MCTAGUE J.:—Sir Albert Edward Kemp died on the 12th day of August, 1929. In his will dated 1st day of December, 1927, by clause 3, he gave and devised his residence, known as "Castle Frank’’ to his trustees upon certain trusts, viz., to allow his widow during her lifetime, and so long as she remained his widow, to occupy it free of rent, and during her lifetime to keep up Castle Frank and pay all taxes, insurance renewals, repairs and the like. In addition, he directed his trustees to bear the expense of maintenance and management of the property, and, to cover such cost, to pay Lady Kemp a certain sum monthly in advance so long as she continued to reside there and use it as her home. Provision was also made for payment to Lady Kemp of a certain lump sum if she preferred to reside somewhere else than Castle Frank, together with monthly payments not quite so large as they would have been had she continued to reside in Castle Frank. Then follows the important clause out of which this application to the Court arises :
“4. I direct that the above provisions in favour of my wife shall be a first charge upon my estate, and shall be provided for and paid by my trustees in priority to any other legacies payable under my said will, and I further direct that any succession duties, and all income taxes which may be payable in respect of the said above provisions for my wife shall be paid out of my estate by my trustees.’’
It so happens that Lady Kemp is the recipient of a considerable income under subsequent clauses in the will not expressed to be free from income tax, and has as well income of her own from sources outside the will altogether.
This state of affairs has made it necessary for the executors to propound the following questions for advice of the Court :
Question I. Are the amounts of income taxes which the executors are directed under clause 4 of the will to repay to Lady Kemp, to be determined upon the footing,
(a) that Lady Kemp has no income apart from the income received under clause 3 of the will; or
(b) that her income from any or all of the following sources is to enter into the computation,
(1) sources outside the will,
(2) under clause 16 of the will,
(3) the repayment of income tax under clause 4?
Question II: If question 1(b) is in whole or part answered in the affirmative, must the executors repay to Lady Kemp,
(a) the whole of the income tax payable by her, or
(b) a proportion only of such income tax, and if so, what proportion ?
Question III : Must the executors, in determining the amount of income tax which they are directed to repay to Lady Kemp, take into the computation
(a) the whole of the deductions and exemptions allowed to her by The Income Tax Acts, or
(b) a proportion only of such deductions and exemptions, and, if so, what proportion, or
(ce) no part of the said deductions and exemptions?
Question IV: Do the "‘income taxes’’ referred to in clause 4 of the will include all taxes from time to time imposed on income (including the Ontario Income Tax, first imposed in 1936) or only such taxes as were imposed on income at the date of the testator’s death?
Question V : Are the income taxes which are repayable by the executors to be paid by them out of capital or income of the estate, or apportioned between capital and income, and, if so, on what basis?
To answer the questions involves a consideration of the intention of the testator in so far as it can be ascertained from the will itself, and the knowledge which the testator can be presumed to have had at the date of making his will.
It seems quite clear that Sir Edward was well aware at the time of making his will that Lady Kemp was then in receipt of an independent income of her own and I think it fairly can be presumed that he knew what income tax was and the method in existence for its execution. Since 1927 it has not changed substantially in principle or method of computation but only in the matter of amount and variety, with consequent added pain to the taxpayer.
The questions involved here have not been dealt with previously in this Court or in any Canadian Court as far as I know, and therefore one must turn for guidance to the decisions of other Courts. In England the question appears to have come up first in In re Bowring; Wimble v. Bowring (1918), 34 T.L.R. 919. In that case a testator left a certain definite annuity to his widow, there being no stipulation as to how it was to be used and no suggestion of any particular purpose. The widow had an independent income of her own in addition to the annuity. Sargant J. held in these circumstances that the residue of the estate must bear such proportion of the total supertax payable by the testator’s wife as the £4,000 annuity, with income tax added, bore to the total amount of the assessment for the purpose of supertax. It must be remembered that the English Act is different from ours and income tax in the narrow sense means a certain definite percentage levied on the whole of the income before consideration is given to supertax, or, as it becomes known later, surtax. The supertax or surtax was levied on the basis of increasing percentages according to the size of the income. Supertax or surtax in England is more like what we know as income tax in this country. I point this out in explanation of Mr. Justice Sargant’s expression "‘with income tax added’’. The same learned Judge adopted the same principle in Jn re Dozat; Doxat v. Doxat, [1920] W.N. 262. In In re Bowen; Paddock v. Bowen, [1925] W.N. 206, Lawrence J. follows the principle initiated in In re Bowring, and the principle is applied again in In re Hulton; Hulton v. Midland Bank, [1931] 1 Ch. 77, in Michelham’s Trustees v. Commissioners of Inland Revenue (1931), 144 L.T. 163, and in In re Reckitt, [1932] 2 Ch. 144. It must be kept in mind that all these cases dealt with straight bequests of annuities free from income tax, or words to that effect.
In the meantime in 1927 the matter came before an American Court, the Rhode Island Court of Appeal, in Read v. Sayles (1927), 51 A.L.R. 451. The judgment is very clear, and excellently summarizes the three different methods of approaching the problem, which I quote as follows, at p. 452 :
“'Three possible methods of making such determination and allocation have been suggested :
(1) By computing the tax that would be imposed on the beneficiary ‘s income if he received no income except the annuity, and considering that amount of tax as payable by the trustees.
‘This method, it appears to us, would clearly fail to carry out the testator’s intention that the beneficiary should receive the annuity free and clear of all income taxes and duties. The presence of the annuity as a constituent part of the annuitant’s total income has, under the revenue act, increased the rate imposed upon every portion of the total income, including the annuity itself, and yet under this method the annuitant would receive from the trustees in exoneration of the annuity no portion of the increased amount of tax upon the annuity consequent upon the increased rate of income tax and surtax. The result would be that by reason of the annuity an increased burden of income taxation has been placed upon the beneficiary, and contrary to the intention of the testator no portion of such increased burden is carried by the trustees.
