and recover the capital.

Wanklyn et al. v. M.N.R.²², was a very similar case. In addition to an interest in the income from the capital sum, the beneficiary there was vested with a general power of appointment. If he exercised the power fully he would become absolute owner of the capital. The Minister sought to tax as if the property had been bequeathed absolutely. Cartwright J., delivering judgment for himself and Fauteux J., held at p. 75:

The respondent’s argument depends upon the proposition that a person who is given a power over property thereby becomes beneficially entitled to such property but in my view this is not the law and no words in the Statute so provide. As is pointed out in Halsbury, 2nd Edition, Vol. 25, page 515:

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

These two cases are analogous to the case at bar. The parent company in the case at bar is in a position at any time to wind up its wholly-owned subsidiary and obtain the legacy bequeathed to the

[Page 812]

subsidiary. The Minister contends that this power places the parent in the position of being “beneficially entitled” to the residue of Mr. Jodrey’s estate. It is true that the word “power” is a term of art and was so used in the two cases to which I have referred. The cases are helpful though in that each recognizes a beneficial interest as an interest or right recognized by the courts of equity. The fact that there would be no legal impediment to one acquiring the property is not sufficient. Beneficial entitlement arises only in those situations where equity recognizes the interest.

Re Chodikoff²³ is the closest case, factually, to the present case. The deceased had made two “dispositions” of shares in a private corporation controlled by him. In one, he caused 500 treasury shares to be transferred at an undervaluation to another personal corporation, the common shares of which were held in trust for his wife and children. In the other disposition he made a simple transfer of a quantity of common shares of one private corporation to another. The Minister sought to invoke the rate of taxation imposed on “strangers” on the ground that the corporations were “strangers”. The taxpayer responded by asserting that only the wife and children would ultimately benefit from the dispositions. Consequently, the lower rate of tax should have been used. Fraser J., at first instance, agreed. Upon appeal, counsel for the respondent argued that the “corporate veil” should be lifted and the transaction regarded in substance as one by which the deceased conferred a benefit upon his wife and children. That is essentially the argument advanced in the instant case. The following passage from the judgment of Arnup J.A. is pertinent:

…Undoubtedly, the effect of the transaction was to increase the assets of Bemar, but the making of the disposition did not in itself, it seems to me, “benefit” the beneficiaries under the trust. Whether in the long run they would be better off by reason of the disposition depended on a number of factors which might occur in the future, including the winding up of Bemar,…

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No property interest accrued to the trust, either at law or in equity, by reason of the disposition. The only effect was that in certain events an asset which it already held might become more valuable.

If the cestuis que trustent did not “benefit” by the disposition, who did? The inevitable answer must be that Bemar did, i.e., that corporation acquired an asset. The asset was not acquired by its shareholders or any class of them, any more than any interest in the asset was acquired by a creditor of the company, if such there were.

In my opinion, the link between the disposition on the one hand and the persons who were said to benefit on the other is much too tenuous and, indeed, is in law non-existent. A person does not become liable to tax under the Succession Duty Act, by reason of a disposition, merely because it later turns out that as a result of a whole series of events, including the disposition, he is better off than he would have been if the disposition had not been made. Only persons who receive a benefit from the disposition itself are caught by the provisions of the statute. (at pp. 330-331)

Chodikoff’s case is important because the Ontario Court of Appeal refused to give effect to the very argument employed in this case. In all likelihood the wife and children would ultimately benefit from the transactions; in law the corporations, and not the family, were the beneficiaries; the Court refused to lift the “corporate veil”.

I refer briefly to the American authorities to indicate the uniformity of jurisprudence on the meaning of “beneficially entitled”. A case often cited is People v. McCormick²⁴. This case makes it clear that the phrase is a compendious expression denoting the types of interests recognized by courts of equity. In Montana Catholic Missions v. Missoula County²⁵, the Supreme Court of the United States expressly included in its definition the element of the ability to sue to enforce the rights.

