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The Minister of National Revenue (Appellant) v.
Dame Lucie Simon, and the General Trust Com pany of Canada, testamentary executors of the will of François Faure (Respondents)
Trial Division, Walsh J.—Montreal, December 14, 1972; Ottawa, May 7, 1973.
Estate tax—Community property (Quebec)—Marriage contract providing that community property pass in toto to surviving spouse—Whether half share assessable to estate tax—Estate Tax Act, R.S.C. 1970, c. E-9, s. 3(1)(a) and s. 3(2)(e).
F died domiciled in Quebec in 1966. The marriage con tract between F and his wife under which community of acquêsts was adopted, provided that the entire property of the community should belong to the survivor whether or not there were any children of the marriage.
Held, on a strict interpretation of section 3(2)(e) of the Estate Tax Act, the entire community of acquêsts was excluded in computing Fs estate.
APPEAL from Tax Appeal Board.
COUNSEL:
Louise Lamarre-Proulx and Alban Garon, Q.C., for appellant.
J. Lambert Toupin for respondents. SOLICITORS:
Deputy Attorney General of Canada for appellant.
Martineau, Walker, Allison, Beaulieu, Phelan and MacKell, Montreal, for respond ents.
WALsx J.—This is an appeal from a decision of the Tax Appeal Board dated April 16, 1971 maintaining the appeal by respondents of an assessment by the Minister of National Revenue dated January 31, 1968 in which tax in the amount of $59,485.84 was assessed against assets transmitted by the late François Faure who died on August 5, 1966. By last will and testament in notarial form made on June 27, 1966 he named his wife, Dame Lucie Simon,
and the General Trust Company of Canada as his testamentary executors. He and his wife had entered into a marriage contract in notarial form on July 4, 1911 in Belgium prior to their mar riage by virtue of which they adopted the matrimonial regime of community of acquêsts in conformity with articles 1498 and 1499 of the Civil Code of Belgium, which by an amendment to the statement of defence made by the respondents at the hearing, are now admitted to be similar to articles 1389a and 1389b of the Civil Code of the Province of Quebec', where, as is also admitted, the deceased François Faure and his wife were domiciled at the date of his death and where the estate devolved.
Article 3 of the said marriage contract reads as follows:
[TRANSLATION] The future consorts stipulate by way of marriage covenant that the entire property of the community shall belong in full ownership to the survivor of the con sorts, and this whether or not there are children or descend ants born of this marriage.
By virtue of this clause respondents excluded the entire community of acquêsts from the cal culation of the property transmitted by the death of the deceased, whereas appellant in its assessment included his one-half share in the community of acquêsts. A Notice of Opposition was taken and the assessment was in due course confirmed by the Minister but on appeal to the Tax Appeal Board respondents' appeal was maintained.
Appellant contends that, under a matrimonial regime of community of acquêsts, as in the case of legal community, the consorts are co-proprie tors of the community as long as it is not dissolved by the death of one of them or for other reason, and that clause 3 of the marriage contract (supra) is not concerned with the divi sion of the community during the lifetime of the consorts, but if it had been divided during their lifetime the community of acquêsts would have been divided equally. According to appellant's reasoning clause 3 attributing the entire commu nity of acquêsts to the surviving consort only takes effect at the death of one of them and that
immediately before his death the deceased was capable of disposing of half the assets of the community of acquêsts within the meaning of sections 3(1)(a) and 3(2)(e) of the Estate Tax Act, S.C. 1958, c. 29 [now R.S.C. 1970, c. E-9], which sections read as follows:
3. (1) There shall be included in computing the aggregate net value of the property passing on the death of a person the value of all property, wherever situated, passing on the death of such person, including, without restricting the generality of the foregoing,
(a) all property of which the deceased was, immediately prior to his death, competent to dispose;
(2) For the purposes of this section,
(e) notwithstanding anything in this section, the expres sion in paragraph (a) of subsection (1) "property of which the deceased was, immediately prior to his death, com petent to dispose" does not include the share of the spouse of the deceased in any community of property that existed between the deceased and such spouse immediate ly prior to his death.