" " The second method suggested is as follows:
(2) By computing the tax upon the beneficiary’s entire income from all sources and subtracting therefrom the tax which would be imposed if the beneficiary received no annuity from the trustees, and considering the balance as the amount of tax payable by the trustees.
"‘This method is unfair to the trust estate and results in a payment by the trustees of a portion of the beneficiary’s income tax which is in excess of the amount necessary to exonerate the annuity. By reason of the fact that the beneficiary’s other income is placed in the same total with the annuity, the rates and the amount of tax ascribable to each item of income are increased and yet by this second method suggested the whole increase is ascribed to the annuity and the whole of such increase would be paid by the trustees in exoneration of the annuity, thus relieving the other income of the beneficiary from all of the added burden of taxation placed upon it by reason of the fact that it had become a component part of a larger total of income. The purpose of the testator was that the beneficiary should receive the annuity free and clear of all income taxes and duties. It cannot, however, fairly be construed as his intention that the trustee should relieve the annuitant of any portion of the burden of increased taxation imposed upon that beneficiary’s other income, even though under the revenue act such increase might result from the testator’s bounty in creating the annuity.
"The third possible method suggested for determining the portion of the beneficiary’s total income. tax which should be paid by the trustees in exoneration of the annuity is as follows:
(3) By computing the tax upon the beneficiary’s entire income and apportioning it between the trustees and the beneficiary ratably in proportion to the amount of the annuity and the amount of income received from other sources, and considering the amount of tax so apportioned to the trustees. as payable by them.
"‘This appears to us to be the equitable method. The annuity and the other income of the beneficiary are each component parts of the total income. To the combination of them both should be ascribed the increased rate and the increased amount of tax, and between them, to each in the same proportion that its amount bears to the total amount of the income, should the total tax be apportioned.
Thus it will be seen that the American Court followed In re Bowring, In re Doxat and In re Bowen (supra).
In the Scottish Reports are to be found at least three interesting cases on the subject: In re Bowring was followed in Re Wordie f s Trustees; Buchanan v. MacGregor or Wordie, [1922] S.C. 28, but a Scottish Court of Appeal in Baird f s Trustees v. Baird, [1933] S.C. 553, expresses disapproval of In re Bowring and decided in that case that the amount of surtax for which the trustees were liable was to be determined upon the footing that the annuitants had no independent income apart from the annuities. Criticism was directed at the English decisions on the ground that they were rather the result of friendly arrangement than fervid controversy. I must confess I have difficulty in following the judgments of the majority of the Court and rather prefer the dissenting Judgment of Lord Murray, which would have applied In re Bowring. Baird f s Trustees v. Baird appears to be an assertion of Scottish independence rather than anything else. That such was the case seems to be borne out by Richmond v. Richmond, [1935] S.C. 585, where another division of the same Court adopted the principle in In re Bowring and courteously criticized Baird f s Trustees v. Baird.
If the bequest to Lady Kemp had been in the form of a simple annuity I should have no trouble in applying the principle established by In re Bowring and followed in most of the cases referred to. But one must endeavour to give effect to the intention of the testator as it can be deduced from the will. Sir Edward was aware that Lady Kemp had an independent income. I judge from the wording of his will that he was anxious that Lady Kemp should retain and keep up Castle Frank and that no financial burden should be placed upon her personally as the result of doing so. As long as Lady Kemp was willing to reside in Castle Frank the testator makes its up-keep and maintenance a first charge on his estate, and provides that the amounts required for such purposes shall be free from all income tax " " and all income taxes which may be payable in respect of the said above provisions for my wife shall be paid out of my estate by my trustees.’’ The benefits accruing to Lady Kemp in question here are subject to an obligation on her part to reside in and keep up Castle Frank. She having assumed such obligation, it seems to me that Sir Edward intended that no income tax burden should be placed upon her as the result of her compliance with his wishes. The provisions in her favour were not direct benefits to her personally, but benefits coupled with the obligation of keeping up Castle Frank. I think it was his intention that there should be no additional income tax burden placed upon her whatever.
The view which I have taken of the matter naturally brings up for consideration another important question. In any given year the trustees, by paying a proportion of Lady Kemp’s income tax, will be increasing her taxable income for that year by the amount of tax paid by them. On that additional amount of income a further tax will be imposed in the following year. To require the residuary estate to pay this is saddling it with a heavy and increasing burden from year to year. There is much to be said against placing such a burden upon the residuary legatees, but, nevertheless, I think such construction is in accordance with Sir Edward’s intention.
Therefore my answers to the questions will be in the following terms. Income taxes directed to be paid by the executors under clause 4 of the will are to be determined upon the footing that Lady Kemp’s income includes income from sources outside of the will, income under clause 16 of the will and repayment on income tax under clause 4. The executors should repay to Lady Kemp all additional income tax which becomes payable by virtue of the income under clause 3 being superimposed upon her income from all other sources. Deductions and exemptions are to be taken as belonging to and for the benefit of Lady Kemp and not for the benefit of the executors, subject to this, that counsel for Lady Kemp has intimated that she is willing that the executors shall have the benefit of a proportion of the saving due to deduction for charitable donations. If counsel cannot agree on an approprite term in the formal order to cover this concession, that matter may be spoken to. The words "‘income taxes’’ referred to in clause 4 of the will, include all income taxes from time to time on income and specifically include Ontario income tax. The income taxes repayable by the executors to Lady Kemp are to be paid out of income primarily and if there is a. deficiency of income, then out of capital.
All parties may have their costs of the motion out of the estate; costs of the executors as between solicitor and client.
Order accordingly-