The expression, beneficial use or beneficial ownership or interest, in property is quite frequent in the law, and means in this connection such a right to its enjoyment as exists where the legal title is in one person and the right

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to such beneficial use or interest is in another, and where such right is recognized by law, and can be enforced by the courts, at the suit of such owner or of some one in his behalf. (at pp. 127-28)

The trustee Acts of eight of the provinces use the phrase “beneficially interested” in the sense of a beneficiary or successor with such an interest as would be recognized and enforced by the courts, someone who, by definition, is competent to seek relief in the event, for example, of default on the part of the executors and trustees of the estate. See the Trustee Act, R.S.N.S. 1967, c. 317, s. 40.

The meaning attached to the phrase “beneficially entitled” is closely linked to the meaning of the word “beneficiary”—at least in succession duty cases. The phrase, the authorities indicate, imports the requirement that he who is “beneficially entitled” be able to go to court to have his interest in the property protected.

The nub of the problem in this case is that the draftsman of the statute selected a phrase well known to the courts; in effect, a term of art. There was awareness of the complications which could arise should a non-resident corporate entity be interposed between the trustee and the resident intended to be benefited. Hence s. 2(5). The draftsman anticipated that courts might be unable to find a shareholder of the corporate legatee to be “beneficially entitled”. The draftsman failed, however, to provide for the interposition of a second non-resident shareholder.

Counsel for the Minister of Finance submits that “the expression ‘beneficially entitled’ has a broad connotation, the ordinary or plain meaning of which encompasses the present transaction”. In the absence of earlier authority and in a context other than one related to estates and succession duties, a court might be much inclined to give effect to this submission and construe “beneficially entitled” according to what could be regarded as the popular usage of the language employed. But, in light of the uniform jurisprudence to the contrary, I find it impossible to accede to counsel’s submission.

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Here, J.B.H. Investments Ltd., the parent company, has no standing or capacity to “sue for and recover” the estate assets. J.G.C. Investments Ltd., the subsidiary, is the beneficial owner of the residue and it alone can sue the estate trustees to obtain legal title of those assets comprising the residue. J.B.H. Investments Ltd. perhaps has the power, through its share control, to compel J.G.C. Investments Ltd. to take steps against the trustees but it has no independent claim and no claim to beneficial entitlement which it can assert. It has no right to require either the executors or the subsidiary company to deliver or apply the bequest to its benefit.

At trial, Mr. Justice Hart in his reasons for judgment in the MacKeen matter, adopted in this case, expressed these views:

In my opinion the Legislature of Nova Scotia in using the expression “Where a corporation… becomes beneficially entitled to property of the deceased”, it was using it in the broad sense to cover the situation where the corporation is put in a position to ultimately exercise the rights of ownership over property of the deceased. It would be unnecessary to use additional words such as “directly or indirectly” or “is controlled by” to effect its purpose. “Becomes beneficially entitled to” is broad enough to cover situations in which the property is registered in another name or held in trust or placed in any form in which the corporation can legally recover the property for its own benefit.

Mr. Justice Hart cited Montreal Trust Company v. The Minister of National Revenue (Torrance Estate)²⁶, where Rand J., in obiter, added a gloss to the Miller’s Agreement case, supra, at p. 149:

The test was, that it must be “postulated of him [the successor] that he has a right to sue for and recover such property”. If the word “recover” extends to the application of money to one’s benefit, and “sue for” to an ultimate and alternative resort as the effective cause of payment, I am disposed to accept it.

The remarks of Mr. Justice Rand were made in the context of the peculiar facts of the Torrance

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Estate case and in my view do not assist in understanding the phrase “beneficially entitled”.