As a result appellant contends that one-half of the assets of the community of acquêsts was the property of the deceased and was passed to his widow on his death and this half should be included in the list of assets transmitted. The amount of the assets of the community of acquêsts at the date of the deceased's death was $638,620.50. Accordingly, appellant added $319,310.25 to the valuation declared for the estate. Other increases in valuation made by appellant in its assessment are not in dispute between the parties.
Respondents for their part point out that the marriage contract, in addition to establishing a community of acquêsts, contains a clause deal ing with the attribution of the community which is sanctioned by the Belgium Civil Code in article 1525 and by the Quebec Civil Code in article 1411, which are substantially similar. Article 1411 of the Quebec Civil Code reads as follows:
When the consorts stipulate that the whole of the commu nity shall belong to the survivor, or to one of them only, the heirs of the other have a right to take back what had been brought into the community by the person they represent.
Such a stipulation is but a simple marriage covenant, and is not subject to the rules and formalities applicable to gifts.
This article was, in 1966, at the date of deceased's death in Section II, subsection (6) of the Civil Code which had the general heading:
SECTION II
OF CONVENTIONAL COMMUNITY AND OF THE MOST ORDINARY CONDITIONS WHICH MAY MODIFY OR EVEN EXCLUDE LEGAL COMMUNITY.
The heading of subsection (6) reads:
Of the clauses by which unequal shares in the community are assigned to the consorts.
Because of this article respondents contend that clause 3 of the marriage contract (supra) does not constitute a gift from one consort to the other but establishes that at the death of one consort the other will always be presumed to have been proprietor of all the assets in the community of acquêsts. By virtue of this rea soning section 3(2)(e) of the Estate Tax Act (supra) has the effect of withdrawing from the calculation of the assets of the estate all the assets of the community of acquêsts since the words "property of which the deceased was, immediately prior to his death, competent to dispose" does not include any part of these community assets. The share of the surviving consort in the community of acquêsts actually comprises the total of these community assets, none of which fall into the estate of the deceased.
The husband had, during the existence of the community, the right to administer same and in 1966, the date at which this estate opened, to also alienate the movable property without the concurrence of his wife although he could not dispose of the immovable property without her consent nor dispose by gratuitous title inter vivos of the movable property without her con currence except small sums of money and cus tomary presents. 2 It is common ground, more over, that the deceased in this case could not bequeath by will any part of the community of acquêsts in view of the terms of the marriage contract. That both parties were well aware of the significance of the fact that the whole com munity of acquêsts in full ownership had been
given by the marriage contract to the surviving consort appears clear from certain clauses in the last will and testament of the deceased in which the third and fourth clauses read in part as follows:
[TRANSLATION] THIRDLY: I declare that I have been mar ried only once, to wit, to DAME LUCIE SIMON, under the regime of community of acquests, in accordance with the provisions of our Marriage Contract passed before MR. HILAIRE GROENSTEEN, Notary, at Laeken -Brussels, in Bel- gium, on the fourth day of July, one thousand nine hundred and eleven (1911), whereunder it is stipulated that the contributions of the consorts shall be excluded from the community, and that the whole of the community shall belong with full right of ownership to the surviving spouse. Whether or not there are children or descendants born of the marriage.
FOURTHLY: In the event that my said spouse should sur vive me, which would give effect in her favour to the provisions of our said Marriage Contract assigning the whole of the said community to the survivor as mentioned above, I give and bequeath all the property, both movable and immovable, of whatever nature and wherever situated, belonging to me personally and not forming part of the said community, to my said Executors and fiduciary heirs and (or) to those who may replace them in that capacity, but only in trust and on the condition that they pay and hand it over in accordance with the following provisions, to wit:
It is evident that the deceased was clearly aware of the distinction between his personal property and the property in the community of acquêsts.
In commenting on article 1411 of the Civil Code, Notary Roger Comtois, in his text Traité théorique et pratique de la communauté de biens at page 255 cites the French commentator Tro- plong who, in discussing the similar article 1525 in the French Code Napoleon states in vol. XXIII at page 2173:
[TRANSLATION] This agreement is not considered as a donation,,it is a covenant authorized by "le droit commun" ... an aleatory covenant between partners.
