Estate of Harry a Miller v. Minister of National Revenue, [1973] CTC 793, 73 DTC 5583

Walsh, J:—This is an appeal from an assessment dated December 20, 1968 wherein a tax in the amount of $109,050 plus $9,080 was levied in respect of the estate tax of the appellant. Appellant’s appeal against the assessment to the Tax Review Board was dismissed by judgment dated March 14, 1972. The question at issue concerns the valuation to be placed on a life insurance policy No 4366077 with the Occidental Life Insurance Company which was evaluated in the return at $11,322 which valuation was increased by respondent to $34,000. On February 28, 1947 the late Harry A Miller had insured his life with the said company under policy No 1524587, the policy providing convertible term insurance. The late Mr Miller transferred and assigned his interests in this policy on February 15, 1966 to his son and daughter, Mr Daniel S Miller and Mrs Patricia Rubin who, four days later, requested the conversion of the policy into an ordinary life policy by virtue of the option in same, as a result of which a new policy was issued dated February 28, 1966, the anniversary date of the original policy bearing No 4366077 with a face value of $34,000 at an annual premium of $1,306.08. The old policy had had a face value of $30,000, the annual premium being $580.50 plus $290.10 for a family income rider. As a result of the cancellation of the old policy Occidental paid the late Harry A Miller $176.58 as a return premium, and Daniel S Miller and Patricia Rubin paid Occidental the premium of $1,306.08 on the new policy. Appellant contends that under the circumstances no gift was made by the late Harry A Miller to Daniel S Miller and Patricia Rubin, that the term policy which was cancelled had no value at the time of the transfer save for the return premium which was paid to him and that therefore the proceeds of the new policy No 4366077 in the amount of $34,000 should be deleted from the assessment.

Respondent contends that the new policy was issued as a conversion or change of the term insurance provided in the old policy, with the same riders attached with the exception of the family income rider, that no evidence of insurability was required for continuation of the disability benefits, that the beneficiary was the same, that the new policy was subject to any assignment of the old policy which had been recorded with the company, and that the application for the old policy together with the request for conversion were the application for the new policy. The late Mr Miller died on October 12, 1966, that is to say within three years of the date of the conversion and the issue of the new policy as a result thereof. Although appellant now contends that no part of the proceeds of the policy should be included in the assets of the estate, the list of gifts shown in the schedule of assets filed with the return as of October 12, 1966 showed gifts in the amount of $32,648.37 and included an amount of $11,322 described as being “life insurance policy transferred to children Daniel Miller and Mrs Pat Rubin

—policy value at date of transfer Occidental Life Insurance—policy 4366077 transferred February 28, 1966—face value $34,000”. Respondent contends that the new policy, resulting from the conversion of the old policy in accordance with its terms, which was made at the request of the new owners with the authorization of the late Harry A Miller, was a policy that was derived from or through the old policy which he assigned to his children. Alternatively, it is contended that if the said disposition did not include the new policy then the value of the disposition should be the value of the old policy as determined by section 30 of the Estate Tax Act which respondent contends is $34,000. The said section 30 of the Estate Tax Act, SC 1958, c 29, reads as follows:

30. Where any property has been disposed of by a deceased under any disposition described in paragraph (b), (c) or (d) of subsection (1) of section 3 made to any person, and at a subsequent time during the lifetime of the deceased the property or a part of the property has been disposed of by that person, whether by the exchange or substitution of other property therefor or in any other manner whatever, the value of the property or the part thereof, as the case may be, so disposed of by that person shall, for all purposes of this Part relevant to the death of the deceased, be deemed to be the value thereof determined as of that subsequent time, and, for the purposes of this section, any part of the property not otherwise so disposed of by that person during his lifetime shall be deemed to have been disposed of by him immediately prior to his death.

Paragraphs (b), (c) and (d) of subsection (1) of section 3 of the Act read:

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, whenever situated, passing on the death of such person, including, without restricting the generality of the foregoing,

(b) property disposed of at any time by the deceased as a donatio mortis causa;

(c) property disposed of by the deceased under a disposition operating or purporting to operate as an immediate gift inter vivos, whether by transfer, delivery, declaration of trust or otherwise, made within three years prior to his death;

(d) property disposed of by the deceased under a disposition whenever made, of which actual and bona fide possession and enjoyment was not, at least three years prior to the death of the deceased,

(i) assumed by the person to whom the disposition was made or by a trustee or agent for that person, and

(ii) thereafter retained to the entire exclusion of the deceased and to the entire exclusion of any benefit to him, whether by contract or otherwise;

Respondent in his pleadings also relies on paragraph 58(1) (e), (o) and

(s) of the Act which read as follows:

58. (1) In this Act,

(e) “disposition” includes any arrangement or ordering in the nature of a disposition, whether by one transaction or a number of transactions effected for the purpose or in any other manner whatever;

(o) “property” means property of every description whatever, whether real or personal, movable or immovable, or corporeal or incorporeal, and without restricting the generality of the foregoing, includes any estate or in- terest in any such property, a right of any kind whatever and a chose in action;

(s) “value”

(i) in relation to any income right, annuity, term of years, life or other similar estate or interest in expectancy, means the fair market value thereof ascertained by such means and in accordance with such rules and standards, including standards as to morality and interest, as are prescribed by the regulations, and

(ii) in relation to any other property, means the fair market value of such property, computed in each case as of the date of the death of the deceased in respect of whose death such value is relevant or as of such other date as is specified in this Act, without regard to any increase or decrease in such value after that date for any reason.

The figure of $11,322 shown in the estate tax return as the value of the Occidental Life policy was calculated by a chartered accountant who was familiar with the affairs of the late Harry Miller and he made his calculations on what would have been the value of the original policy if it had always been a whole life policy, making the calculation himself without getting any figures from the insurance company. This theoretical calculation is not the correct basis for evaluating a term policy. In the same return he included the sum of $9,326.37 as the value of another policy with the Crown Life Assurance Company transferred on July 4, 1966 for which the transferees had paid this sum, being the cash surrender value of the policy, which was a straight life policy. I do not believe that the estate is bound by these figures or estopped from seeking a correction of them and, in fact, on communicating with the federal Estate Tax Department, the value of the Crown Life policy, for which the full cash surrender value had been paid to the deceased, was deleted from the assessment, and as a matter of interest, although of course not binding on the respondent herein, the provincial Succession Duty Department accepted the deletion of both amounts from the return as originally filed.

Respondent, in refusing to delete the Occidental Life insurance policy value from the return makes the distinction that since it had no cash surrender value it cannot be said to have been purchased from the deceased, but that it nevertheless had some value arising from the conversion rights without the necessity of medical examination and as nothing was paid for the transfer as such, this transfer constituted a gift within three years prior to death. On this interpretation the full value of the policy in the amount of $34,000 would properly be included in the assessment by virtue of section 58.

The sequence of events was as follows. The original policy No 1524587 was taken out by the late Harry Miller on February 28, 1947 at age 37. It was automatically renewable for five years at a time following that date at adjusted premiums depending on the age of the insured at each renewal, and in the normal course of events it would have come up for renewal again on February 28, 1967. It contained a supplemental family income contract which was valid, however, for only 20 years providing family income of $450 month in the event of his death prior to the policy anniversary nearest age 57. The commuted value of the policy according to Mr Constant Salera, the supervisor of agencies of the company, at the time it was taken out was $98,250 because of this family income plan, which value descended each year during the 20- year period and since there was only one year to go at the time of the conversion following the transfer the commuted value was $34,000 which is the amount for which the new policy was issued. The conversion option permitted this to be done without evidence of insurability to any form of non-participating whole life or endowment insurance issued by the company at a premium rate depending on the attained age at the nearest birthday of the insured at the date of conversion. Conversion had to be made prior to the policy anniversary nearest age 65 and the conversion clause stated in part:

Written requests for such conversion, payment of the necessary increased premium and surrender of this agreement for cancellation must be made.

In the eyes of the insurance company, therefore, it would appear that if conversion was made the old policy was cancelled and a new policy would be issued as was done in this case. It was pointed out during the course of the evidence given by Mr Paul Arnovitz, agency manager of Occidental Life, that although the schedule in the policy provided for a premium on conversion to ordinary life at age 56 of $51.71 per $1,000, which would have resulted in a premium of $1,758.14 for $34,000, the transferees were only charged $1,306.08 which he explained by the fact that competition with other insurance companies forces a lower rate than that set out in the old policy as otherwise the only people who would exercise the conversion option would be those who were unin- surable. The lower rate was the current one his company was charging for conversion at that time and would have been the same whether the deceased himself had converted or, as was the case, this had been done by the transferees. The new policy contained no family income rider but the premium was, of course, higher for the ordinary life policy than what the deceased had been paying for the original term policy.

Harry A Miller, as the insured, consented to the conversion although Mr Salera admitted that his consent, since he was no longer the owner, was perhaps not required. On conversion a credit is given based on the average annual increase in the premiums over the five years and in the present case this credit amounted to $176.58. No such refund is made if the policy is terminated but it constitutes an inducement to convert and is normally credited against the first year premium of the converted policy. It is therefore normally given to the person who converted but if, as in this case, the conversion was made by the transferees, and they paid the full premium on the new policy then the refund was made to the owner of the original policy, I cannot interpret the fact that Mr Miller received the premium refund credit, however, as a payment made by the transferees for the transfer of ownership of the policy. It does not represent the cash surrender value of the policy which had none but is merely an adjustment of premiums with the insurance company. As Mr Miller had paid the premiums on the old policy the refund was very properly paid to him even though he would have been entitled to no such refund had the policy merely been can- celled, so that in a sense he benefited by the transferees’ decision to convert same, but this is not equivalent to a payment made by them.

