T-282-76
Mary Mastronardi, Deanna Louise Bucko and
Armando Mastronardi, Executors of the Estate of
Umberto Mastronardi, deceased (Plaintiffs)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Windsor, June 29;
Ottawa, July 16, 1976.
Income tax—Subject matter deemed realization of capital
gain—Meaning of "immediately before his death" re valuation
of property—Income Tax Act, S.C. 1970-71-72, c. 63, s. 70(5)
as am.
The owner of certain shares died in 1973; the subject matter
of this appeal was the deemed realization of the capital gain in
relation to the shares. Since 1972, a five year term insurance
policy on the life of the deceased for $500,000, reducing by
$100,000 each year, was owned by deceased's company. Plain
tiffs claimed that the shares had a fair market value of $323.58
each immediately before the death and that no regard should
be had to any value which might be added attributable to the
insurance policy. Defendant argued that immediately before
death, the policy was worth $500,000 and such value was to be
considered in determining fair market value. Defendant submit
ted that "immediately before his death" in section 70(5) of the
Income Tax Act means the instant of death, and on that
assumption, the fair market value of the shares would be
$778.59 each, because at the instant of death an informed
purchaser would know that the company would receive the
$500,000 from the policy.
Held, the appeal is allowed. In this case, after the death, the
company obtained the proceeds of the policy which appreciated
the fair market value of the shares from $323.58 to $778.59.
There is a two-step fiction in interpreting section 70(5). First,
after death there is a deemed disposition "immediately
before ... death", and, second, there is a deemed realization of
proceeds "equal to the fair market value of the property at that
time". The words "immediately before ... death" should not be
taken to mean the instant of death, nor do they import a
necessity of valuing capital property taking into account the
imminence of death. No value of the policy should be included
in determining the fair market value of the shares.
INCOME tax appeal.
COUNSEL:
J. Ball for plaintiffs.
G. W. Ainslie, Q.C., and O. A. Pyrcz for
defendant.
SOLICITORS:
Gignac, Sutts, Nosanchuk, Windsor, for
plaintiffs.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
GIBSON J.: What is the subject matter in this
appeal from assessment is a deemed realization of
a gain on capital property consisting of certain
common shares in Mastronardi Produce Limited
because of the death of the owner of these shares
on February 20, 1973 while resident in Ontario.
Such deemed realization of a gain is statutorily
created by section 70(5) of the Income Tax Act.
By reason of section 70(5) of the Act, the
deceased owner is "deemed to have disposed, [of
these shares, being capital property] immediately
before his death, ... and to have received proceeds
of disposition therefor equal to the fair market
value of the property at that time."
The applicable "roll-over" provision in respect
to the devisees or recipients of these shares from
the estate of this deceased owner at the material
time was section 70 subsection (5) paragraph (c)
of the Income Tax Act, S.C. 1970-71-72, c. 63, s.
1 which read:
(c) any person who, by virtue of the death of the taxpayer,
has acquired any particular capital property of the taxpayer
(other than depreciable property) that is deemed by para
graph (a) to have been disposed of by him shall be deemed to
have acquired it at a cost equal to its fair market value
immediately before the death of the taxpayer;
Since then, section 70 subsection (5) paragraphs
(a) and (c) of the Income Tax Act have been
amended by S.C. 1973-74, c. 14, s. 19, so that each
now reads as follows:
(a) the taxpayer shall be deemed to have disposed, immedi
ately before his death, of each property owned by him at that
time that was a capital property of the taxpayer (other than
depreciable property of a prescribed class) and to have
received proceeds of disposition therefor equal to the fair
market value of the property at that time;
(c) any person who, by virtue of the death of the taxpayer,
has acquired any particular capital property of the taxpayer
(other than depreciable property of a prescribed class) that is
deemed by paragraph (a) to have been disposed of by him at
any time shall be deemed to have acquired it immediately
after that time at a cost equal to its fair market value
immediately before the death of the taxpayer;
The parties have agreed to certain facts, among
which are the following:
The Plaintiffs were confirmed as executors and trustees
under the Last Will and Testament of the late Umberto
Mastronardi. (hereinafter referred to as the deceased), by
Grant of Probate dated July 5, 1973 issued by the Surrogate
Court of the County of Essex in the Province of Ontario ....