Troplong adds that the surviving consort is deemed to have been the proprietor ab initio from the moment the assets are acquired. Looked at this way the community is really considered as a partnership. As a result of the partition, the surviving consort as a partner is, as a result of the declaratory effect of the partition, deemed to have been the owner of the assets in the community from the date of their purchase. Comtois approves of this explanation.
He emphasizes, however, at page 257, that in order to constitute a marriage covenant and not a donation it must have an onerous character and be aleatory, which is the case here where each party makes the same stipulation in favour of the other. He points out at page 258 that a fiscal consequence of this is that these assets will not be taxed, since matrimonial covenants as such excluding donations, are not subject to succession duty. As authority for this he quotes Eugène Rivard, Les droits sur les successions dans la Province de Québec at page 92.
Notary Sirois in an article in vol. 4, Revue légale (N.S.) reached the same conclusion at page 520 where he states:
[TRANSLATION] Thus when by their contract of marriage made by virtue of articles 1406 and following of the Civil Code the consorts stipulate that all or a greater portion than one-half ... of the assets of the community shall go to the survivor ... this is a simple marriage covenant which gives rise to no duties.
The late Chief Justice P.B. Mignault also agreed in his Droit civil canadien, vol. 6 at page 385, that a clause of this sort in a marriage contract is not a donation but an onerous contract. A more recent commentator, Leon Faribault in his Traité de droit civil du Québec, vol. 10, page 401, expresses the same view.
However, the French commentators, Planiol and Ripert, commenting on article 1525 of the Code Napoleon state at page 272 that since the total attribution of the community is subordinat ed to the condition of surviving in order for the clause to benefit the surviving spouse, it becomes what they refer to as a "gain de sur- vie", i.e. a survival benefit. The authors go on to explain that a covenant of this sort does not produce any effects until the dissolution of the community by the death of one of the parties, and accordingly does not affect the powers of the husband nor of the wife over the community during their lifetime.
In the light of the foregoing doctrine it appears indisputable that a clause such as that in the present marriage contract conferring the entire community of acquêsts on the survivor of
the consorts is not a gift but has the effect of conferring the entire community on the survivor retroactively to the date of the marriage con tract, subject always, of course, to the right of the heirs of the deceased consort to take back what has been brought into the community by the person they represent. During the existence of the marriage, however, the parties remain co-proprietors of this community of acquêsts and it is not possible to state until one of them dies that the other owns the entire community. Dealing with legal community, Mignault has this to say in volume 6 at page 337:
[TRANSLATION] The wife who renounces loses all her rights in the property of the community. Loses: for she had rights on this property of the community during the mar riage. She was co-proprietor with the husband, not by virtue of a suspensive condition depending on her acceptance, but subject to a resolutory condition if she renounces. If she accepts the resolutory condition which she had becomes irrevocable; if she renounces it is resolved retroactively, and the husband is deemed to have always been the sole proprie tor of the assets of the community.
This theory was approved by the Supreme Court of Canada in the case of Sura v. M.N.R. [1962] C.T.C. 1 in which Taschereau J. stated at page 8:
[TRANSLATION] If it were otherwise, and if the wife were not the co-proprietor of the community, she would have had to pay succession duties at the time of the dissolution of the community for transmission of property coming to her from her husband would then have been involved. But, this is not the case because there is no transmission but merely a partition from which she takes the share which comes to her and which has belonged to her since the marriage. What she receives does not come to her from the patrimony of her husband.
While this was an income tax case dealing with legal community in which the wife only had a one-half interest, these comments would be ap plicable with equal force to the present case where on the death of one consort the survivor became the proprietor retroactively of the entire community of which he or she had only been co-proprietor during the existence of the mar riage. On this reasoning it is quite proper to state that no succession duties would be payable on the property composing this community of acquêsts under the provisions of the Quebec Succession Duty Act which imposes duties on property transmitted owing to death, and in fact
no such duties were imposed in the present case.