Mr. Justice Hart cited at length from Rodwell Securities Ltd. v. Inland Revenue Commissioners²⁷, which, as I read the case, roundly rejected the argument that “beneficial ownership” was not a term of art but fell to be construed liberally so as to include any person having complete control over the disposition of property. Pennycuick J. in the Rodwell case rightly noted that the section with which he was dealing did not contain the words “directly or indirectly”. In this respect, that case parallels the case at bar. Pennycuick J., in a passage which bears upon the present inquiry said:

The rest of counsel’s contentions really amounted in one set of terms or another to the proposition that the expression “beneficial owner” requires, and must be given a wide and liberal construction. I can answer that only by saying that it seems to me that one must construe the expression according to its legal meaning. I do not think that there is anything in the context of the section which requires one to do otherwise. (at p. 261)

Mr. Justice Hart interpreted the expression “beneficial owner” as meaning “the real or true owner of the property… the one who can ultimately exercise the rights of ownership in the property”. No authority is given for this proposition. The legal basis is not clear.

Chief Justice MacKeigan agreed with Mr. Justice Hart and reinforced his conclusion that the parent company was beneficially entitled to the estate interest acquired by its subsidiary by combining the operation of s. 1(ae) and s. 2(5). He said:

Let me explain. By s. 2(5) each MacKeen parent company is, as the sole beneficial shareholder of its subsidiary, undoubtedly deemed to be the successor in respect of the property bequeathed to that subsidiary. A “successor” by s. 1(ae) is declared to be a person who “becomes beneficially entitled” to property of the deceased on his death. The parent company, having been deemed a successor by s. 2(5), must then by s. 1(ae) be

[Page 817]

deemed to be a person beneficially entitled to the property in question.

Turning again to s. 2(5) and applying it again, the parent company is a non-resident corporation. It is a “successor” via its subsidiary. By the combined effect of s. 2(5) and s. 1(ae), as above, it must therefore be itself deemed to have become beneficially entitled to the property. Accordingly its shareholder “shall be deemed to be a successor” of the property.

With great respect, there is nothing in the particular statute or in any rule of statutory construction of which I am aware that permits one to climb up the corporate hierarchical ladder by applying s. 2(5) time and again. That is the very gap in the legislation of which the testator took advantage.

If the lower Courts are correct and the phrase “beneficially entitled” points to the locus of the benefit and the ultimate use and enjoyment of the property, it will be seen, by this process of reasoning, that the grandchildren are “beneficially entitled” by virtue of s. 1 (ae) ab initio. This is not the position taken by the Minister in these proceedings. The Minister relied upon s. 2(5) in order to reach the grandchildren. The grandchildren, not the parent J.B.H. Investments, possess the ultimate right and power to achieve by lawful means the full enjoyment of the property. That results in a dilemma that is difficult to resolve. The difficulty in the reasoning of the lower Courts is that such a construction of “beneficially entitled” leads ineluctably to the conclusion that s. 2(5) is superfluous and adds nothing to s. 1(ae).

In sum, the legal meaning of “beneficially entitled” is firmly imbedded in the concrete of earlier adjudication. However unenamoured one may be with the conduct of the testator in this case, I do not think it is open to this Court to jettison trust law and give a broad, non-technical meaning to the phrase “beneficially entitled”, based upon (i) the supposed intent of the legislature to catch transactions of this nature or (ii) the proposition that one is beneficially entitled to property if at some time in the future he can exercise powers (not drawn from the will) by which he may ultimately acquire an interest in the property. Here the Court is not being asked to introduce words into the Act in

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order to cure an ambiguity, but rather to introduce a new section to provide for a situation not captured by it. To do so would be tantamount to changing the rules after the game has been played.

IV

LIFTING THE CORPORATE VEIL

IV. Lifting the Corporate Veil

I think, however, it is proper for the Court to look not only at principles of trust law, but to those of corporate law. Principles of corporate law are of assistance in determining whether, by virtue of its ownership of all of the outstanding shares of J.G.C. Investments Ltd., J.B.H. Investments Ltd. can be said to be “beneficially entitled” to the assets of J.G.C. Investments Ltd.