The deceased died suddenly and without warning of cardiac
arrest on February 20, 1973 at which time he was a resident of
the Province of Ontario.
(Since 1972, a five year term insurance policy on
the life of the deceased Umberto Mastronardi in
the face amount of $500,000 reducing by $100,000
on each anniversary date was owned by Mas-
tronardi Produce Limited.)
(It is common ground that prior to the death of the
deceased, because of the special provisions of this
term life insurance policy, that an informed pur
chaser of the shares of Mastronardi Produce Lim
ited would not pay any more for such shares of
that company than he would have if that company
did not own this term life insurance policy.) (Mas-
tronardi Produce Limited as the owner of this term
life insurance policy on the life of the deceased had
assigned it to the bank at the time of death of the
deceased but such assignment is irrelevant for the
purposes of this appeal.)
In accordance with subsection 70(5) of the Income Tax Act
as it applied during the 1973 taxation year, the deceased was
deemed to have disposed, immediately before his death, of
311.4 common shares in Mastronardi Produce Limited and to
have received proceeds of disposition therefor equal to the fair
_ market value at that time.
Without having regard to any value attributable to the life
insurance policy in question immediately before the death of
the deceased each common share in question would have a fair
market value equal to $323.58.
If the value of the corporation's assets were deemed to be
increased by the face amount of the life insurance policy in
question immediately before the death of the deceased it is
common ground that each common share held by the deceased
would have a fair market value equal to $778.59.
The Minister of National Revenue concluded that immedi
ately before the death of the deceased the value of the policy
was not less than $500,000.00 and that such amount would
have to be taken into account in arriving at the net worth of the
company and hence the value of the common shares immediate
ly before the death of the deceased.
On re-assessing the deceased's estate in respect of the
deceased's 1973 taxation year, notice of which re-assessment
was dated July 21, 1975, the Minister of National Revenue
added to taxable income a taxable capital gain of $70,845.05 in
respect of the deemed disposition of 311.4 shares of Mastronar-
di Produce Limited at $778.59 per share less the valuation day
value per share which was $323.58.
Among other things, the plaintiffs submitted
that the capital property of the deceased represent
ed by the common shares of Mastronardi Produce
Limited owned by the deceased had a fair market
value equal to $323.58 per share immediately
before the death of the deceased and that no
regard should be had to any value which might be
added to the value of such shares attributable to
the said term life insurance policy owned by Mas-
tronardi Produce Limited in the amount of
$ 500,000.
The respondent in the pleadings submitted that:
... immediately before the death of the deceased, the term
insurance policy on his life, which was owned by Mastronardi
Produce Ltd., had a value of $500,000.00, and that accordingly
such value is to be considered in the determination of the fair
market value of the shares in Mastronardi Produce Ltd. which
the deceased was deemed to have disposed of pursuant to
subsection 70(5) of the Income Tax Act.
In the present Income Tax Act, for the first
time, there was enacted a scheme of taxation in
respect to capital gains and capital losses. (At the
same time, the federal estate tax was abolished.)
The provisions in respect to capital gains or losses
apply in relation to the disposition of property not
included in income under section 3(a) of the Act.
Some dispositions provided for in the Act are
fictional dispositions.
The capital gain, the subject of this appeal, as
stated, is the deemed realization of these shares,
which deemed realization is statutorily created by
the provisions of section 70(5) of the Income Tax
Act.
The provisions of section 70(5) of the Act
require valuation of these shares (1) "immediately
before" the death of the deceased, and (2) "equal
to the fair market value of [these shares]... at
that time".
Speaking generally, section 70 subsection (5) of
the Income Tax Act applies not only to capital
property which appreciates after death but also to
capital property which depreciates after death. For
example, in the case of a joint tenancy of land, on
the death of one joint tenant, that interest disap-
pears and the capital property the joint tenant held
during his lifetime depreciates 100% after his
death. This result also obtains in other situations
as for example in the case of a life interest not
secured by way of trust or to any other right being
capital property that ceases on death.