This does not necessarily settle the matter, however. The Estate Tax Act adopts a different approach, imposing tax on the aggregate value of property passing on death and it is the word ing of this Act which must be interpreted to determine its application to the facts of the present case.
It is clear that the deceased husband in this case could only administer the community prop erty and sell movable property but he was not otherwise competent to dispose inter vivos of the property of the said community of acquêsts without the concurrence of his wife (save for small sums of money and customary presents) 3 . The wife would receive at his death whatever was left of the community of acquêsts—that is to say, what had not been disposed of during his lifetime. In the usual case of legal community in which the husband would have been subject to the same restrictions with respect to the dispos al of the property of the community during his lifetime, all that was left might have been included in computing the aggregate net value of the property passing on his death by virtue of section 3(1)(a) of the Act (supra) 4 . Section 3(2)(e) (supra) makes an exception, however, in order to overcome what would otherwise have been a serious difficulty with respect to estates opening in the Province of Quebec where the surviving wife would be deemed to have always been the owner of one-half of the community property but would nevertheless have been obliged to pay tax on the entire community if it was held that during the marriage the deceased husband had been competent to dispose of it under the provisions of the aforementioned sec tion 3(1)(a). Section 3(2)(e) excludes from the definition of "property of which the deceased aw s, immediately prior to his death, competent to dispose", "the share of the spouse of the deceased in any community of property that existed between the deceased and such spouse immediately prior to his death". Respondents
argue that this does not only apply to legal community but also to the community of acquêsts as the term "any community" is used and that in the present case the share of the spouse of the deceased was the entire amount of the community of acquêsts and therefore it should be excluded in its entirety.
The Minister, for his part, directs attention to the opening words of section 3(1) which include in the aggregate net value of property passing on death, the value of all such property includ ing "without restricting the generality of the foregoing" and then proceeds to list various types of property including that provided for in subsection (1)(a). He argues, therefore, that the property to be taxed is not limited to property of which the deceased was, immediately prior to his death, competent to dispose within the meaning of subsection (1)(a) as defined in sub section (2)(e) which merely constitutes one type of the property to be so included. He suggests, for example, that section 3(1)(e), which reads as follows:
3. (1) There shall be included in computing the aggregate net value of the property passing on the death of a person the value of all property, wherever situated, passing on the death of such person, including, without restricting the generality of the foregoing,
(e) property comprised in a settlement whenever made, whether by deed or any other instrument not taking effect as a will, whereby any interest in or income from such property for life or any other period determinable by reference to death is reserved either expressly or by implication to the deceased as settlor or whereby the deceased has reserved to himself the right, by the exercise of any power, to restore to himself or to reclaim the absolute interest in such property ; 5
might be applied, since despite the establish ment of the community of acquêsts in the mar riage contract the deceased consort still had an interest enabling him to alienate such property during his lifetime, and to share in the use of the income from it. It is my view, however, that while this section might be wide enough to cover a marriage contract, the deceased's inter est in the income from the community of acquêsts during his lifetime cannot be said to have been reserved, even by implication, in the
said contract. His rights to the income derive from the laws relating to administration of com munity property, rather than from any rights reserved in the marriage contract, nor could he restore to himself or reclaim any absolute inter est in the community of acquêsts.
