Covert et al. v. Minister of Finance of Nova Scotia

Covert et al. v. Minister of Finance of Nova Scotia
Collection
Supreme Court Judgments
Date
1980-07-18
Report
[1980] 2 SCR 774
Judges
Martland, Ronald; Ritchie, Roland Almon; Pigeon, Louis-Philippe; Dickson, Robert George Brian; Beetz, Jean; McIntyre, William Rogers; Chouinard, Julien
On appeal from
Nova Scotia
Subjects
Taxation
Decision Content
Supreme Court of Canada
Covert et al. v. Minister of Finance of Nova Scotia, [1980] 2 S.C.R. 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 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? (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 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, 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] 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, [1977] 1 S.C.R. 2, applied; MacKeen Estate v. Minister of Finance of Nova Scotia (1977), 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] 2 S.C.R. 466, referred to.]
APPEAL from a judgment of the Supreme Court of Nova Scotia, Appeal Division[2], 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. The judgment of Martland, Pigeon, Beetz and Chouinard JJ. was delivered by
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. 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. 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 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 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:
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 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 case[3]), 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] 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 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 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-General[4]. 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 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 Revenue[5]. 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. 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 Chodikoff[6]. 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 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 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 Commissioners[7]. 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, 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. McGregor[8], 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. 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