Hart J. held that “beneficial entitlement” was used in its broadest sense; i.e., the right ultimately to establish the exercise of the rights of ownership. On appeal, MacKeigan C.J.N.S. dealt with the judgment of Pennycuick J. in Rodwell Securities Ltd. v. Inland Revenue Commissioners, supra. There, the question to be answered was whether a wholly-owned subsidiary (Securities) of a wholly-owned subsidiary (Group) of a parent company (London) was beneficially owned by the parent London.

Pennycuick J. held:

According to the legal meaning of the words, a company is not the beneficial owner of the assets of its own subsidiary. (at p. 260)

MacKeigan C.J.N.S. regarded that statement as (a) inapplicable and, (b) not quite accurate. A completely different statutory context and corporate scheme was involved in that case. In his view:

It seems to me apparent that a company may, depending on its make-up and status, become the beneficial owner of the assets of its subsidiary, and thus be beneficially entitled to them within the meaning of the latter phrase as used in the Succession Duty Act.

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With respect, Pennycuick J. did not hold merely that London was not the beneficial owner of Securities. Nor did he simply hold that it was not the beneficial owner of the Group company. His finding did not turn on the interpretation of a statutory definition of “beneficial owner”. Rather, he based his decision on the general principle that a company is not the beneficial owner of the assets of its own subsidiary:

…the parent company may very well have a controlling interest right down the line, but does not own any of the assets of the subsidiaries. So here, although the London company plainly has a controlling interest in the Securities company, it does not own beneficially any of the assets of the Group company, including the shares in the Securities company. (at p. 260)

In his view, there was no indication in the statutory provision directing any construction of “beneficial owner” other than according to its legal meaning.

The other case directly referred to in the Courts below is Littlewoods Mail Order Stores, Ltd. v. McGregor²⁸. It illustrates a contrast in approach. There, a parent, Littlewoods, and its subsidiary, Fork, embarked on an elaborate scheme by which Fork acquired a freehold estate and Littlewoods made payments, in the form of rent. Lord Denning M.R. was not prepared to regard the rent paid as a business expense of Littlewoods. He held (at p. 860):

I think that we should look at the Fork company and see it as it really is—the wholly‑owned subsidiary of the taxpayers. It is the creature, the puppet, of the taxpayers in point of fact; and it should be so regarded in point of law. The basic fact here is that the taxpayers, through their wholly-owned subsidiary, have acquired a capital asset.

In Littlewoods the Court was concerned with the nature of the payment, rather than with a question of proprietary rights of a parent, in the assets of a subsidiary. Denning M.R. drew back the corporate veil in order to ascertain the nature of the rent payments made by the parent company. It is clear,

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though, that since the Court viewed a portion of the rents paid as being on account of capital acquisition, the further inference is that the parent would own the property of the subsidiary, on termination of the lease.

Notwithstanding the views of Lord Denning M.R. as expressed above, the general and unquestioned principle of law is that a shareholder has no proprietary interest in the assets of a company in which he holds shares, otherwise than upon a winding-up.

Bank voor Handel en Scheepvaart v. Slatford and another²⁹ contains a useful discussion on this very point. Citing Salomon v. Salomon³⁰, and other cases, Devlin J. affirmed the principle that the assets of a company are not the assets of its shareholders. The cases relied upon: Macaura v. Northern Assurance Co.³¹; E.B.M. Co. Ltd. v. Dominion Bank³²; Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Birtain) Ltd.³³ He accepted as correct a statement by the Permanent Court of International Justice, in Standard Oil Co.’s Claim³⁴, at p. 162:

…the decisions of principle of the highest courts of most countries continue to hold that neither the shareholders nor their creditors have any right to the corporate assets other than to receive, during the existence of the company, a share of the profits, the distribution of which has been decided by a majority of the shareholders, and, after its winding-up, a proportional share of the assets.