The Minister further depends on sections 3(2)(a) (now R.S.C. 1970, c. E-9, s. 3(4)(a)) and 58(1)(i) (now R.S.C. 1970, c. E-9, s. 62(1)(i)) which read as follows:
3. (2) For the purposes of this section,
(a) a person shall be deemed to have been competent to dispose of any property if he had such an estate or interest therein or such general power as would, if he were sui juris, have enabled him to dispose of that property;
58. (1) In this Act,
(i) "general power" includes any power or authority ena bling the donee or other holder thereof to appoint, appro priate or dispose of property as he sees fit, whether exercisable by instrument inter vivos or by will, or both, but does not include any power exercisable in a fiduciary capacity under a disposition not made by him, or exercis- able as a mortgagee;
directing attention to the fact that the definition of "general power" in 58(1)(i) refers to a power exercisable by instrument inter vivos or by will disjunctively and argues that the deceased had a general power to dispose of the property of the community of acquêsts during his lifetime sub ject always to the concurrence of his wife, when this concurrence was necessary by virtue of article 1292 of the Civil Code (supra). I am of the view, however, that the rights of disposal which the deceased consort undoubtedly had with respect to the community of acquêsts during his lifetime arose not out of a general power as defined in section 58(1)(i) but rather because he had "an estate or interest therein" enabling him to dispose of it (although only inter vivos and in some instances with the concur rence of his wife) in accordance with the provi sions of section 3(2)(a), and that any disposition which he made of it during his lifetime could not include an appropriation of the capital of it for his own use, so that he would be accountable to
the said community of acquêsts for any such disposition. Moreover, section 3(2)(e) com mences with the words "notwithstanding any thing in this section" and is thus not only an exception limiting the words "competent to dis pose" as used in section 3(1)(a), but also must limit the application of section 3(2)(a).
The jurisprudence to which I was referred is not very helpful since the precise issue has apparently never arisen before, although some analogies may perhaps be drawn from the cases cited on other points. The Sura case (supra) in the Supreme Court, which refused to permit income earned on community property to be divided between husband and wife for income tax purposes, merely decided that although they were co-proprietors of the community during their lifetime the husband had the administra tion of it and the income earned must be includ ed in his tax return, the tax being imposed on the person and not on the property, and that the person who must pay the tax is the one whose enjoyment of the income is absolute, unfettered by any restriction on his freedom to dispose of the income as he sees fit. The cases of Wilson Estate v. M.N.R. 66 DTC 5430; M.N.R. v. Maine Estate 64 DTC 5128; and Hickson Estate v. M.N.R. 64 DTC 5230 all deal with the inter pretation of wills, and whether or not there was general power to dispose thereunder. Perhaps some analogy might be drawn from the Maine Estate case which concerned a will leaving the income of the husband's estate to the wife and on her death to the children and grandchildren with the trustees being "authorized" to pay her such amounts as she might "request or desire". Counsel for the Minister said the question of her competency to dispose could be reduced to the simple question of whether the wife could, on the day after her husband's death, have said: "I want all of that property"? If she could have enforced such a demand she would have been deeméd competent to dispose. Jackett P., as he then was, accepted this. In the present case the question might be put as to whether the husband could, at any time before his death, have dis posed of all of the property of the community of acquêsts. The answer would have to be, how ever, in this case that while he could have disposed of some of it, he could not have given
it away without the concurrence of his wife, nor disposed of it by will, and for the disposal of immovables his wife's consent would also have been necessary. Mr. Justice Thurlow touched on a somewhat similar issue in the case of Conway Estate v. M.N.R. 65 DTC 5169 which con cerned a joint bank account. He held that the husband could have disposed of it during his lifetime but had he done so he would have been accountable to the wife for her interest therein and that he therefore had no right to withdraw the entire balance either to make it his own or to dispose of it without her consent, so he was found to be not competent to dispose of it within the meaning of the provisions of section 3(1)(a) and 3(2)(a) of the Estate Tax Act. The judgment found that in the absence of proof to the contrary one-half of the account must be deemed to have been the wife's and therefore this half should not be included among the prop erty of the husband's estate. The facts in that case are evidently substantially different from the facts of the present case in that the wife could also have disposed of the bank account during the lifetime of the parties, whereas in the present case it would only be the husband who could have disposed of the community assets, and also in that it was deemed in the absence of proof to the contrary that each consort had a one-half interest in the bank account, while in the present case, although they were in co-pro prietorship in the community of acquêsts, this does not mean that they were equal proprietors of it. In fact, either one or the other was the owner of the entire community as a result of the condition that whichever consort died first would lose all right to any part of it with the surviving consort's share being the whole of such community.
