ROBERTSON C.J.O.:—Appeal from order of MeTague J. of 14th December, 1938, on an originating motion for order construing and interpreting certain parts of the will of the late Sir Albert Edward Kemp.
The questions arise in relation to clause 4 of the will.
The testator, by clause 3 of his will, had provided that his trustees, during the lifetime of his wife, so long as she remained his widow, and so long as she desired to make use of the same as a residence, should keep up his residence property, known as Castle Frank, in a suitable condition for that purpose, and that all costs and charges for the payment of taxes, insurance, repairs, renewal and other like expenditures for the proper structural upkeep of the houses and buildings should be paid by his trustees, and he directed that they should allow his wife, during her lifetime so long as she remained his widow, to occupy Castle Frank as her home and residence free of rent.
Clause 3 further provided that while his wife should occupy Castle Frank as her home and residence, his trustees should bear the expense of the maintenance and management thereof, and to cover such cost, the testator directed his trustees to pay to his wife $2,250.00 each month in advance, so long as she continued to reside in Castle Frank and to use it as her home.
He further provided in the same clause that if his wife ceased to occupy Castle Frank as her home, his trustees should raise out of his general estate the sum of $75,000.00 to enable her, if she so desired, to purchase or build or otherwise provide a suitable home for herself. He declared that this sum of $75,- 000.00 was intended to be an absolute gift to his wife, and that she should not be obliged, unless she wished to do so, to expend that sum or any part of it in purchasing, building or otherwise acquiring a residence, and he made the further provision that upon his wife ceasing to occupy Castle Frank as her residence, the monthly allowance of $2,250.00 for the upkeep there should cease, and he gave her in lieu thereof a monthly allowance of $2,000.00 while she remained his widow.
Clause 4, under which the questions now to be considered arise, is as follows:
"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.’’
Under later provisions of the will Lady Kemp is in receipt of other substantial income from the estate. She had also in the lifetime of the testator, and continues to have, an independent income of her own from other sources.
For the purposes of The Income War Tax Act, R.S.C. 1927, ch. 97, the net income upon which the tax is computed is ascertained at one total sum, notwithstanding that it may be derived from various sourees. The income tax payable is arrived at by the application to the whole net income, of rates which increase on a graduated scale as the amount of the net income increases. One effect, therefore, of including with the income of Lady Kemp from other sources, further taxable income under the provisions of clause 3 of the will, is to increase the rate at which the higher portion of her income is taxed. It is contended on her behalf that the intention of clause 4 of the will is that that portion of her taxable income which is derived under the provisions of clause 3 of the will should bear the highest rate of taxation applicable to any part of her income, and she claims that upon any other basis she is not entirely relieved from the payment of income tax in respect of the provisions of clause 3.
MeTague J. has given effect to the contention made on behalf of Lady Kemp and has directed that the trustees must repay to Lady Kemp all income tax levied against her in excess of the income tax which would have been levied against her if she were in eceipt-of no income under clause 3.
Substantially the same question that arises here has frequently been considered in England. The principle that appears to be well settled there is that in such circumstances the residue of the estate is required to bear only such proportion of the total tax payable by the beneficiary in respect of Income as the portion of income in respect of which the beneficiary is entitled to be relieved bears to the total income subject to the tax.
Reference may be made to Re Bowring ; Wimble v. Bowring, 34 T.L.R. 575, [1918] W.N. 265; In re Doxat, [1920] W.N. 262; Re Pettit; Le Fevre v. Pettit, [1922] 2 Ch. 765; Re Hulton; Hulton v. Midland Bank, [1931] 1 Ch. 77. The same principle has been applied in an American case, Read v. Sayles (1927), 51 A.L.R. 451.
The principle of these decisions is recognized by MeTague J., and he says he would have no trouble in applying it if the bequest were in the form of a simple annuity. He considers, however, that the benefits accruing to Lady Kemp under clause 3 are subject to an obligation on her part to reside in and keep up Castle Frank, and that the provisions in her favour are not direct benefits to her personally, but benefits coupled with the obligation of keeping up Castle Frank. He held, therefore, that it was the testator’s intention that there should be no additional income tax burden placed upon her whatever, and made an order in the terms already stated.