In this case, after the death of the deceased
Mastronardi Produce Limited obtained the pro
ceeds of the said $500,000 term life insurance
policy which appreciated the fair market value of
the shares of that company from an amount equal
to $323.58 per share to a fair market value equal
to $778.59 per share.
In the process of interpreting this statutory
provision in relation to the facts of this case, it is
apparent that there is a two-step fiction enacted by
section 70 subsection (5) of the Act.
The first fiction is that the taxpayer after he
dies is deemed to have disposed of the subject
property "immediately before his death".
The second fiction is that he is deemed "to have
received proceeds of disposition therefor equal to
the fair market value of the property at that time".
The problem is to determine what was the legis
lative concept of section 70 subsection (5) of the
Act and apply such to the facts of this case.
The submission of the defendant in relation to
the shares of Mastronardi Produce Limited is that
they should not be valued anterior to the death of
the deceased. Instead, the submission is that the
words in section 70 subsection (5) of the Act
"immediately before his death" are equivalent in
meaning and intent to the instant of death. On
that assumption then, it is submitted that the price
that would be paid for each of the shares in a
transaction between an informed vendor and an
informed purchaser would be $778.59 because at
the instant of death an informed purchaser would
know that the company would receive the $500,-
000 proceeds from the said term life insurance
policy.
On the other hand, the plaintiffs submit that the
words in that subsection "immediately before his
death" refer to a span of time before death which
is relevant in determining the fair market value of
these shares of the subject private company.
A number of English, Australian and Canadian
authorities were submitted by the parties, but none
of them are of substantial assistance in determin
ing the legislative concept of section 70 subsection
(5) of the Income Tax Act.
However, after careful consideration of these
authorities, of the provisions of section 70 subsec
tion (5) of the Income Tax Act, both as it
appeared in S.C. 1970-71-72, c. 63 and as it
appeared in S.C. 1973-74, c. 14 and of the facts of
this case, I have come to the following conclusions:
The words "immediately before his death" in
section 70 subsection (5) of the Income Tax Act
should not be construed as meaning the equivalent
of the instant of death; and also those words do not
import a necessity of valuing capital property
taking into account the imminence of death.
In the subject case, at the date of death of the
deceased Umberto Mastronardi, section 70 subsec
tion (5) of the Act, S.C. 1970-71-72, c. 63, pre
scribed that the deemed realization took place
"immediately before [the deceased's] death" and
that at that time, as owner, he was deemed "to
have received proceeds of disposition therefor
equal to the fair market value of the property at
that time".
And the "roll-over" provision at the date of
death of the deceased in respect to the recipients or
the devisees in this case of these shares from the
estate of this deceased owner was section 70 sub
section (5) paragraph (c) of the Income Tax Act,
S.C. 1970-71-72, c. 63 and it provided that these
persons "acquired" these shares "that is deemed
by paragraph (a) to have been disposed of by him
shall be deemed to have acquired [these shares] at
a cost equal to its fair market value immediately
before the death of the taxpayer".
In my view, therefore, in this case, both such
valuations must be considered as having taken
place at some other time rather than at the instant
of death of the deceased and no premise of immi
nence of death of the deceased should form any
part of such valuations.
It follows, therefore, as a result and I so find
that the defence as pleaded is untenable, namely
that "immediately before the death of the
deceased, the term insurance policy on his life,
which was owned by Mastronardi Produce Ltd.,
had a value of $500,000.00, and that accordingly
such value is to be considered in the determination
of the fair market value of the shares in Mas-
tronardi Produce Ltd. which the deceased was
deemed to have disposed of pursuant to subsection
70(5) of the Income Tax Act". On the contrary,
the finding is that no value of this term insurance
policy is to be considered in the determination of
the fair market value of these shares.
Accordingly, this appeal is allowed and the
assessment is referred back for further reassess
ment, not inconsistent with these reasons.
The plaintiffs are entitled to costs.
Either party, by appearance of counsel or under
Rule 324, may move for judgment based on these
reasons.
Judgment shall not issue until settled by the
Court.
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