While it may never have been intended that property passing in this way as the result of the establishment of a community of acquêsts should escape taxation altogether, a taxing stat ute must be strictly interpreted and unless the specific terms of it impose the tax claimed the right to this tax cannot be inferred. The problem of the Minister in the present case is to establish
justification for taxation of one-half of the com munity of acquêsts when the surviving consort was clearly entitled to all of it retroactively to the date of the marriage contract. If the inser tion of section 3(2)(e) in the Act was necessary to prevent the taxation of the entire property of a legal community as property passing on death, what would be the effect of this section on conventional community specifying unequal shares, for example 75% to the wife in the event of her husband predeceasing her? I believe one would have to conclude that since this was the "share of the spouse of the deceased" in the community of property that existed between her and her spouse immediately prior to his death that this would be excluded from his estate. Would not the same situation prevail here when the "share" consists of the "whole community"? Section 3(2)(e) uses the words "any community" which are broad enough to comprise not only legal community but also any sort of conventional community including the community of acquêsts we are dealing with here. The share of the surviving consort immediately prior to the deceased's death was either all or none of the community, depending on who died first, but the moment he died it then became the entire community, retroactively to the date of the marriage con tract, and is deemed to have always been hers, since the only condition was a resolutory one which she did not exercise, and not a suspensive one taking effect only at the deceased's death (see Mignault, vol. 6, page 337 (supra)).
On a strict interpretation of section 3(2)(e) of the Act, therefore, it would appear that, while this situation may never have been foreseen or intended, it has the effect of excluding the entire community of acquêsts from the deceased's estate.
There is considerable confusion in the judg ment of the Tax Appeal Board appealed from which deals with the matter as if it were the
surviving consort's share (which it takes to be one-half) of the community which the Minister was seeking to tax, whereas it is, of course, the deceased's share (which the Minister takes as one-half) which is being taxed. Since, in any event, the appeal was allowed against the assessment of the Minister of one-half of the assets of the community of acquêsts, I will dismiss the appeal of the Minister, with costs, although for different reasons, in view of my finding that the entire assets of the community of acquêsts should be excluded from the assess ment of deceased's estate.
1 These articles read as follows:
1389a. When the consorts stipulate that the community between them shall consist only of acquests, they are deemed to exclude from the community all their property and debts existing at the date of the marriage as well as all property devolving upon them thereafter as their individual property. In such case, after each consort has pretaken his or her duly established contributions, the partition is limited to the acquests made by the community.
1389b. Moveable property existing at the time of the marriage or falling to the consorts afterwards shall be con sidered to be acquests, unless the contrary is proven by an inventory or other equivalent title, and, as between the consorts themselves, according to the rules in articles 1387 and 1389.
The debts are governed by the rules contained in articles 1396 to 1399.
2 Quebec Civil Code, 1292 after 1964 and before 1969 amendment.
3 Quebec Civil Code, article 1292 (before 1969 amendment):
1292. The husband alone administers the property of the community.
He cannot sell, alienate or hypothecate without the con currence of his wife any immoveable property of the com munity but he can, without such concurrence, sell, alienate or pledge any moveable property other than a business or than household furniture in use by the family.
Saving the provisions of The Husbands' and Parents' Life Insurance Act, the husband cannot, without the concurrence of his wife, dispose by gratuitous title inter vivos of the property of the community, except small sums of money and customary presents.
4 Prior to the 1964 amendment to article 1292 of the Civil Code the husband had wider powers, being able without the concurrence of his wife to dispose of both movable and immovable property, subject only to the limitation that he could not dispose of immovable property gratuitously inter vivos or of the whole or an aliquot part of the movable property, except for the establishment of their common children. Section 3(1)(a) of the Estate Tax Act was not
changed following the 1964 amendment to article 1292 of the Civil Code and it is not necessary to decide here whether as a result of this amendment the powers of disposition of the husband were so restricted that he could no longer be deemed to be "competent to dispose" within the meaning of section 3(1)(a).
5 It is of interest to note that the Estate Tax Act of 1958, 7 Eliz. II, c. 29, used the words "an interest in such property" and this was changed so as to read "any interest in or income from such property" by the 1964 amendment, 13 Eliz. II, c. 8, s. 1(1). It must be presumed that there was a special reason for this and the words added would seem to give a wider application to the section.
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