During his examination Mr Arnovitz also conceded that at each renewal of the policy the rate then currently in effect was always charged for the next five-year period rather than that shown in the tables in the policy. He also conceded on cross-examination that if the policy holder could foresee death it would not be advantageous for him to convert the policy before reaching the age of 65 as conversion would result in higher premiums, although the policy would have a cash surrender value starting from the date of conversion. As Mr Salera testified, however, a somewhat preferential rate is given to policy holders converting term insurance to ordinary life than what they would pay if they were purchasing ordinary life insurance on the same date, the difference being perhaps $150 to $200 per annum in premiums for the amount involved in this policy.* [1] Furthermore, if there had been no conversion privilege, Harry Miller could not have obtained an ordinary life policy at age 57 without medical examination, and even if he had passed same the rate he would have had to pay would have been higher than the rate on the converted life policy. Except for these indirect advantages, however, the policy had no cash value until his death and, similarly, the new policy had no value until and unless the premiums were paid by the transferees.

The attention of the Court was directed to two judgments dealing with somewhat similar issues although to some extent they can be distinguished from the facts of the present case. The first of these was a Tax Appeal Board judgment in the case of Estate of Walter Kenneth Carmichael v MNR, 39 Tax ABC 83; 65 DTC 554, in which the husband sold an insurance policy on his life of a face value of $20,000 to his wife for the sum of $1,200 which was the cash surrender value of same. By way of gift he then forgave her from paying him this $1,200. When he died within three years the executors of his estate contended that the sum to be assessed for estate tax should be the amount of the $1,200 gift rather than the $20,000 face value of the policy. It was found as a matter of fact that no proof was made establishing the gift, but in any event the decision found that it would not be the $1,200 which formed part of the deceased’s estate but rather the $20,000 being the face value of the insurance policy. J O Weldon, QC in his decision states at page 89 [558] :

The appraisal of the problem which arose in this appeal, contained in the preceding paragraph, does not mean, of course, that a wife cannot exercise her apparent privilege and apply for a policy on her husband’s life, or purchase a policy from him on his life which he has previously taken out, and hold that policy separate and distinct from his estate. It does mean that every case stands or falls on its own facts. In acquiring a policy on her husband’s life as outlined above, the wife should, at least, appear to be acting independently of her husband and, because of the close husband-wife relationship, be doubly prepared, if called upon to do so, to trace, explain, and if neces- sary document each step taken by her in the acquisition and maintenance of such a policy. If a husband wants his wife to have extra money for her own purposes, that is up to him. If he is prepared to surrender control of a policy on his life by selling the policy to his wife, that is also up to him. If a wife wants to insure her husband’s life or acquire a policy from him out of her own funds on a business-like basis and thereafter pay the premiums on the policy also out of her own funds and run the chance of dying before her husband, that is up to her.

There is nothing in the present case to suggest that the transfer was not done in a business-like manner between the parties or that the transferees would not have paid the late Mr Miller out of their own funds the full value of the policy, had it had a value as they did in the case of the Crown Life policy.

The other case is a judgment of Thorson, P in the case of Lloyd W Gardiner (Public Trustee), Administrator of the Estate of Gordon Papp v

MNR, [1964] CTC 128; 64 DTC 5074, in which a company of which the deceased owned 90% of the shares took out an insurance policy on his life with his wife named as beneficiary. This policy was assigned by the company to the wife who owned the remaining 10% of the shares and on the death of the insured within three years thereafter the proceeds of the policy were included in his estate. The finding to the effect that since the company was controlled by the deceased, the disposition made by the company to the wife was a disposition under paragraph 3(6)(b) of the Act, does not concern us here. The Court held, however, that the Minister was justified, by virtue of paragraph 3(1 )(c) in including the value of the policy in the assessment. There was no evidence in that case to justify the contention that the wife had given some consideration for the assignment but the Court held that it could not be held that the assignment had no value for the beneficiary had, immediately after the assignment, a chose in action and that on the death of the deceased she would immediately have the right to receive payment of the amount of the policy. In reaching the conclusion that Mrs Papp did not give any consideration for the assignment, Thorson, P stated at page 131 [5076]:

The assumption that she undertook to pay the premiums on the policy of insurance after it was assigned to her on October 22, 1959, is unwarranted. She said that she was aware that an assignment was being made and that she would assume responsibility for making the payments of the premiums, that there were moneys owing to her by the Company, that she had a surplus in it and that she understood that the payments of the premiums were to be made by the Company and deducted from the amounts owing to her. But I am convinced and I find that Mae Ritter Papp never agreed with the Company, or Gordon Papp, to pay the premiums on the policy.