Devlin J. had no doubt that courts can violate principles of company law in considering relationships between corporate entities. But he would require statutory language which permits or enables a court to do so:

No doubt, the legislature can forge a sledgehammer capable of cracking open the corporate shell, and it can,

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if it chooses, demand that the courts ignore all the conceptions and principles which are at the root of company law, but the phrase “belonging to or held or managed on behalf of is too mild a weapon for that purpose. (at p. 799)

The Macaura case, supra, is cited by the appellants herein. There, the appellant owned a sizeable estate, on which he held five insurance policies against fire on timber and wood products. He assigned the interest in the timber to a company, in which he held virtually all the shares. He was the shareholder and creditor of the company at the time there was a fire. The House of Lords held he had no insurable interest, as shareholder, in the assets of the company. Lord Buckmaster held:

Now, no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up. (at p. 626)

Lord Sumner stated, equally as clearly:

He stood in no “legal or equitable relation to” the timber at all. He had no “concern in” the subject insured. His relation was to the company, not to its goods… (at p. 630)

Lord Wrenbury agreed:

…the corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation. (at p. 633)

In this Court, in the case of Army and Navy Department Store Ltd. v. M.N.R.³⁵, Cartwright J. stated in his concurring reasons that, “With the greatest respect for those who hold the contrary view, I do not think that shareholders, either individually or collectively, have any ownership direct or indirect in the property of the company in which they hold shares.” (at p. 511)

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The authors of Fraser & Stewart, Company Law of Canada, 5th ed., 1962, make the point (at p. 20) that the distinction between a company and its shareholders is equally applicable where a company is a subsidiary of another company, and that a company and its wholly‑owned subsidiary are separate and distinct legal entities, citing Cohen L.J. in Ebbw Vale Urban District Council v. South Wales Traffic Area Licensing Authority³⁶, at p. 370:

Under the ordinary rules of law, a parent company and a subsidiary company, even a hundred per cent subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies one cannot be said to be the agent of the other.

Professor Gower in Modern Company Law, 4th ed., at pp. 123 et seq. details exceptional cases in which the courts have felt themselves able to ignore the corporate entity and treat the individual shareholders as entitled to its property. These are grouped under headings such as agency, trust (but not in the sense that a company holds its property on trust for its members qua members), fraud or improper conduct, public policy, quasi-criminal cases and group enterprises. There is no hard evidence of agency nor was agency argued before this Court. The present transaction does not fit easily into any of the other categories mentioned. See also Palmer’s Company Law, 22nd ed., vol. 1, paras. 18-22, 18-23.

Generally speaking, in the absence of fraud or improper conduct the courts cannot disregard the separate existence of a corporate entity; see Pioneer Laundry and Dry Cleaners Ltd. v. Minister of National Revenue³⁷. There have been a number of helpful articles written respecting the lifting of the corporate veil in Canadian tax law: “Lifting the Corporate Veil in Canadian Income Tax Law” by Tamaki (1961-62) 8 McGill L.J. 159; “Taxation and the Corporate Veil” by Mitchell (1966) 14

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Can. Tax J. 534; “Lifting the Corporate Veil: Legislative and Judicial Incursions for Income Tax Purposes” by Drache (1977) 29 Tax Conference Report 673; “The Corporate Veil in Tax Law” by Durnford (1979) 27 Can. Tax J. 282.

The Minister placed emphasis upon locus of benefit and ultimate control rather than upon initial or intermediate locus of receipt. The Court is invited to disregard the corporate arrangements, although the authority for doing so is not specified. The essence of the argument and the decision of the Appeal Division is that a shareholder can beneficially own, and therefore be beneficially entitled to, the assets (or right to acquire assets) of the corporation in which he holds shares. With respect, shareholding control does not give beneficial ownership of corporate assets nor beneficial entitlement thereto.