With respect, I do not think the considerations which weighed with the learned Judge in holding that the principle of the English cases referred to, does not apply, are relevant. The fact that Lady Kemp may have obligations imposed, as well as benefits conferred, upon her by clause 3 of the will may be a very good argument to address to the income tax authorities in support of a claim for deduction from her taxable income, but I am unable to see that the interpretation of clause 4 is affected thereby. It is to be observed that clause 4 applies equally whether Lady Kemp elects to reside at Castle Frank or elects to accept in lieu of residing there $75,000.00 as an absolute gift, and a monthly allowance of $2,000.00. In either event the trustees are to pay out of the estate whatever income taxes may be payable in respect of the provisions made by clause 3 in favour of Lady Kemp. What has to be determined is the method of arriving at the income taxes payable in respect of these provisions, when the tax is levied in one sum in respect of all her taxable income.
Re Bowring; Wimble v. Bowring, 34 T.L.R. 575, [1918] W.N. 269, 18 the earliest of the cases in England to which reference has been made. In that case the testator gave to his wife during her life an annuity of £4,000 free of debt and of income tax, supertax and any other tax or impost of that nature, to the intent that she should receive the sum of £4,000 net per annum. Generally, in the cases in England somewhat similar language directing payment free of income tax or without deduction for income tax is to be found. If there is any real difference in meaning between such a direction and the words found in clause 4, one is inclined to think that the former might more reasonably be deemed to express an intention to relieve the beneficiary of all income tax burden consequent upon the gift of additional income. The problem, both in England and here, arises from the fact that taxes are assessed and levied upon the total net income of the taxpayer. As a separate levy is not made in respect of the several component parts of the taxable income, no distinguishable part of Lady Kemp ‘s income tax is computed upon her income under clause 3 of the will. That part of her income tax which is computed at the highest percentage rate is no more payable exclusively in respect of her income derived under clause 3 of the will than it is payable exclusively in respect of the income from other sources. Having regard to the way in which income tax is assessed and levied, it would seem that the principle adopted by the cases in England to which reference has been made, that is, to take a proportionate part of every dollar of the tax as payable in respect of each particular part of the income, is the only way in which the language of clause 4 can be applied. If the testator had intended to go further and to relieve Lady Kemp, not only from income tax in respect of the provisions of clause 3, but also from any increase in her income tax generally resulting from these provisions, it would have been a simple matter to Say so.
The second question arises under clause 4 of the will. The income tax paid by the trustees under clause 4 of the will, in relief of Lady Kemp, is, for the purposes of The Income War Tax Act, additional income received by her, in respect of which she is also taxable. Mr. Justice MeTague has held that this further tax comes within clause 4 of the will and is to be borne by the trustees. I am unable to see anything in the language of clause 4 that applies to such a tax. Clause 4 is a separate provision for the benefit of Lady Kemp, in addition to clause 3 and not as part of it. I think it is impossible to read the words, "‘all income taxes which may be payable in respect of the said above provisions for my wife ‘ as including an additional benefit not within the provisions of clause 3. One is not at liberty to speculate whether the testator had fully in mind, or, on the other hand, was under misapprehension as to the operation of The Income War Tax Act. All that the Court can do is to take the language of the testator and apply it.
I am, therefore, of the opinion that the appeal must be allowed and the order varied as herein indicated, in respect of the two matters argued before us.
Costs of all parties of the appeal may well be paid out of the estate, the costs of the trustees as between solicitor and client.
Middleton, HENDERSON and GILLANDERS J J. A. agreed with ROBERTSON C.J.O.
FISHER J.A.:—I confess to having formed during and at the end of the argument of this appeal, a strong opinion that the reasoning and conclusion of my brother McTague could not be disturbed, but after a careful re-reading of the will and consideration of the eases, particularly In re Lord Armaghdale (1928), 44 T.L.R. 239, following In re Bowring; Wimble v. Bowring (1918), 34 T.L.R. 575, [1918] W.N. 265, I have reached the conclusion, with some doubt but not sufficient to disagree with the reasoning and conclusions of my Lord the Chief Justice, that the appeal should be allowed with costs payable out of the estate, those of the executors as between solicitor and client.
Appeal allowed.