And again at page 131-2 [5076]:

The evidence of Mr Alfred Holm makes it clear that he suggested the idea of the assignment to Gordon Papp and never discussed it with Mrs Papp until after her husband had died. And his evidence was that the Company continued to make the premium payments and claimed them as operating expenses. They were never charged against Mrs Papp’s account. There was no indication that she had promised to make the premium payments. I find, therefore, that Mae Ritter Papp did not give any consideration to the Company or her husband for the assignment.

That ts certainly not the situation in the present case where the as- signees clearly paid with their own money the premium on the new policy after the conversion following the assignment of the old policy. The judgment goes on to state, however, at pages 132 [5076-7]:

lt was urged on behalf of the estate that the assignment of the insurance policy had no value. Under its terms it had no surrender value and no loan value and Mr C D Wilson gave evidence that at the time of the assignment it had no market value. But this does not dispose of the matter, for immediately after the assignment of the policy of insurance Mae Ritter Papp had a chose in action. It is true that she could not sell it or borrow on it or get any surrender value for it, but it did have value, for if Gordon Papp had died she would immediately have had the right to receive payment of the amount of the policy.

I find, accordingly, that the assignment of the policy of insurance was a disposition of property and an immediate gift inter vivos within the meaning of section 3(1 )(c) of the Act.

This judgment was appealed to the Supreme Court which dismissed the appeal without giving reasons, so it is not possible to say whether this was done solely on the basis that the proof did not indicate any payment of the premiums following assignment by Mrs Papp or whether the second ground that the assignment of a chose in action, even if it has no market value, constitutes a gift within the meaning of paragraph 3(1 )(c) of the Act was also considered and adopted by that Court.

In the present case I am satisfied that the policy No 4366077, issued as a result of a conversion, was a new policy subject to different terms and conditions on which the transferees themselves paid the premium. This does not, however, dispose of the matter. They were enabled to obtain this new policy as a result of the transfer by Harry Miller to them of his rights as owner of the former policy which included the right of conversion. As a result of this they were enabled to obtain the new policy without the necessity of having Mr Miller submit to a medical examination, and possibly at a lower premium (although there is some conflicting evidence as to this) than what they would have had to pay even if this medical examination were successful in order to take out for the first time an ordinary life policy on his life rather than convert the convertible term insurance. The transfer of ownership of the policy, therefore, would appear to come within the words “a right of any kind whatever and a chose in action” in the definition of “property” in paragraph 58(1 )(o) of the Act (supra).

While the policy had no monetary value to the late Harry Miller at the time of the transfer (save for the fact that he had for 13 days remaining at the date of the transfer $30,000 life insurance protection and $450 a month family income protection for one more year if he died before the policy anniversary date of February 28, 1966, the premium being paid on that date) the transfer did confer certain indirect benefits on the transferees which may or may not have had a monetary value. This policy which was thus transferred gratuitously to the transferees was subsequently, during the lifetime of the deceased, exchanged by them for the new policy which brings the provisions of section 30 of the Act (supra) into play. The new policy had a value of $34,000 to the transferees although they had to continue to pay the premiums on same until the death of Mr Miller in order to benefit by this. The value must be determined according to subparagraph 58(1)(s)(ii) of the Act (supra). The fact that the transferees had to continue to pay premiums on the policy to keep it in effect and be in a position to benefit from it at Mr Miller’s death does not in my view alter the situation. In the case of the Crown Life policy for which they paid him the full cash surrender value with the result that the proceeds of the policy were not at his death included in the succession they also had to continue to make the premium payments until his death to benefit by same. The fact that a gift requires payment of certain maintenance charges by the donee to preserve its value does not change its nature as a gift.

This appears to create a somewhat anomalous situation in that in the case of an insurance policy with a cash surrender value the transferee can, upon paying with his own funds the full amount of this cash surrender value to the transferor, become the owner of this policy so as to take the proceeds out of the transferor’s estate at his death, whereas if the policy has no cash surrender value and the transferee, although willing to do so, therefore is not in a position to pay anything to the transferor for the transfer of the policy it will in due course form part of the transferor’s estate at his death. I can, however, see no way of avoiding this situation if it is accepted, as was done in the Papp case (supra), that the policy transferred was a chose in action, even if it had no ascertainable monetary value which could justify the selling of same for a consideration to the transferee so as to avoid the transfer being considered as a gift within the meaning of the Act. The appeal is therefore dismissed, with costs.