There is a tendency to think loosely in terms of a parent owning the assets of its wholly‑owned subsidiary but that is not so in law. No one would suggest that a person owning 100 shares of Canadian Pacific is the owner of, or has a beneficial interest in, the assets of Canadian Pacific. No distinction can be made in principle between ownership of 100 shares in a major corporation and ownership of all of the issued shares in a small company. In neither case does the shareholder own any asset other than shares. And the situation is unaffected by the fact that one or more shareholders may have voting control and thereby be in a position to acquire the assets or a portion thereof on wind-up, or upon a distribution of assets other than on wind-up. If shareholders are beneficially entitled to the property of a corporation in which they hold shares, then s. 2(5) would not have been necessary.

It is fundamental that a company as a body corporate is in contemplation of law an entity separate and distinct from shareholders who compose it. The principle of Salomon v. Salomon & Co. Ltd., supra, is still very much part of our law and in general the courts have rigidly applied it.

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It would appear, therefore, that not even by principles of company law can J.B.H. Investments Ltd. be regarded as beneficial owner of the assets of J.G.C. Investments Ltd. With respect, I think the lower Courts were clearly wrong in law in misapprehending the meaning of beneficial entitlement and in confusing concepts of control and ownership. Thus, the Court of Appeal was able to say that control sufficient to enable J.G.H. Investments Ltd. ultimately to compel transfer of estate assets to it, satisfied the s. 2(5) standard of beneficial entitlement.

V

SHAM

V. Sham

I come finally to the question of “sham”. Although sham was not alleged by the Minister, it none the less warrants some consideration. I think it must be kept uppermost in mind that the legislation here under consideration contains no provisions which introduce a statutory concept of sham, fraud, improper tax avoidance or illegal transactions for the purpose of succession duty. In contrast, see Part XVI of the Income Tax Act, 1970-71-72 (Can.), c. 63, entitled “Tax Evasion”.

It is also plain that appellants do not fit the conventional “sham” standard of a transaction purporting to create apparent legal rights and obligations which are at variance with the legal relationships which in fact characterize the arrangement. There is here no subterfuge. The documents were intended to be acted upon. They were not used as a cloak to conceal a different transaction. They did not create between the parties legal rights and obligations different from the rights and obligations which the parties intended to create. There is no camouflaging of the rights or obligations of either J.B.H. Investments Ltd. or J.G.C. Investments Ltd.

In the Nova Scotia Courts, Mr. Justice Hart, in his reasons for judgment said:

I do not believe the Court has any right to set aside bona fide transactions obviously designed for the avoid-

[Page 825]

ance of tax on the ground that they are artificial and designed to minimize or avoid payment of tax. The jurisprudence which has arisen around the provisions of Part 16… does not apply here since those provisions are not contained in the Nova Scotia Succession Duty Act. The argument of the Crown that the scheme of distribution adopted by Colonel MacKeen was patently designed to avoid the provisions of the Act and that the Court should therefore interpret the Act so as to catch the taxpayer must fail.

I do not see, on the record, any indication that an appeal was taken from the finding of Hart J. on this issue.

The McCreath case (Minister of Revenue for Ontario v. McCreath³⁸) was cited in argument and in the Courts below. The question there was whether a settlor had retained an interest in settled property so as to disentitle the property to an exemption under The Succession Duty Act of Ontario. That was a different case. The donor sought to create the impression through the language of the gifting instrument that she had disposed wholly and irrevocably of the subject-matter of the gift. The Court held that the degree of control retained defeated characterization of the transaction as a gift.

CONCLUSION

VI. Conclusion

Applying the statutory language to the facts, I can only conclude that the transaction in the case at bar does not fall within the words of s. 2(5) in such manner that the twelve grandchildren are deemed to be successors to the property of the deceased. On the legal meaning of the words of s. 2(5) of the Act, J.B.H. Investments Ltd. is the deemed successor and has no liability for tax under s. 8(2) because it is not resident in Nova Scotia. The grandchildren are not successors and therefore are not liable for duty under s. 8(2) of the Act. One would have to travel beyond the words of the Act to find otherwise.

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This is consistent with the approach of Lord Simon of Glaisdale in Ransom v. Higgs³⁹, at p. 94:

But for the Courts to try to stretch the law to meet hard cases… is not merely to make bad law but to run the risk of subverting the rule of law itself. Disagreeable as it may seem that some taxpayers should escape what might appear to be their fair share… it would be far more disagreeable to substitute the rule of caprice for that of law.

The answer I would give to the first question makes it unnecessary to consider the second question which was asked, namely, whether or not s. 2(5) is ultra vires the powers of the Legislature of Nova Scotia.

I would allow the appeal, set aside the judgment of the Appeal Division of the Supreme Court of Nova Scotia and the assessment of the twelve grandchildren of the deceased Roy A. Jodrey under the Act Respecting Succession Duties of Nova Scotia. The appellants are entitled to costs in all Courts.

Appeal dismissed with costs, RITCHIE, DICKSON and MCINTYRE JJ. dissenting.

Solicitors for the plaintiffs, appellants: R.N. Pugsley and J.T. MacQuarrie, Halifax.

Solicitor for the defendant, respondent: T.B. Smith, Ottawa.

(a) the corporation shall be deemed not to be the successor of the property except to the extent that the value of the shares of the shareholders of the corporation is not increased in value by the corporation acquiring or becoming beneficially entitled to the property; and

(b) each of the shareholders of the corporation shall be deemed to be a successor of property of the deceased to the extent of the amount by which the value of his shares in the corporation is increased by the corporation acquiring or becoming beneficially entitled to the property.

Footnotes

1. 12. (5) Where a corporation which is not resident in the Province, other than a corporation without share capital, by reason of the death of a deceased acquires or becomes beneficially entitled to property of the deceased,
2. 21978 3961 (NS CA), [1978] C.T.C. 554.
3. 3(1977), 1977 1790 (NS SC), 36 A.P.R. 572.
4. 4[1947] 1 Ch. 615.
5. 51958 33 (SCC), [1958] S.C.R. 146.
6. 61970 306 (ON CA), [1971] 1 O.R. 321.
7. 7[1968] 1 All E.R. 257.
8. 8[1969] 3 All E.R. 855.
9. 9[1976] 1 W.L.R. 852.
10. 101976 20 (SCC), [1977] 1 S.C.R. 2.
11. 11[1925] A.C. 619.
12. 121980 221 (SCC), [1979] 2 W.W.R. 683, [1980] 2 S.C.R. 466.
13. 13[1892] A.C. 150.
14. 14[1902] 1 K.B. 388.
15. 15[1936] A.C. 1.
16. 16[1908] A.C. 493.
17. 17[1976] 3 All E.R. 375.
18. 18[1947] Ch. D. 615.
19. 19[1952] 2 All E.R. 483.
20. 201949 32 (SCC), [1949] S.C.R. 453.
21. 21[1949] 4. D.L.R. 705.
22. 221953 79 (SCC), [1953] 2 S.C.R. 58.
23. 231970 306 (ON CA), [1971] 1 O.R. 321.
24. 24(1904), 208 111. R. 437.
25. 25(1905), 200 U.S. 118.
26. 261958 33 (SCC), [1958] S.C.R. 146.
27. 27[1968] 1 All E.R. 257.
28. 28[1969] 3 All E.R. 855.
29. 29[1951] 2 All E.R. 779.
30. 30[1897] A.C 22.
31. 31[1925] A.C. 619.
32. 321937 297 (UK JCPC), [1937] 3 All E.R. 555.
33. 33[1916] 2 A.C. 307.
34. 34[1927] B.Y. Int’l L. 156.
35. 351953 63 (SCC), [1953] 2 S.C.R. 496.
36. 36[1951] 2 K.B. 366 (C.A.).
37. 37[1938-39] C.T.C. 411 (P.C.).
38. 381976 20 (SCC), [1977] 1 S.C.R. 2.
39. 39(1974), 50 T.C. 1.